The French tax administration published a second Guideline on 12 July 2007 (4 C-8-07), which lays down the procedural aspects pertaining to the exemption from French withholding tax on dividends paid by French companies to EEA parent companies, following the ECJ decision in Case C- 170/05 Denkavit delivered on 14 December 2006. The tax administration set out the main principles pertaining to the withholding tax exemption in Guideline 4 C-7-07 of 10 May 2007. Details of the second Guideline are summarized below.
On 14 December 2006, the European Court of Justice (ECJ) gave its decision in the case Denkavit International BV, Denkavit France SARL v. Ministre de l'Économie, des Finances et de l'Industrie (C-170/05) to the effect that the French withholding tax on outbound dividends is incompatible with the freedom of establishment set out in Art. 43 of the EC Treaty.
On 10 May 2007, the French tax administration accepted to extend the relief for economic double taxation, available to French parent companies by means of the participation exemption, to EEA parent companies to the effect that no French withholding tax on dividends would be applied under certain conditions.
Content of the Guideline
The second Guideline lays down the conditions and the procedural aspects of the withholding tax exemption set out in Guideline 4 C-8-07 of 10 May 2007.
(a) Scope of the exemption.
(i) Personal scope. The withholding tax exemption applies to companies and other entities registered and effectively managed in the European Economic Area (except Liechtenstein), provided they meet the requirements of the French participation exemption set out in Arts. 145 and 216 of the French Tax Code (Code Général des Impôts (CGI). This means that eligible entities must be subject in whole or in part in their country of residence to standard corporate income tax. In addition, they must hold at least 5% in the capital of the French subsidiary for a 2-year period. The holding requirements are assessed according to the French tax rules.
(ii) Objective scope. French-source dividends eligible to the withholding tax exemption are defined as those eligible to the French participation exemption. The concept of dividends covers only regular distributions of profits and reserves (e.g. distribution pertaining to a capital decrease or a share buy-back, exceptional distributions of reserves and liquidation bonuses). Hidden profit distributions defined in Arts. 109 to 111 CGI and profits from French permanent establishment of foreign companies are excluded from the exemption.
(b) Requirements at the level of the EEA parent company. To benefit from the exemption, the EEA parent company must be unable to set off the applicable French withholding tax. This may be the case if (i) the parent company benefits from a participation exemption regime in its country of residence, (ii) the parent company is liquidated, or (iii) the parent company is in a loss position that cancels out any carry forward of foreign tax credits corresponding to the French withholding tax.
(c) Administrative requirements. Upon request from the French tax administration, French distributing companies must provide an attestation (and justifications) under which the EEA parent company commits to meet all the conditions for the exemption. In addition, the parent company and the distributing company must be able to prove that the transaction does not constitute an artificial arrangement.
If the above-mentioned conditions in (b)(i), (b)(ii) and (b)(iii) above are not met, the exemption is retroactively repealed. In such a case, the French distributing company will have to file a corrective declaration and refund the withholding tax, increased by interest for late payment. Penalties may also be due.
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