As discussed in previous French Tax Updates (see June 2014 and February 2015), the treatment of French source dividends paid to foreign nonprofit organizations (NPOs) raises the issue of comparability of NPOs with French nonprofit organizations. The practical impact of the analysis is that, in the case of noncomparability, NPOs would not benefit from the treatment applied to French nonprofit organizations. NB: Currently, French nonprofit organizations are liable to a 15 percent French corporate tax in respect of French dividends. Under the prior legislation, applicable to the below case law, French nonprofit organizations were exempt from taxation in respect of French dividends.
A US law governed pension plan (USPP) suffered French WHT at the rate of 15 percent by application of the US–French treaty. The USPP argued before a French lower court that it should benefit from the exemption provided to French nonprofit organizations given their similarities. The lower court decided in favor of the USPP (TA Montreuil, December 16, 2014, n° 1207668) by using the below reasoning:
- The relevant provisions of the European Union law provide for the principle of free movement of capital, including with non-Member States.
- In its Santander decision, the EUCJ decided that, for purposes of comparing the different tax treatments applied to different persons, only the pertinent criteria should be taken into account to establish whether such differences reflect an objective difference of situations.
- The exemption provided to a French nonprofit organization is based on the criteria that its management is not driven by profit-making objectives, and that its nonprofit activities are preponderant.
- The application of the 15 percent French WHT to the USPP is valid only to the extent its activities are not comparable with those of the French nonprofit organization.
- The USPP is a pension plan trust within the meaning of section 401(a) of the Internal Revenue Code and, as such, is exempt from tax in the US; under article 18 of the US–French tax treaty, a 401(a) plan is generally considered to be recognized as such in France, i.e. it is managed for the exclusive benefit of the relevant employees, and the management of the plan does not benefit from any profit made within the plan.
- Thus, the USPP should be viewed as providing services which are identical to those provided by a French pension plan.
- Therefore, the difference of tax treatment is not justified by an objective difference of situation, and the French WHT should not apply.
The decision of the lower court confirms that the comparability of French and non-French nonprofit organizations should not be based on the detail of the rules applicable in French domestic case law (e.g. the maximum remuneration of the managers, etc.); rather, as per the Santander case, only the "pertinent criteria" should be used for purposes of the comparison.