Scope of The 3 Per Cent Tax
The 3 per cent tax is levied on dividend distributions and/or deemed dividend distributions by French companies, French permanent establishments and other French entities that are liable for corporate income tax in France. For French tax purposes, the 3 per cent tax is defined as a corporate tax owed by the French distributing entity; it is not defined as a withholding tax.
The 3 per cent tax does not apply, inter alia, to distributions that are made by small and medium-sized companies (as defined by EU Regulation n° 800/2008), or between companies that are included in the same French tax consolidated group.
Compliance With The Parent-Subsidiary Directive
Under Article 5 of the EU Parent-Subsidiary Directive, distributions to EU parent companies directly holding at least 10 per cent of the shares of the relevant EU distributing subsidiaries during at least two years are exempt from any withholding tax.
Under Court of Justice of the European Union (CJEU) case law, withholding tax is defined as
Any tax on income received in the State in which dividends are distributed, where (i) the chargeable event for the tax is the payment of dividends or of any other income from shares, (ii) the taxable amount is the income from those shares and (iii) the taxable person is the holder of the shares.
Since the 3 per cent tax is levied on the French distributing entity, rather than on the holder of the shares, the success of a claim based on the withholding tax exemption of the EU Parent-Subsidiary Directive is uncertain. In Athinaïki Zythopoiia AE, C-294/99, 4 October 2001, however, the CJEU recognised in similar circumstances that a tax levied at the level of a distributing entity had the same economic effect as a withholding tax and should therefore be regarded as such.
Compliance With The Freedom of Establishment
Under Article 49 of the Treaty on the Functioning of the European Union (TFEU), restrictions on the freedom of establishment of EU companies are prohibited to the extent that they cannot be justified by an overriding reason of public interest.
The 3 Per Cent Tax Constitutes a Restriction on the Freedom of Establishment
Under CJEU case law, a difference in the tax treatment of French companies that are comparable based on the place of establishment of their shareholders constitutes a restriction on the freedom of establishment.
The 3 per cent tax is levied on a French distributing company held by a non-French parent company with no permanent establishment in France, but not on a French distributing company held by a French parent company if both of them are included in the same French tax consolidated group. Under French case law, the position of such French distributing companies should be considered as comparable, to the extent that the non-French parent company would have been in a position to form a tax consolidated group with its French subsidiary had it been established in France. See, for example, SARL Coréal gestion, 249047, 30 December 2003, in which the French Tax Supreme Court ruled that the position of a French subsidiary of a German company was comparable with the position of a French subsidiary of a French parent company, to the extent that the German company would have been in a position to benefit from the French participation exemption regime had it been established in France. This difference in tax treatment should therefore constitute a restriction on the freedom of establishment.
The Restriction is Not Justified by Any Overriding Reason of Public Interest
A restriction on the freedom of establishment may be justified by an overriding reason of public interest if it is proportional to the achievement of the objective pursued. In particular, the French tax authorities could argue that this restriction is justified by the preservation of the cohesion of the tax system.
This would be regarded as a valid justification if there is a direct link between (i) the grant of a tax advantage and (ii) the compensation for that advantage through a tax levied within the framework of the same tax regime. In the case at hand, the French tax authorities would claim that the exemption from the 3 per cent tax granted to distributions within French tax consolidated groups is compensated for by the taxation of distributions made to shareholders of the French parent companies. This objective would not be achieved if the exemption from the 3 per cent tax was also granted to distributions to non-French parent companies.
It is unlikely, however, that this justification would be upheld in the courts as the exemption from the 3 per cent tax granted to distributions within French tax consolidated groups is not subject to the condition that the distributions received by the French parent company be distributed onward to its shareholders and, in this respect, be subject to the 3 per cent tax. An example that reflects similar circumstances is Aberdeen Property Fininvest Alpha Oy, C-300/07, 18 June 2009.
Furthermore, non-French parent companies that have a permanent establishment in France are entitled to form a French tax consolidated group, so distributions by their French subsidiaries are definitely exempt from the 3 per cent tax.
French subsidiaries that are at least 95 per cent held by EU parent companies should therefore be entitled to claim a refund of the 3 per cent tax based on Article 49 of the TFEU.
Compliance With Double Tax Treaties
Most of the double tax treaties signed by France include a non-discrimination provision. Under this provision, French companies that are wholly or partly held by residents of the other contracting State cannot be subjected to taxation that is more burdensome than the taxation to which other French similar companies are, or may be, subject.
According to French case law, the French subsidiary of a non-French parent company should be considered as similar to a French subsidiary that is included in a French tax consolidated group to the extent that the non-French parent company would have been in a position to form a tax consolidated group with its French subsidiary had it been established in France. For example, see Andritz, 233894, 30 December 2003, in which the French Tax Supreme Court ruled that the French subsidiary of an Austrian company was similar to the French subsidiary of a French parent company, to the extent that the Austrian company would have been in a position to benefit from the French participation exemption regime had it been established in France.
French subsidiaries that are at least 95 per cent held by parent companies established in a double tax treaty-protected State should therefore be entitled to claim a refund of the 3 per cent tax, based on the non-discrimination provisions of the relevant treaty.
Making a Claim For a Refund
Claims to obtain a refund of the 3 per cent tax based on these grounds must be sent to the French tax authorities no later than 31 December of the second year following the year during which the 3 per cent tax was paid.
If the French tax authorities reject the claim, or do not reply within a six month period (which is deemed to be a refusal), the taxpayer is entitled to bring the claim before the competent administrative lower court during a two month period following the notification of the refusal or, in case of a deemed refusal, following the end of the six month period.
Lower court decisions are generally rendered within two years of the start of the action.
If the court’s decision is not satisfactory to the taxpayer, an appeal can be brought before the competent administrative court of appeal and, ultimately, before the Supreme Tax Court in cases of a breach by the court of appeal of a rule of law.