TAX NEWS - 2010

France Tax: Withholding tax on dividends paid to foreign UCITs contrary to EU Law

The French Administrative Lower Court of Paris ruled on 22 April 2010 that the withholding tax levied on French-source dividends paid to an Irish UCIT violated the free movement of capital principle in the Treaty of the Functioning of the EU and EEA. The French tax authorities have four months to lodge an appeal against the decision (until August 2010), although they have not yet done so.

Under French law, dividends paid by a French company to a non-French UCIT are subject to a 25% withholding tax, whereas dividends paid by a French company to a French UCIT are exempt from taxation in France (i.e. no withholding tax and no corporate income tax at the level of the UCIT). In addition, the French tax authorities take the position that tax treaties do not apply to UCITs, unless specific provisions are included in a treaty (see, for example, France's treaties with Germany, Spain and Sweden).

The decision by the Administrative Lower Court was issued in the context of the 2009 European Court of Justice (ECJ) decision in the Aberdeen and the reasoned opinion (i.e. the second stage of the infringement procedure) sent by the European Commission to France in March 2010 requesting that the rules on the taxation of dividends paid to foreign pension funds and investment funds be amended because they treat foreign funds less favorably than domestic funds. The ECJ ruled in Aberdeen that the EC Treaty precludes EU Member States from having legislation that exempts dividends distributed by a resident subsidiary to a resident UCIT from tax, but impose withholding tax when dividends are distributed by a resident subsidiary to a UCIT located in another EU Member State.

The decision is positive news for claims that already have been submitted by foreign UCITs to the French tax authorities. For other UCITs, the decision shows there is an opportunity to submit a claim in relation to French withholding tax suffered as from 1 January 2006.

Prepared by Taj, French tax and legal firm, member of Deloitte Touche Tohmatsu