The Court of Appeals of Paris decided on 23 May 2005 that a Scottish bank, which had acquired dividend coupons under an usufruct agreement with a US company, was the beneficial owner of the dividends distributed by the French subsidiary of that US company (and the attached avoir fiscal imputation credit within the meaning of Arts. 9(6) and (7) of the Fance-Uk tax treaty of 22 May 1968). Details of the decision are summarized below.

(a) Facts. A US parent company concluded on 5 November 1992 an usufruct agreement with a UK bank, under which the bank acquired for a 3-year period dividend coupons attached to the shares of the French subsidiary of the US parent company. The French company distributed dividends on 30 September 1993 to the bank for an approximate amount of FRF 90 million, before withholding tax. The bank requested on 15 December 1993 the refund of the French withholding tax (25%) levied in excess of the maximum rate of 15% provided in Art. 9(6) of the France-UK tax treaty, and the transfer of the avoir fiscal tax credit (Art. 9(7) of the treaty).

The tax administration rejected the claim of the bank, arguing that the beneficial owner of the dividend distribution was not the UK bank but the US parent company. According to the tax administration, the price paid by the UK bank to the US company to acquire the dividend coupons corresponded to the amount of the net dividends, before withholding tax; hence, the transaction had to be characterized as a loan, granted by the UK bank to the US parent company for 3 years, and remunerated by the payment of the avoir fiscal tax credit to the UK bank. The bank brought the case to the Lower Court of Paris, which rejected the claim on 4 July 2001. The bank appealed before the Court of Appeals of Paris.

(b) Issue. The issue was to determine whether or not a UK bank, which had acquired dividend coupons under an usufruct agreement with a US company, was the beneficial owner of the dividends distributed by the French subsidiary of that US company within the meaning of Art. 9(6) of the France-UK tax treaty.

(c) Decision. The Court accepted the claim of the bank and opined that the tax administration had failed to demonstrate that the UK bank was not the beneficial owner of the dividends. The Court first stated that the advantages of the treaty could be granted only to the effective beneficial owner of the dividends.

The Court reasoned that the tax administration had failed to demonstrate that:

-		the UK bank was an artificial conduit or a mere agent of the US parent company;
-		the usufruct agreement, which was concluded between independent parties, was fictitious and should be characterized as a loan;
-		the price paid by the bank did not reflect the value and use of the assets purchased; and
-		the allocation of risks between the US company and the bank was abnormal within the framework of a similar international transaction, even though such transaction could not be regarded as an usufruct contract within the meaning of French Civil Law.

In addition, the payment of dividends was not legally guaranteed and remained uncertain, so that the tax administration had failed to demonstrate the existence of a loan.

The Court concluded that the fact that the usufruct agreement allowed the bank to realize a profit after receiving the dividends and the avoir fiscal (minus the withholding tax) was not exclusively motivated by tax reasons. In fact, the operation allowed the US parent company to increase its external funding while maintaining its capital structure. Consequently, the bank had to be regarded as the effective beneficial owner of the dividends distributed by the French company within the meaning of Art. 9(6) of the treaty, and was therefore entitled to the refund of the excess withholding tax and the transfer of the avoir fiscal tax credit.