ECJ decision finds the French participation-exemption regime partially illegal

As a reminder, under French law, dividends received from resident or non-resident subsidiaries are 95% exempt at the French parent company’s level (the participation-exemption regime) provided certain conditions are met (shareholding of at least 5% during two years).

The remaining 5% of such dividends is subject to tax at the standard rate, resulting in an effective taxation of circa 1.9%. By exception, dividends distributions between companies members of a tax consolidated group are 100% exempt, being noted that the French tax consolidation regime is only available for entities subject to French corporation tax.

On September 2, 2015, the European Court of Justice ruled that the freedom of establishment was restricted by the French tax legislation which de facto excludes from the 100% participation-exemption regime dividends received from EU entities which are not eligible to become part of a French tax consolidated group.

Considering this Court decision, and without waiting for the decision of the referring French court, French parent companies should consider the opportunity to claim the refund of the corporation tax paid on the 5% portion of the dividends received (i) during financial years closed as from November 30, 2012, (ii) from EU subsidiaries which would have been eligible to join a French tax consolidated group if established in France.

Furthermore, this Court decision strongly supports the analysis aimed at demonstrating that the 3% French distribution tax is a forbidden restriction to the freedom of establishment. Indeed, companies subject to French corporation tax are liable to a 3% tax on their dividends distributions, except for distributions within tax consolidated groups.

As a consequence, French companies held at 95% at least by an EU parent company should also consider the opportunity to claim the refund of the 3% tax paid during financial years closed on December 31, 2013 or after.