Dividends received by French companies from European subsidiaries: potential tax refund
Pursuant to article 145 and 216 of the French Tax Code, dividends received by a French company owning at least 5% of the share capital of the distributing company are exempted from tax, save for a lump-sum amount equal to 5% of the dividends. However, dividends distributed by a French company which is a member of the same tax group as its parent benefit from a full tax exemption (except for dividends distributed during the first year in which the subsidiary joins the tax group).
An issue arises as a result of the fact that foreign companies cannot join a French tax group as they are not subject to French corporate tax. Therefore, the tax treatment of dividends received by a French company varies depending on the location of its subsidiary (whether in France or another Member State).
The European Court of Justice (“ECJ”) stated in a recent ruling (Groupe Steria1) that the French legislation disadvantages parent companies that own subsidiaries established in other Member States by limiting their freedom of establishment and that should be considered as an infringement of EU law. The Amended Finance Bill for 2015 should modify this regime as a result of this ruling.
We recommend that French parent companies receiving dividends from subsidiaries established in other Member States review their position in order to determine whether they are eligible to benefit from a potential tax refund. The statute of limitations period for such a claim expires on 31 December of the second year following the year during which the tax was paid (for example, for dividends received during FY2012 closing on 31 December (which were subject to French corporation tax in 2013), the claim for a refund must be filed by 31 December 2015).
Compatibility with the EU Law of the 3% tax on dividend distribution
The Amended Finance Law for 2012 introduced a 3% corporate income tax surcharge (the“CIT surcharge”) on distributions. The rules of the surcharge raise some issues about its compatibility with the EU Treaty as well as with the EU Parent-Subsidiary Directive.
Indeed, the European Commission has brought infringement proceedings against France. Although the rationale for such proceedings is not known, the compatibility of this provision with EU Law (and, in particular, the EU Treaty and the Parent-Subsidiary Directive) raises the following questions.
Potential infringement of the freedom of establishment
The CIT surcharge could be considered as an infringement of the freedom of establishment principle set out in the EU Treaty for the following reasons:
- potential discrimination between French subsidiaries due to the tax residency of its parent company: when a dividend is distributed by a French subsidiary to its French parent company (which is a member of the same tax group), the distribution is not subject to the CIT surcharge, whereas the same distribution made to a parent company located in another Member State is subject to the CIT surcharge (as that EU parent company cannot join a French tax group); and
- potential discrimination between a French permanent establishment (“PE”) and a French subsidiary of a foreign company: the French PE of an EU company is excluded from the scope of the CIT surcharge on the distributed profits, whereas the dividends paid by a French subsidiary to its foreign parent company are subject to the CIT surcharge. Therefore, an EU company investing in France through a PE is subject to a more favourable tax treatment than one investing through a subsidiary.
Potential infringement of the EU Parent-Subsidiary Directive
The cumulative taxation on distributions resulting from the CIT surcharge could also be viewed as being in conflict with the EU Parent-Subsidiary Directive as dividends distributed to an EU company will be subject to the 3% tax, whilst the Directive provides that such dividends should not be subject to tax.
We recommend that French companies that have distributed dividends subject to the CITsurcharge take pre-emptive action by filing a claim as soon as possible. Indeed, a potential decision of the ECJ or French courts regarding the incompatibility of the CIT surcharge with EU principles will not allow for an extension of the period during which companies may file a claim.
Therefore, it is essential to make a pre-emptive claim within the statute of limitations period which is until 31 December of the second year after the year in which tax was paid (hence, for aCIT surcharge paid during 2013, the company has until 31 December 2015).
French subsidiaries whose parent company is located in a third State (such as the United States) could also potentially challenge the CIT surcharge on the basis of the non-discrimination provision included in an applicable French tax treaty (such as the France / US tax treaty).
Macron Law: new favourable provisions regarding employee incentives
Joint-stock companies are eligible to grant restricted stock units (“RSUs”) to their employees or managers which aim to provide them with an additional income whilst retaining such individuals within the company. The Macron Law introduces important modifications to this incentive scheme.
Regime applicable at the level of the entity
Companies granting RSUs have to pay an employer contribution of 30% assessed on the fair market value of the RSUs at the date of grant. The Macron Law introduces two significant changes:
- with respect to the contribution rate: the rate is reduced to 20% for all companies and could even be reduced to 0% in certain circumstances for European small and medium sized enterprises that have never distributed dividends since their incorporation; and
- with respect to the payment: the employer contribution will now be due at the time of vesting, which means that there is certainty that such payment derives from a benefit actually granted to an employee.
Regime applicable to the beneficiary
The existing regime requires that the RSUs are subject to a minimum 2-year vesting period followed by a minimum 2-year holding period.
The Macron law modifies these requirements by providing that the vesting period must be at least one year (rather than two years) and the beneficiary is not entitled to sell the RSUs before the end of a minimum period of two years from the grant.
Furthermore, the tax treatment of the acquisition gain is also improved as such gain may benefit from the ownership duration rebate which commences from the vesting date. Previously the ownership duration did not apply to the acquisition gain but only to the capital gain.
All of these measures are applicable to RSUs granted by an Extraordinary General Meeting held on or after 8 August 2015.
The RSUs granting process should be carefully reviewed in order to determine whether grants made after the enactment of the law are subject to this new regime.