Legal background: Dividends paid by a company subject to corporate income tax in France, with headquarters also located in France, to a company established in another member State of the European Union are exempted from  the 30% withholding tax subject to certain conditions. 

In particular, the company receiving the dividends must justify the statute of beneficial owner, and in this event the company is controlled directly or indirectly by one or more residents of states that are not member of the European Union, this shareholding chain shall not have main purpose or, as one of its main purposes, to benefit from this exemption (article 119 ter of the French Tax Code).

Scheme in place: To benefit from the withholding tax exemption, some legal entities devoid of substance are interposed between the distributor company and the non-resident of the European Union. The main purpose of this interposition is the research of the benefit from this exemption.

Outcome of audit: The French tax administration is very careful to these schemes, and it may address some requests for international administrative assistance to other member states in order to obtain accurate information on the beneficiary company of these distributions.  In this event of transaction, the French Tax Authorities will make a tax reassessment of withholding tax and may apply penalties for willful failure of 40% or fraudulent means of 80%.