On 2 September 2015, the Court of Justice of the European Union (CJ) rendered its judgement in the case Groupe Steria (C-386/14). The CJ decided that the French rule that only grants a full tax exemption on dividend income if such income is received from a company belonging to the same tax-integrated group (i.e. fiscal unity), is an unjustifiable restriction to the freedom of establishment. Since French parent companies cannot form a fiscal unity with their foreign subsidiary companies under French tax law, the full tax exemption is effectively unavailable for dividends from subsidiaries established in other Member States.

The case involved a French company that received dividends from its subsidiaries established in France and other Member States. Under the French tax rules at issue, dividend income received from a subsidiary within the same fiscal unity is eventually fully exempt by means of a so called add-back, while dividend income received from a subsidiary outside the fiscal unity is exempt for only 95%. As French law does not allow for the formation of a fiscal unity in cross border situations such a full exemption is unavailable for dividends received from foreign subsidiaries. In consequence, French law required French companies to resort to a 95% exemption instead under the French participation exemption regime. The CJ considered this to be a restriction to the freedom of establishment that cannot be justified by an overriding reason in the general interest.

The judgement may be considered to be a major development in EU law. The CJ held that Member States are by no means free to disallow foreign subsidiary companies access to an element of a fiscal unity, such as full participation exemption as in the present case, by merely referring to the national scope of its fiscal unity systems. The CJ explicated that such a perceived freedom of the Member States cannot be inferred from the Court’s observations in X Holding (C-337/08). In X Holding the CJ held the ineligibility to form a cross-border fiscal unity under Dutch tax law not to infringe the fundamental freedoms. In Groupe Steria the CJ puts its judgment in X Holding into the perspective of merely addressing the issue of cross-border loss imports as an argument to justify a non-eligibility to form a cross-border tax group.

It may be inferred from the CJ’s judgment in Groupe Steria that the scope of the X-Holding judgment seems limited to the element of cross-border loss relief. In practice this means that any tax advantage that has been unavailable because of the ineligibility to form a cross-border fiscal unity can now be examined as to its compatibility with the freedom of establishment.