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CJEU decision may allow French companies to reclaim tax, say experts

French companies with subsidiaries in other member states may be able to reclaim tax they have overpaid following a decision by the Court of Justice of the European Union (CJEU) on France's tax regime, said Paris-based tax expert Steven Guthknecht of Pinsent Masons, the law firm behind Out-Law.com.03 Sep 2015

The CJEU said in a ruling this week that France's 'intégration fiscale' tax legislation interferes with freedom of establishment in the EU and is contrary to EU law.

Under the French parent subsidiary regime, 95% of dividends received by a parent company, either from a French or a foreign subsidiary, are tax exempt. The 5% non-exempt amount is deemed to correspond to the expenses incurred by the parent with respect to the costs and expenses of the shareholding.

However, if the parent and subsidiary belong to a 'tax-integrated' group under the intégration fiscale rule, then the 5% amount is also exempt from tax.

As intégration fiscale is only available to French companies with subsidiaries in France, this rule disadvantages parent companies that own subsidiaries in other member states, making it less attractive for these companies to exercise their freedom of establishment, the CJEU said.

The Administrative Court of Appeal of Versailles brought the issue before the CJEU in the case of Steria, a company that has holdings in subsidiaries in France and in other member states. Steria had submitted a claim to the tax authorities in France for the tax levied on its non-tax-integrated subsidiaries outside France. Steria argued that the French rules are contrary to the freedom of establishment enshrined in EU law.

The CJEU said that for the rule to be justified, it would have to relate to situations that are not objectively comparable, or there would have to be an "overriding reason in the general interest".

The court considered that the situation of companies in 'tax-integrated' groups is comparable to those who are not, as both bear the costs and expenses related to their shareholdings. 

The difference in treatment is also not justified by any overriding reason, such as the need to preserve the power to impose taxes between member states, the CJEU said.

"That difference in treatment concerns only incoming dividends, received by resident parent companies, so that what is concerned is the fiscal sovereignty of one and the same member state," the CJEU said.

The court concluded that the difference in treatment is not compatible with freedom of establishment.

Jake Landman, a UK-based tax disputes expert at Pinsent Masons said that the CJEU has recognised a number of justifications for breaches to the freedom of establishment in the past.

"Some of these were put forward by the French government, in support of the intégration fiscale tax rules but there are strict conditions which must be met in order for the justifications to apply, and the CJEU concluded that the conditions were not met in this case," he said.

"Other taxpayers in a similar position to Group Steria should consider making such reclaims where they are in time to do so," Landman said.

However, Steven Guthnecht said that the tax treatment of non-EU source dividends paid to a French holding company is still unclear.

He said that the Steria case could lead to claims in relation to other French provisions that only apply to distributions between companies that are not members of a French consolidated tax group.

Guthknecht said: "France's amended Finance Bill for 2012 introduced an additional 3% tax on income distributed by French entities liable to corporate income tax.  However, this additional tax does not apply to amounts distributed between members of the same consolidated tax group. Therefore even if the EU parent company of the French distributing entity meets all the requirements to benefit from the French tax consolidated regime it may not benefit from the above exemption since it is not a French resident company."

He said "EU companies with French subsidiaries might be able to reclaim the 3% contribution tax they have overpaid following this decision of the CJEU."