The European Court of Justice (the “ECJ”) recently ruled that the existing policy of imposing withholding tax on dividends paid by French companies to investment funds established in other EU Member States was not compatible with European Union (“EU”) law.
The ECJ ruling, which issued on 10 May 2012, followed a request by France’s Supreme Administrative Court (the “SAC”) for a preliminary ruling by the ECJ on a number of issues arising from ten test cases referred to the SAC by the Administrative Lower Court of Montreuil. The test cases related to the tax treatment of dividends paid to investment funds located in Belgium, Germany, Spain and the United States.
Despite France’s argument to the contrary, the ECJ ruled that French and foreign investment funds are sufficiently comparable and so the imposition of a 30% withholding tax (or 25% up to 31 December 2011) on non-French investment funds violates the provisions of the EU law as no such withholding was applicable to French funds. In addition, while the ECJ avoided a specific ruling on the position of non-EU investment funds, it was indicated that the mere fact that efficient tax audits could not be carried out in jurisdictions outside the EU was not capable of justifying the imposition of differing tax treatments. It was further indicated that this remains the case even when a foreign investment fund is established in a jurisdiction that has not concluded a tax treaty with France incorporating provisions as to mutual assistance.
Implications
As a result of the ECJ’s ruling, both EU and non-EU investment funds that have been the subject of withholding tax in France since 1 January 2009 may be able to secure the repayment of sums withheld under this tax. It is estimated that the ECJ’s ruling could lead to tax rebates amounting to €4.2 billion. As the principles laid down in the ECJ’s ruling are far-reaching and can apply to a number of different portfolios, it has been estimated that the total value of claims on an EU-wide basis could be as high as €20 billion.
In addition, the ruling may have implications regarding the future establishment and on-going operation of investment funds. To date France has been one of the primary European jurisdictions for the domiciliation of investment funds, most of which were domestic in focus. However, now that the advantage which they held over non-French funds with regard to dividend payments from French companies has been removed this may lead to asset managers reconsidering the use of other jurisdictions when launching new funds, with Ireland and Luxembourg being the most likely options due to their leading roles as domiciles for cross-border European funds.
For example, 30% of European cross border funds (being funds which derive less than 80% of their assets from a single market) are domiciled in Ireland. The ECJ’s ruling is likely to lead to an acceleration of the trend which, according to statistics from the Central Bank of Ireland dated November 2011, saw the net asset value of Irish domiciled funds increasing more than 30% over the previous two years. In addition, the annual statistical report from the European Fund and Asset Management Association (“EFAMA”) dated February 2012 showed that Irish UCITS (Undertakings for Collective Investment in Transferable Securities) experienced the highest net inflows of any fund domicile during 2011 - some €50 billion more than the next most successful domicile. Furthermore, the EFAMA statistics show that in the last 11 years the net assets of Irish UCITS have grown by more than 500% and that Ireland’s share in the overall UCITS market increased by 26% since the beginning of 2011. In the fourth quarter of 2011 alone, Irish UCITS attracted five times more new monies than those of all other jurisdictions combined.
In addition, based on the foregoing, following the ECJ’s ruling, asset managers with existing French and other EU funds may elect to rationalise their structures, for example by converting the existing funds into feeder schemes.
