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French Constitutional Court Outlaws Surtax

Wednesday, October 11, 2017

France's surtax on profit distributions has been ruled unconstitutional, in a decision issued by the Constitutional Court on October 6.

The three percent surtax on dividend distributions and deemed dividend payments has been effective since September 1, 2012, and applies to companies that are subject to French corporate income tax, although distributions made between companies within a group are exempt.

In March 2015, the European Commission started an infringement proceeding against the surtax on dividend distributions on the basis that it contravenes EU law, and in May 2017, the European Court of Justice ruled that the surtax is incompatible with the EU Parent Subsidiary Directive.

In that case, the ECJ said that member states may not subject a parent company to a tax burden on profits received from its EU subsidiaries that exceeds taxation of five percent of the profits distributed by the subsidiary, which is the maximum level laid down by the Parent Subsidiary Directive.

Under French law, dividend redistributions received from an EU subsidiary are subject to a total tax burden that is higher than the maximum ceiling permitted by the directive when the three percent surtax is applied.

Following the ECJ's ruling, the French Supreme Court asked the Constitutional Court to determine under which situations redistributions of dividends received from a French or non-EU subsidiary would still fall within the scope of the surtax.

However, in its ruling, the Constitutional Court said that differing treatment could not be justified and ruled that the surtax is unconstitutional under the equality principle.

An amendment to repeal the surtax, effective from the date of the Constitutional Court's ruling, has been included in the 2018 Finance Bill.