The CJEU confirmed on 17 May 2017 that the French 3% tax on distributed earnings is contrary to the Parent-Subsidiary Directive. French companies that received dividends from EU subsidiaries are thus authorized to claim repayment of the 3% tax levied in 2015 and 2016 on their dividend distributions. It also provides additional arguments to all the other French companies which had to pay this 3% tax.

Incompatibility of the 3% tax with the Parent-Subsidiary Directive

The Court of Justice of the European Union confirmed on 17 May 2017 that the French 3% tax on distributed earnings is contrary to the Parent-Subsidiary Directive.

More specifically, the Court ruled that Article 4 (1) (a) of the Parent-Subsidiary Directive, as amended on 8 July 2014, "must be interpreted as precluding a tax measure laid down by the Member State of a parent company, such as that at issue in the main proceedings, providing for the levy of a tax when the parent company distributes dividends and the basis of assessment of which tax is the amounts of the dividends distributed, including those coming from that company's non-resident subsidiaries".

According to the Court, the 3% tax on distributed earnings is thus creating a double taxation which is contrary to the purposes of the Parent-Subsidiary Directive, especially when the French company is redistributing dividends it received from non-resident subsidiaries.

Opportunity to request reimbursement of the tax unduly paid

In application of this decision, it is confirmed that French companies that received dividends from EU subsidiaries are authorized to claim repayment of the 3% tax levied on their dividend distributions.

Although it could be considered that, per se, this decision does not preclude a Member State to levy this tax on dividend distributions which do not constitute a redistribution of dividends received from EU entities (e.g.: distributions of operating earnings and/or redistribution of dividends received from French of non-EU subsidiaries), it gives strong arguments to claim for the reimbursement of any 3% tax imposed on distributed earnings paid by French companies since the action of treating differently distributions made by French companies depending on the source of the distributed income is very likely to constitute a discrimination contrary to the French constitution, the EU legislation and French international commitments.

As this stage, the position that the French tax authorities will take is still uncertain. They could either:

  • admit that the 3% tax is incompatible (among others) with the EU legislation and accept all refund claims lodged with respect to the 3% tax levied on dividend distributions to EU parent companies ; or
  • take a very restrictive approach and limit tax refunds to French companies that are in a position to demonstrate that the 3% tax has been levied on the redistribution of dividends received from EU subsidiaries. In such a case, further litigation will be required to claim the reimbursement of the 3% tax when the French company is not in a position to trace the origin of the distribution earnings and/or did not receive dividends from an EU subsidiary which could be deemed redistributed.

We should know more in the coming weeks.

As a reminder, French companies have until 31 December 2017 to file a claim regarding the 3% tax paid in 2015 and until 31 December 2018 to file a claim regarding the 3% tax paid in 2016. It is thus important to lodge claims with the French tax authorities before the end of year to avoid being time-barred with respect to the tax paid in 2015.