23 June 2020
On 5 June 2020, the French Supreme Administrative Court (Conseil d'Etat) issued its decisions in four cases regarding eligibility for the dividend withholding tax exemption under the Parent-Subsidiary Directive (PSD). The PSD provides, inter alia, for a withholding tax exemption for profit distributions made by qualifying EU subsidiaries to their qualifying EU parents.
The directive specifies that it does not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse. The French law implementing the PSD prescribes that the withholding tax exemption applies if the EU recipient is the beneficial owner of the dividends. Further, it disallows the benefits of the withholding tax exemption if the EU recipient is directly or indirectly controlled by one or more non-EU residents, unless the payer substantiates that the structure was not put in place to benefit from the withholding tax exemption under the directive.
While all four cases are substantially identical, the decision hitherto disclosed publicly concerns the French subsidiary (Eqiom, as a successor to Hocim and an earlier absorbed entity, hereafter Fco) of a Luxembourg entity (Enka, hereafter LuxCo). Fco distributed dividends to LuxCo and abstained from withholding tax on the distribution based on the PSD exemption. Following a tax audit, the French tax authorities reassessed Fco for failure to withhold tax on the grounds that LuxCo was not the beneficial owner of the dividends and, consequently, the distribution did not qualify for the PSD exemption. The tax authorities reasoned that the distribution was made to a Swiss bank account, and that Fco failed to provide any substantive evidence -such as at a minimum substantiated proof that LuxCo is the holder of the Swiss bank account- to the effect that LuxCo is the beneficial owner of the distribution.
Fco appealed the case to the Supreme Administrative Court after both the first level tribunal and the Court of Appeals upheld the position of the tax authorities. In its decision, the Supreme Court equally upheld the position of the tax authorities and ruled that the beneficial ownership condition is a lawful and valid condition for eligibility to the withholding tax exemption under the directive. The decision of the Supreme Court appears to be in conformity with a similar decision of the European Court of Justice of 26 February 2019 (so-called Danish cases decision, C-117/16 - previous coverage).
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