(Articles 29 and 82 of the 2015 Amending Finance Act)
Received Dividends (Amendment of Article 145 of the French Tax Code)
Article 29, declared as conforming to the French Constitution by the Constitutional Council in its decision of December 29, 2015 n° 2015-726-DC, proceeds to several amendments :
1. Shares held in Bare Ownership can Benefit from the Participation Exemption Regime
Shares held in bare ownership are taken into account, as well as shares held in full ownership, to determine if a company is holding at least 5 % of the share capital of an issuing company. The fulfilment of this condition is, amongst others, necessary to obtain the status of parent company and then benefit from an exemption of received dividends (with the exception of the 5 % portion of costs and expenses).
This provision applies for determining the results of the fiscal year ending on or after 31 December 2015.
2. European Directive n° 2015/121 dated of January 27, 2015 providing Anti Abuse Clause is translated in French Law
The new anti abuse clause provides that participation exemption regime cannot apply to distributions resulting from a scheme or series of schemes put in place to obtain, as a main objective or as one of the main objectives, a tax benefit that is contrary to the purpose of the parent-subsidiary regime and which is not genuine based on the applicable facts and circumstances.
The idea is to refuse the participation exemption regime to dividends paid to non-European taxpayers through European companies.
Calling into question the participation exemption regime seems to be subject to the fulfillment of two cumulative conditions:
- One of the objective of the scheme must be to obtain the dividend exemption contrary to the purpose of the European Directive. This requirement, which can seem to be closed to the one provided in Article L. 64 of the French tax procedure code related to abuse of rights, is in fact broader. Indeed, whereas abuse of rights need an exclusive tax objective, the new anti abuse clause is content to a main tax objective.
- The scheme must be deprived of valid business reasons. This concept is not precise and will require from the judge a particular attention to avoid incursion of French Tax Authorities in companies' management decisions. However, government specified that valid business reasons should be interpreted in the same way as the 1990 cross boarder mergers Directive.
That anti abuse clause applies to the determination of the results of the fiscal year ending on or after December 31, 2015.
3. A Safe Harbor Clause applicable to Dividends Received from Non-Cooperative State or Territory (NCST) is established
To date, a parent company which received dividends from a subsidiary established in NCST would be able to benefit from the participation exemption regime if it can be proved that operations realized by its subsidiary do not have the intention nor the effect to locate profits in NCST.
This provision puts an end to the general exclusion of dividends received from a subsidiary established in a NCST from the participation exemption regime.
It applies to the determination of the results of the fiscal year ending on or after 31 December 2015.
4. The List of Distributions Excluded from the Participation Exemption Regime is Restored
Because of its inaccuracy, the French Constitutional Council has censured a provision of the Amending Finance Act for 2014 which replaced the list of distributions excluded from the participation exemption regime by a general measure reserving the benefit of the participation exemption regime to profits submitted to French corporate income tax or equivalent.
Therefore, Article 29 restored the previous list which notably concerns dividends received from investment companies or listed real estate investment companies.
Paid Dividends (Amendment of Article 119 ter of the French Tax Code)
Article 29 also amends the withholding tax exemption regime applicable to dividends paid by a French company to its European parent company.
1. To appreciate the 10 % holding requirement, shares can be held in full ownership or in bare ownership. This provision is in line with European case law (EUCJ, December 22, 2008, C 48/07, Vergers du Vieux Tauve) which considered that shares held in bare ownership can be qualified of equity securities under Article 3 of the European Directive. The French administrative Supreme Court also recently confirmed this analysis.
Current French Tax Authorities' regulations which refuse the benefit of the withholding tax exemption regime to shares held in bare ownership should be cancelled.
2. The withholding tax exemption regime applicable to parent companies established in the European Union (EU) is extended to parent companies established in European Economic Area (EEA). As such, dividends distributed to parent companies, or permanent establishment, located in Norway, Iceland and Liechtenstein should be exempted from withholding tax.
3. To date, the withholding tax exemption regime applies to paid dividends related to shares representing between 5 % and 10 % of a French company providing that its parent company is established in the EEA and cannot offset French withholding tax in its State of residence. This provision is in line with a French Tax Authorities' regulation which has drawn the consequences of the EUCJ Denkavit case law stating that a tax treatment varying in according with the parent company head office characterizes a restriction in freedom of movement.
4. Article 119 ter anti abuse clause is rewritten ; it is the same as the one provided with the framework of the participation exemption regime ; refer to our previous comments.
5. Dividends distributed to loss-making foreign companies are exempt from withholding tax providing that it is under court-ordered liquidation.
Article 82 of the Amending Finance Act for 2015 brings French tax law into line with European law by establishing a new Article 119 quinquies in the French tax code.
Indeed, the European Commission considered, in a formal notice addressed to France, that the difference between a French loss-making company or a French company under court-ordered liquidation, which is not taxable on received dividends, and a foreign company in the same situation, which is taxable on received dividends, constitutes a restriction of the free movement of capital.
As such, from January 1, 2016, dividends distributed to companies established in the EU or in cooperative States will benefit from the withholding tax exemption.
To benefit from the exemption regime provided by Article 119 quinquies of the French tax code, two cumulative conditions must be fulfilled by the beneficiary company:
- The generation of tax-losses (determined in accordance with the rules applicable to the head office) ;
- The company must be subject to a process similar to the French judicial liquidation mentioned in Article L. 640-1 of the French commercial code.
That exemption also applies to dividends paid to a permanent establishment. In this case, the exemption is subject to the fulfillment of the following conditions:
- The head office of the beneficiary and its permanent establishment are both located in EU or cooperative States ;
- The permanent establishment generated tax-losses (determined in accordance with the local rules applicable to the permanent establishment) ;
- The company is subject to a process similar to the French judicial liquidation or is in bankruptcy (the permanent establishment, which does not have legal personality, cannot be subject to an autonomous procedure similar to the French judicial liquidation).
Profits made in France by Foreign Companies
At last, it should be noted that the withholding tax exemption regime provided by Article 115 quinquies of the French tax code applicable to profits made in France by companies which have their registered office in the EU is extended to companies which have their registered office in Norway, Iceland and Liechtenstein.