On 10 May 2012, the ECJ (Joined Cases C-338/11 to C-347/11) ruled that French withholding tax on French source dividends paid to foreign investment funds is not compatible with the EU free movement of capital to the extent French investment funds do not suffer tax.
Investment funds resident in the EU or in Third Countries had challenged the French 25% WHT in court. The lower court of Montreuil first requested an opinion from the French Supreme Court (Conseil d'Etat), which itself recommended that several questions should be referred to the ECJ. The lower court consequently referred to the ECJ the following questions:
- In order to determine the existence of a discrimination, what is the appropriate level of comparability? In order to determine whether there is a difference in the treatment provided by French tax legislation, should the analysis be undertaken only at the level of the fund or at the level of the unit holders as well alongside the status of the fund?
- If the ECJ considers that the status of the investor has to be taken into account, under which conditions would a French WHT be compatible with the free movement of capital?
The ECJ answered only to the first question and ruled that French tax law creates a difference of treatment between residents and non-residents fund. Since the French provision under scrutiny is based on the “residence” of the funds, the comparability should consequently be assessed solely at this level. In light of the aim of the law which seeks to prevent dividends to be subject to a series of tax charges, the ECJ concluded that the situation between domestic and foreign funds is comparable.
Other arguments which had been put forward by the French Government (ie the balanced allocation of taxing right between Member States, the effectiveness of fiscal supervision and the coherence of the tax system), were not accepted by the ECJ. In addition, the Court underlined that the French Government did not prove that the efficiency of tax audits may justify the discrimination.
As concerns Third Countries, the Court did not analyze the impact of article 64 § 1 of the TFEU (i.e. the" grand fathering" clause) as this was not part of the questions raised within this preliminary ruling.
Last but not least, the ECJ refused to limit the temporal effect of its ruling as was requested by the French Government. This ruling should consequently open a new period to file claims in France for past years.