French tax treatment of foreign dividends and interplay withfundamental EU freedoms

This effectively partial taxation of

profit distributions does not occur, however, if the French

parent company and the French subsidiary are taxed jointly

under a French tax consolidation regime - intégration fiscale. Since foreign

companies are not allowed to take part in this form of group

taxation, the European Court of Justice (ECJ) has been asked to

examine whether such a regime is consistent with the freedom of

establishment principle and the corporation tax legislation of

the European Union.

On June 11 2015, the opinion of

Advocate General Kokott in Case C-386/14 Groupe

Steria SCA versus Ministère des finances et des comptes publics was

published on the website of the Court.

Background to the

case

The main proceedings

concern the corporation tax of the French company Groupe Steria

SCA (Groupe Steria) from 2005 to 2008. Groupe Steria is the

parent company of a group subject to the special rules

governing group taxation.

Groupe Steria is

seeking to deduct the 5% proportion for costs and expenses (5%

proportion), which is non-deductible under article 216 of the

French Tax Code, in respect of revenue that one of its French

subsidiaries received from its holdings in companies

established in other EU member states. The French authorities

refuse this deduction because it is only possible under article

223 B of the French Tax Code if the holdings'

revenue originates from a member of the French tax group. Under

article 223 A of the French Tax Code, however, companies

resident abroad may not be members of a French tax group.

Groupe Steria does

in fact accept the exclusion of foreign companies from group

taxation. However, it takes the view that the French

legislation is inconsistent with the freedom of establishment

principle in that it refuses to allow deduction of the 5%

proportion in respect of holdings that could be part of the

French tax group were they not resident abroad.

Proceedings before

the court

The Administrative

Court of Appeal of Versailles, which is now dealing with the

main proceedings, referred the following question to the ECJ on

August 13 2014 for a preliminary ruling pursuant to article 267

TFEU:

Does

article 43 EC [Treaty] preclude the rules governing French

group taxation which enable the parent company of a group to

neutralise the add-back of the proportion of costs and

expenses, fixed at 5% of the net amount only of those dividends

received by it from resident companies included within the

French tax group, when such a right is refused to it under

those rules as regards the dividends distributed to it from its

subsidiaries established in another member state which, had

they been resident, would have been eligible in practice, if

they so elected?

In the proceedings

before the ECJ, Groupe Steria, Germany, France, the

Netherlands, the United Kingdom and Northern Ireland, and the

European Commission all submitted written observations. Groupe

Steria, the French Republic and the Commission also made

submissions at the hearing held on May 13 2015.

Advocate

Kokott's opinion

In the opinion

issued on June 11 2015, the Advocate proposes to the ECJ that

the freedom of establishment under article 43(1) EC and article

48 EC precludes legislation of a member state which, under a

special rule on group taxation available only to domestic

companies, allows group companies to deduct the charges

relating to holdings in other group companies when this

deduction is otherwise excluded.

The restriction on

the freedom of establishment at issue here is thus not

justified to preserve the coherence of the tax system either. A

regulation such as that disputed in the main proceedings is

therefore contrary to the freedom of establishment under

article 43(1) EC and article 48 EC.

Practical

implications - claiming a refund

In anticipation of

the ECJ ruling - expected by the end of the year

- French holding companies of EU group companies which

have unduly paid French corporation tax on EU-source dividends

are able to claim back any French corporation tax paid in the

past from the French tax authorities.

In this respect, the situation is

pretty clear as regards French corporation tax paid on

EU-source dividends. A claim can be filed until December 31 of

the second year following the year during which the French

corporation tax was paid.

In practice, it means that French

holding companies of EU group companies may claim refunds up to

December 31 2015 with respect to any EU-source dividends

received since 2012 (and subject to French corporation tax in

2013). Failure to lodge a claim by the end of this calendar

year therefore could result in no refunds being given for any

tax paid in 2013. It is therefore prudent not to wait the final

ruling of the ECJ to lodge a claim before the French tax

authorities.

This case is also directly relevant

to Germany and other EU member states as the same issues arise

- that is, exclusion of foreign subsidiaries from tax

groups, deemed non-deductible expense of 5% of the dividend

received and full expense deduction in respect of profits

pooled within a group.

However, the outcome of the decision

is less clear for non-EU source dividends paid to a French

holding company. It is indeed debatable whether a French

holding company could consider that such foreign source

dividends may not be treated differently and less favourably

than EU-source dividends.

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