Questions of compatibility with the Parent-Subsidiary Directive and with the domestic law principle of equality in tax law are referred, respectively, to the CJEU and the Constitutional Council.

By two decisions dated 27 June 2016 relating to the 3 percent distribution tax on dividends, the Council of State has referred two interlocutory questions to the CJEU on the treatment of dividends redistributed by companies established in the EU and has submitted an application for a priority preliminary ruling on the issue of constitutionality to the Constitutional Council on the exemption from tax for dividend distributions between tax consolidated companies.

Initially, the taxpayers asserted that the provisions relating to the 3 percent distribution tax are unconstitutional in that they result in a difference in treatment stemming from the possibility (or not) of applying articles 4 or 5 of the Parent-Subsidiary Directive in order to avoid the application of article 235 ter ZCA of the French tax code. The Council of State was thus invited, to begin with, to decide on the question of the conformity of the 3 percent distribution tax with the Parent-Subsidiary Directive and thereafter to determine whether it led to a difference in treatment which would necessitate an application for a priority preliminary ruling on the issue of constitutionality (“QPC”).

By decision n° 399024, Association française des entreprises privées et autres, the Council of State refused to transmit the QPC to the Constitutional Council but referred two interlocutory questions to the CJEU. The Council of State effectively considered, on the one hand, that "the question of whether the distribution tax constitutes a tax on profits that is contrary to article 4, paragraph I, a) of the Directive presents a serious difficulty" and, on the other hand, that “the question is whether, if the distribution tax does not constitute a tax that is prohibited by article 4, paragraph 1, a) of the Directive, it could not be regarded as a “withholding tax”, from which profit distributions must be exempt by virtue of article 5 of this Directive”.

The Council of State also added that as long as the interpretation of articles 4 and 5 of the Directive had not led the judge to reject the application of the contested provisions to distributions within the field of application of the Parent-Subsidiary Directive, “no difference in the tax treatment of distributions can occur to the detriment of distributions made by a French parent company of profits of French or EU origin”, which means that “as matters stand” the QPC cannot be considered to be of a serious nature. However, it indicated that the claimant companies should resubmit a QPC depending on the outcome of the pending interpretation of articles 4 and 5 of the Parent-Subsidiary Directive by the CJEU.

The taxpayers also contested the 3 percent distribution tax on the grounds that it established a difference in treatment between distributions carried out within a tax consolidation group by a subsidiary to its parent company, and those carried out by a French subsidiary also 95 percent owned by its parent company, whose registered office is situated in a country other than France, due to the fact that in the first case the distributions are exempt from the 3 percent tax and in the second case they are not.

The Council of State, in its Société Layher decision n° 399506, considered that the QPC concerning the compatibility of this difference in treatment with the principle of equality before tax law and public burdens provided by articles 6 and 13 of the Déclaration des Droits de l'Homme et du Citoyen (declaration of human and civic rights of 1789) was of a serious nature and should therefore be referred to the Constitutional Council.

Companies that are more than 95 percent owned by a parent company but are not part of a tax consolidation group must therefore, in order to preserve their rights, make sure that they initiate litigation proceedings before the Constitutional Council decision which should be reached during the month of September 2016.