France: New EUCJ Case On Dividend Withholding, Q2 Noteworthy Case Law, Amending Finance Law For 2014, And Parent-Subsidiary Directive Modification

Last Updated: 9 July 2014
Article by Nicolas André and Lodewijk Berger

The present French Tax Update will look over (i) a new case pending before the European Union Court of Justice ("EUCJ") that involves the dividend withholding applied under Dutch tax law ("SG Case"), (ii) recent case law decisions issued by the EUCJ, the French Constitutional Court (Conseil constitutionnel) and the French Administrative Supreme Court (Conseil d'Etat), (iii) the main provisions of the first Amending Finance Law for 2014 (Première loi de finances rectificative pour 2014, "2014 Amending Finance Law"), and (iv) an update with respect to the modification of the EU Parent-Subsidiary Directive ("PSD").


In the years 2000 through 2008, an equity derivatives unit of the taxpayer was trading in Dutch equities derivatives. It also acquired underlying equities to hedge equity derivative positions. Significant amounts of dividends were received on the equities, but these dividends were in part priced into the equities and the related derivatives. On balance, the taxpayer generated trading margins from these activities that were relatively small compared to the Dutch withholding tax incurred on the gross dividend income, which exceeded €100 million (the dividends were subject to 15 percent Dutch dividend withholding tax. Prior to 2007, the Dutch domestic dividend tax rate was 25 percent, but the taxpayer was entitled to a reduced 15 percent rate under the tax treaty between France and the Netherlands). In the years 2000–2007, the taxpayer was able to credit the Dutch dividend withholding tax against French income tax, but due to losses realized in 2008, it was unable to benefit from a credit in France in 2008.


Dutch tax law background: Dutch dividend withholding tax. Dividend distributions by Dutch companies are subject to a 15 percent Dutch dividend withholding tax over the gross amount of the distribution. Subject to conditions, reduced rates and/or exemptions are available for qualifying Dutch and/or foreign shareholders under Dutch domestic law, tax treaties, and the PSD. A Dutch taxable corporate shareholder that receives a dividend from a Dutch company and that is not entitled to an exemption may credit the Dutch withholding tax incurred on the dividend against Dutch corporate income tax due over its net taxable income in the relevant taxable year. This credit may result in a tax refund if and to the extent the dividend tax incurred on the gross dividend exceeds the corporate income tax due over the taxpayer's net taxable income, i.e., the taxable income after deduction of costs. The effective Dutch tax due by a Dutch shareholder in relation to the dividend income may thus be lower than 15 percent. A foreign shareholder, however, is under comparable circumstances generally not entitled to a refund of (part of) the 15 percent Dutch dividend tax, regardless of whether it is able to fully credit the Dutch dividend tax incurred against income tax in its country of residence. In the SG Case, the taxpayer is challenging this difference in tax treatment between Dutch and foreign shareholders that incur Dutch withholding tax.

French tax law background: French tax credit for foreign dividend withholding tax. In the case at hand, one may wonder why the taxpayer could not fully benefit in France from all of the Dutch tax credit. To the best of our knowledge, this could be due to either (i) its loss-making position or (ii) the (then-applicable) French rules governing the amount of tax credit awarded to French taxpayers receiving dividend payments.

Article 220 1-b of the French tax code (Code general des impôts, "FTC") provides the general principle whereby, inter alia, when a foreign source dividend is received by a French corporate taxpayer, and such dividend has been subject to a foreign withholding tax, such withholding tax amounts to a tax credit to the extent the tax credit is recognized in the double tax treaty entered into between France and the source country of the dividends. Article 11 2-b of the double tax treaty entered into between France and the Netherlands in 1973 (the "FR/NL Treaty") provides that Dutch-source dividends may be subject to a maximum 15 percent withholding tax, and Article 24 B-a of the FR/NL Treaty further provides that Dutch-source dividends that have been subject to a Dutch withholding tax indeed entitle the French tax resident receiving such dividends to a tax credit equal to the Dutch withholding tax so levied.

The availability of a tax credit is, however, subject to a specific rule, called the règle du butoir ("Butoir"), which limits the amount of imputable tax credit to the amount of French corporate tax effectively due in respect of the underlying income. In other words, the Butoir is required to determine the French corporate tax liability due in respect of the relevant dividend. Two types of questions thus arise: (i) whether such liability should be computed by reference to the actual amount of dividend (gross or net of withholding tax), or should such amount be reduced by the imputation of certain related costs, and, in the latter case, (ii) which costs should be taken into account.

For some time, including at the time of the facts of the SG Case, the answers to the above questions were not very clear, leading numerous taxpayers to take conservative positions on the matter (e.g., the computation of the relevant French corporate tax liability after deduction of all related expenses). Such situation led the French tax authorities to ask for the position of the Conseil d'Etat, which advised (March 31, 2009, n° 382545) that the relevant expenses are those directly related to the acquisition and conservation of the securities producing the underlying income (e.g., the custodian expenses), but that such expenses would not include the financial cost of the borrowing used to fund the acquisition for the securities. The Conseil d'Etat advised further that any loss generated upon the sale of the securities (including the loss corresponding to the receipt of the underlying income during the holding period) should not be part of the expenses allocated to such income.

Further to this opinion of the Conseil d'Etat, a new specific anti-abuse rule was introduced in the FTC under Article 220 1-a (third paragraph) whereby, under certain conditions, the Butoir is applied by taking into account any related expenses, including any loss realized upon the sale of the relevant securities, together with any amount paid by the taxpayer to the person (or its affiliates) from whom it purchased the securities (except the purchase price of the securities); these rules apply when, upon the original purchase of the securities by the taxpayer, the parties have agreed that the seller (or its affiliates) would have the right or the obligation to purchase back these securities from the taxpayer. Note that the latter may avoid these rules if it can evidence that the principal purpose or effect of the transaction was not to obtain the benefit of the underlying tax credit.


In the SG Case, the taxpayer argues that it is treated disadvantageously compared to a Dutch resident corporate taxpayer under comparable circumstances, and this different tax treatment in the Netherlands constitutes a violation of the free movement of capital and the anti-discrimination provision laid down in the EU Treaty.

The Dutch Lower Court and the Court of Appeals ruled in favor of the Dutch tax authorities, but the Dutch Supreme Court (Hoge Raad der Nederlanden) has decided to request a preliminary ruling from the EUCJ, and it has submitted the following questions

  • Does the application of the freedom of movement of capital require that the comparison of a nonresident with a resident in a case in which dividend tax is withheld on a dividend payment by the source country be extended to the corporation tax against which the dividend tax is set off in the case of residents? ("Question 1")
  • If the answer to Question 1 is in the affirmative, should account be taken, in making that comparison, of all the costs that, in an economic sense, are connected with the shares from which the dividend arises? ("Question 2")
  • If the answer to Question 2 is in the negative, should account then be taken of a possible write-off of a priced-in dividend and of a possible financing burden resulting from ownership of the shares concerned?
  • If the answer to Question 1 is in the affirmative, is it sufficient, in the assessment as to whether a potentially discriminatory withholding tax levied at source is effectively neutralized on the basis of a convention for the avoidance of double taxation concluded by the source country, that (i) the double taxation convention concerned contains a provision in that regard, and that, although that option is not unconditional, (ii) in the case in question, it has the result that the Netherlands tax burden for a nonresident is not heavier than that for a resident? In the case of inadequate compensation in the year in which the dividends are received, is it relevant, in the assessment of that neutralization, that there is the possibility of carrying forward the deficit and of utilizing the set-off in subsequent years?


Possible actions to be taken under Dutch tax law. The different treatments of foreign and domestic shareholders for taxes on dividends remain a heavily debated issue in the Netherlands and a number of other EU Member States.

Depending on the responses from the European Court of Justice on the questions raised by the Dutch Supreme Court, the SG Case may have significant impact across the EU. Refund claims may be successful, and taxpayers should therefore consider preserving their positions by filing refund claims and objections.

Court review of a similar set of facts under French tax law. The question in the case at hand (i.e., whether the source country of an outbound dividend distribution from which was withheld a dividend withholding tax has to take into account the corporate income tax against which the withholding tax is credited in the recipient country) was in part dealt with in France by the Conseil d'Etat in two decisions issued in 2012 (May 9, 2012, n° 342221–2, GBL Energy; October 29, 2012, n° 352209, Kermadec).

In both cases, a Luxembourg-based holding company with shareholdings of less than 5 percent in the share capital of French companies did not meet the conditions to benefit from the French parent-subsidiary regime, and thus dividends paid from the French companies were subject to withholding tax in France. Even if the Luxembourg-based holding company were entitled to a tax credit under the double tax treaty entered into between France and Luxembourg, this tax credit could not be offset as a result of its loss-making position. Both companies argued a discriminatory restriction on free movement of capital in view of the difference of treatment between nonresident loss-making companies and resident loss-making companies that would not have been subject to tax.

The Conseil d'Etat did not request, as the Hoge Raad der Nederlanden did in the SG Case, a preliminary ruling from the EUCJ. Interestingly, the Conseil d'Etat held that the French dividend withholding tax was not an infringement on the freedom of movement of capital since Member States are allowed to apply different tax collection methods for resident taxpayers and nonresident taxpayers, even if it results in a cash-flow disadvantage (i.e., immediate taxation for nonresident companies vs. deferred taxation for resident loss-making entities by reduction of the available losses). See also "French dividend withholding and EU freedom of movement of capital" below on a recent French case law on a similar issue.



The Conseil constitutionnel decided, on June 20, 2014, that the different tax treatments of the buyback of shares violate the constitutional principle of equality before the law.

Under the French rules, applicable before the above decision, the profit generated by the shareholders, upon the buyback, could be treated, depending on the legal structure, as capital gains or as a mixture of dividends and capital gains.

The capital gains treatment was, by law, expressly reserved to specific situations where the company would purchase the shares as part of its buyback program or to distribute the shares to its employees (i.e., under ESOPs); the dividends/capital gains treatment was applicable to most other cases, i.e., essentially the buyback of shares to decrease the share capital (not motivated by losses).

The court decided that such a distinction was not grounded on objective differences of situations, given that, for example, the shares purchased under the buyback program eventually could be cancelled, as in a buyback to decrease the share capital.

The court also decided that such a difference of treatment is not motivated by any reason of public interest.

The practical consequences of the above decision are as follow

  • The specific legislation that enabled the capital gains treatment would be abrogated as from January 1, 2015;
  • All buyback of shares before January 1, 2014 would be treated under the capital gains rules;
  • Unless the French Parliament introduces a new relevant legislation before January 1, 2015, all buybacks during 2014 would be treated under the capital gain regime.


On June 12, 2014 (joined cases C 39/13, C 40/13 and C 41/13, SCA Group Holding BV and others), the EUCJ issued its decision on the compatibility of the Dutch tax consolidation (fiscale eenheid) regime with the EU freedom of establishment law.

In the case at hand, two Dutch companies were held by a German company. The German company filed a request with the Dutch tax authorities in order to constitute a tax consolidated group with its Dutch subsidiaries, as a Dutch parent company would have been able to do. The Dutch tax authorities did not allow the constitution of such a tax consolidated group on the ground that all companies forming part of a Dutch tax consolidated group have to be corporate tax residents of the Netherlands (or at least have a permanent establishment there). The case was then brought to court.

The EUCJ decided that such exclusion of the Dutch tax consolidation regime constitutes a restriction to the freedom of establishment, for which no valid justification was found available (be it the need to preserve the coherence of the Dutch tax system or the need to prevent tax avoidance).

The Dutch consolidated tax regime will thus have to be amended, as will the consolidated tax regime implemented by other EU Member States that are in essence similar to the Dutch regime (e.g., the French regime).

It should be noted that in this same decision, the EUCJ further confirmed its Papillon decision (November 27, 2008, C 418-07, Sté Papillon) in a similar set of facts (i.e., the possibility for a Dutch parent company with an indirectly held Dutch sub-subsidiary itself held by a German subsidiary of the Dutch parent company to constitute a Dutch tax consolidated group with such Dutch sub-subsidiary).


On June 23, 2014, the Conseil d'Etat ruled for the second time on schemes involving so-called shell companies (coquillards) whereby a company (i) acquires no longer operational companies holding assets that are easily convertible into liquid assets, (ii) has such companies distribute dividends benefiting from the parent-subsidiary exemption, and (iii) deducts for corporation tax purposes a provision for impairment in value of the acquired companies' shares. Frequently targeted by the French tax authorities under the abuse of law (abus de droit, "AoL") procedure, these schemes offered an opportunity for the Conseil d'Etat to refine its position. NB: Following several opinions issued by the advisory committee in charge of AoL matters (Comité de l'abus de droit) and numerous lower-court decisions in relation to such schemes, the French Parliament amended in 2012 the rules governing the deduction for corporation tax purposes of provisions for impairment in value of shares to take into account such arrangements, thus rendering them no longer legally feasible today.

In the June 2014 case, a French company had acquired substantial shareholdings in two companies holding bonds issued by a Luxembourg-based company, for a total amount of €3.6 million. Over the two following years, the target companies paid dividends amounting to €3.8 million. By committing to hold the shares of the target companies for a two-year period, the acquiring company met the conditions of the parent-subsidiary regime provided for in Articles 145 and 216 of the FTC and thus received tax-free dividend distributions. Moreover, over this same time period, the acquiring company deducted, for corporation tax purposes, provisions for impairment in value of the shares of the target companies' shares (that effectively amounted to the dividends received).

The Conseil d'Etat overruled the decision of the Administrative Court of Appeal (Cour administrative d'appel) on the basis that, even if there was some non-tax motivation to the arrangement (i.e., the difference between the acquisition price and the amount of dividends received), this motivation wasn't substantial compared to the tax benefit that was obtained by a literal application of Articles 145 and 216 of the FTC, in disregard of the spirit behind these rules. By reference to the parliamentary reports and debates that led to the establishment of the parent-subsidiary regime from 1920 until today, the Conseil d'Etat found that the draftsman's intent was to foster the implication of parent companies in the economic development of their subsidiaries.

Confirming a decision issued last year (July 17, 2013, n°356523, Garnier Choiseul Holding), the Conseil d'Etat disregarded the arguments of the taxpayer (inter alia the fact that the companies participating in the arrangement existed before the dividend distribution and that the arrangement did not involve a special purpose vehicle) and ruled that the scheme was purely tax motivated.


The Conseil d'Etat decided, on May 7, 2014, that a 15 percent French withholding tax ("French WHT") applied to French-source dividends, distributed to an individual Belgian tax resident, should be viewed as discriminatory, violating the principle of free movement of capital within the EU.

The Belgian tax resident was arguing that, despite the provisions of the Belgian–French tax treaty, he is, effectively, not entitled to any Belgian tax credit in respect of French WHT. Accordingly, the French WHT was a final tax liability for him, and he was arguing that such liability was higher than that which he would have suffered, had he been a French tax resident.

The Conseil d'Etat agreed to carry out a comparison between the specific situation of the Belgian tax resident and that of a French individual tax resident receiving the same amount of dividends; the latter would be entitled, under French domestic rules, to certain rebates that would effectively result in a taxation of less than 15 percent.

Interestingly, the result of the computation would have been different if the dividends had been significantly higher, given that certain of the domestic rebates are effectively capped.

It remains to be seen to what extent the courts would follow such a "case by case" concrete comparison in the future.


A draft of the 2014 Amending Finance Law was presented to the French Parliament on June 11, 2014. As it currently stands, such draft essentially contains tax measures affecting individuals. It also provides for certain long-awaited measures affecting the effective French corporation tax rate: (i) the repeal of the so-called social solidarity contribution ("C3S") as from 2015 for corporation taxpayers whose turnover is below €3.25 million in 2015 (the C3S being definitively repealed as from 2017), (ii) the extension of the so-called exceptional contribution on corporation tax (applying to corporation taxpayers with a turnover exceeding €250 million at a rate of 10.7 percent on the basis of the basic corporation tax liability) until December 31, 2016 instead of December 31, 2015, and (iii) the intent to decrease the corporation tax rate to 28 percent by 2020.


Following a meeting held on June 20, 2014, the EU Economic and Financial Affairs Council ("ECOFIN") agreed on a proposal for a amendment of the PSD in order to prevent the double nontaxation of corporate groups deriving from a hybrid arrangement. Such proposal was discussed in our French Tax Update for June, and it essentially provides for a linking rule whereby the Member State where the recipient is a resident should actually tax profit distributions to the extent that such profit distributions are deductible by the distributing subsidiary. The proposal should now be adopted at the forthcoming ECOFIN meeting, and Member States will have until December 31, 2015 to implement it under their domestic law.

The ECOFIN further announced that the adoption of a general anti-abuse rule would require more work and should remain an ongoing project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nicolas André
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