(i) Inbound cross-border dividends
Under French tax law, dividends received by a French parent company from a qualifying subsidiary are basically tax exempt. However, 5% of the received dividends remain taxable, since this amount is deemed to represent tax-deductible expenses incurred for the management of the participation. This is not true with regard to pure domestic cases, i.e. dividend payments between French resident companies who meet the various conditions for the application of the French group tax regime. In these cases, the taxable portion of the dividends is “neutralised” for the computation of the group taxable result, which leads to a “full exemption” of dividend payments between French domiciled companies.
So far, dividend payments from a non-domestic subsidiary to a French parent company could not benefit from a full exemption since the French group tax regime is exclusively available to domestic companies. On 2 September 2015, the Court of Justice of the European Union (CJEU) ruled in the Groupe Steria case (C-386/14) that this unequal treatment between domestic and non-domestic cases is not compatible with the freedom of establishment.
Due to the CJEU’s decision it is likely that the French tax law will be amended so that French parent companies receiving dividends from their non-domestic subsidiaries could also benefit from a full exemption.
In the meantime, i.e. until the law has been adjusted, in cases where the conditions for the application of the French group regime would be met, it is recommended that a full exemption is claimed for dividend payments the French parent company receives from its non-domestic group companies.
(ii) Outbound cross-border dividends
Since 17 August 2012, certain dividend distributions as well as deemed dividend distributions made by companies subject to French CIT and French branches of non-European Union companies are subject to a 3% special tax. However, such tax is not applicable to dividend distributions made within a French tax group or dividend distributions made by small- or medium-sized enterprises as defined in the EU law.
Some French taxpayers have challenged this 3% special tax and claimed that it is not compliant with EU law. In response to these claims, the European Commission has introduced an infringement procedure against France and France may now respond to the objections raised by the Commission. The Commission may also request France to amend the 3% tax legislation and bring it in line with the EU law. In case France fails to comply with such a request, the Commission could refer the case to the CJEU.
However, in any case companies doing business in France should consider filing a “proactive” refund claim before year’s end (for companies closing their FY at 31 December) for any 3% tax they have already paid, this since contributions paid in 2013 will be statute bared.
For more information on the topic discussed above, including what it means in practice or for other tax questions, contact your local PwC engagement team or me.