A French UCIT is fully exempted on dividends received from French companies, but foreign UCITs are subject to a withholding tax (WHT) levied at 25% (increased to 30% as of January 1, 2012) or a lower rate that might be provided by the tax treaties.
The claimants (from Spain, Germany, Belgium and the US) argue that such a difference of treatment between French UCITs and foreign UCITs constitutes a restriction of the free movement of capital, provided by article 56 TEC and the tax treaties including a non-discrimination clause. Such a difference of treatment can only result from comparing two similar situations.
The key concern before the European Court of Justice (ECJ) is the determination of the level at which the review of the comparability of situations must be realized in order to assess a difference in tax treatment which constitutes a discrimination contrary to free movement of capital: should this assessment be done at the level of the investment vehicle or also at the level of the unit holders?
If the ECJ confirms that the tax situation has to be appraised at the level of the investment vehicle, then discrimination is very likely. Undue WHT paid by the UCITs might be refunded, under certain circumstances.
- Non-French UCITs, located in the EU or a state having completed with France a tax treaty including a non-discrimination clause (the US for example)
- By analogy: non-French real estate investment funds that are equivalent to French OPCI (SPPICAV / FPI)
- The WHT paid on dividends distributed by French companies (excluding French OPCI)
- Levied at the rate of 25% (increased to 30% as of January 1 2012), or a lower rate (often 15%) provided by the international tax treaties
- A tax claim, which is a letter addressed to the non-resident department of the French tax administration
- Payment justification of the WHT should be enclosed, specifying that the proof is free and does not only result from the copy of the WHT tax return 2777 filed by the paying agent
Due to the significant amounts the claims filed by the taxpayers could represent, the French Government asked the ECJ to restrict the retrospective effect of its decision.
- Before the ECJ decision expected on May 10, 2012:
- the WHT incurred from January 1, 2008 (to the extent of the relevant tax treaty) or from January 1 2010 (according to French domestic rules), and in the following years;
- After the ECJ decision expected on May 10, 2012:
- If such a waiver is granted by the ECJ, no claim relating to the past could be filed after the decision. A claim could be filed for 2012 and the future as long as the domestic law is not amended accordingly;
- Otherwise, the WHT incurred from January 1, 2009.
The impending decision is essential to provide a framework for comparing tax situations as well as the consequences that might exceed the scope of the foreign UCITs.
Indeed, entities structured as OPCIs are certainly composed mainly of real estate but also securities that may be shares of French companies. Dividends derived from French securities are fully tax free (as real estate incomes). But, a foreign real estate investment vehicle (that is equivalent to a French OPCI) receiving dividends from French (non-property) companies in which it holds shares, is currently subject to a WHT levied at 30%, which would likely be discriminatory.