In February 2009, the Conseil d'Etat decided that certain foreign nonprofit organizations ("Foreign NFP"), including foreign pension funds, should not be treated less favorably than their French counterparties when receiving French source dividends (principle of free movement of capital). Given that the French NFP were exempt in respect of French source dividends, whereas the Foreign NFP were liable to French withholding tax on the same, a subsequent French Finance Bill provided that both French and Foreign NFP should be liable to a 15 percent taxation (corporate tax and withholding tax) to the extent the Foreign NFP could demonstrate (using a form provided by the FTA) that they should be treated as "nonprofit." Therefore, the question was: Under what precise criteria should the "nonprofit" activity be defined?
In a recent case decided by the Administrative Appeal Court (Cour administrative d'appel, "CAA") of Versailles on March 4, 2014, the FTA was taking the position that the "nonprofit" analysis should be based on the criteria used under French domestic law; in other words, the FTA was taking the position that the use of domestic criteria would not be against the principle of free movement of capital.
The Versailles CAA took the view that, in accordance with the Santander case decided by the EU Court of Justice, only "pertinent criteria of distinction" should be relevant for the purposes of the above analysis.
In the specific case before the Versailles CAA, a UK pension fund had 13 directors and was remunerating them by an amount that was higher than the relevant maximum amount allowed by the French domestic rules defining the "nonprofit" criteria for a similar activity (also the French rules allow only a maximum of three paid directors).
The Versailles CAA took the view that (i) the UK pension fund was providing, to the beneficiaries, the same services as those provided by a French pension fund, and (ii) to the extent the remuneration paid to the directors was not based on performance, and rather reflects the level of their responsibilities, the management of the UK pension should be viewed as "nonprofit" and, therefore, comparable to the French pension fund.
In other words, the Versailles CAA, siding with the UK pension fund, decided that the maximum amount of remuneration (as defined by the French domestic law) is not a pertinent criteria to decide the "nonprofit" activity of the UK pension fund as long as the latter provides similar services as French pension funds within a noncommercial remuneration system (i.e., not based on performance).