European tax: ECJ rules on application of Parent-Subsidiary Directive to French SAS

The European Court of Justice (ECJ) issued its decision in the case of Gaz de France – Berliner Investissement SA v. Bundeszentralamt für Steuern (C-247/08) on 1 October 2009, concluding that the EC Parent-Subsidiary Directive (PSD) does not apply to France's société par actions simplifées (SAS) for periods before 2005. The German Tax Court of Cologne had referred the case to the ECJ requesting a preliminary ruling on whether the PSD should apply to dividends paid to a French company of a type not specifically included in the annex to the Directive. If the PSD did apply, there would be no German withholding tax on the dividends.

France introduced the SAS in 1994. Frequently used as a joint venture vehicle, the SAS is similar to both a French limited liability company (société à responsabilité limitée or SARL) and a joint stock company (société anonyme or SA). The French Tax Code specifically provides that an SAS is taxed in the same manner as an SA, i.e. an SAS is treated as an SA for all purposes of the Code.

According to the PSD, which provides for an exemption from withholding tax on qualifying intra-EU dividend distributions, only companies having one of the legal forms listed in the annex to the Directive are entitled to an exemption from withholding tax on profits distributed by a subsidiary to its parent company. The SARL and SA are both legal forms listed in the annex as entities that are considered as a "company of a Member State" for purposes of the PSD, but the SAS was not  included until the Directive was amended in 2003, when new forms of companies were added to the annex (with an effective date of 1 January 2005). The 2003 update also added that the PSD will apply to all companies set up under French law and subject to French corporate income tax.

Until it converted to an SA in 2002, Gaz de France, a company established in France, had the legal form of an SAS. The SAS wholly owned Gaz de France Deutschland GmbH (GmbH), a German limited liability company. In 1999, the GmbH distributed profits to its French parent company and withheld tax on the dividends in accordance with the relevant rules in the German Income Tax Act. The SAS's request for a refund of the withholding tax was rejected by the German tax authorities on the grounds that the SAS was not a "parent company" within the meaning of the PSD. The SAS appealed the decision of the German authorities, raising two questions concerning the 1999 distribution by its German subsidiary:

- Whether, for purposes of the PSD, a French company that has the legal form of an SAS can be considered, even for years before 2005, as a company of a Member State so that it would be entitled to an exemption from withholding tax on the 1999 distribution; and
- If not, whether the pre-2005 version of the PSD infringed the freedom of establishment and/or the free movement of capital by excluding the SAS as a legal form entitled to the withholding tax exemption.

The ECJ was expected to rule that the late update to the PSD, which took place nine years after the SAS form came into existence, constituted an infringement of the freedom of establishment and free movement of capital. These expectations were based on several considerations, including the ECJ's role in judging EU bodies (the European Commission, the European Council, etc.) and that, in waiting so long to update the PSD, the Council breached European law. Further, even though not listed in the annex, the SAS satisfies all other conditions set out in the PSD (i.e. it is tax resident in a Member State and is subject to corporate income tax in that state without any possibility of being exempt). The SAS also is taxed under the same tax regime as an SA (which was listed in the annex at the time) in France. Moreover, the PSD has as one of its purposes to establish a common system of taxation to eliminate tax effects that would disadvantage cooperation between companies of different Member States, as compared with cooperation between companies of the same Member State, and thereby facilitate the grouping of companies at an EU level.

The ECJ, however, followed the recommendation of Advocate General Ján Mazák in the case and specifically held that, under the annex to the PSD, a French SAS is not a company of an EU Member State that could benefit from the provisions of the Directive before the 2003 amendment. The ECJ also held that denying the benefits of the PSD to French entities that had a legal form not listed in the annex did not restrict the freedom of establishment or the free movement of capital. Citing earlier case law (i.e. the joined cases of SAM Schiffahrt and Stapf), the ECJ noted that, when it is asked to issue a preliminary ruling on a measure, the assessment of the validity of the measure normally must be based on the situation that existed at the time the measure was adopted. Because the PSD was adopted before the SAS was introduced into French law, it is not possible to invalidate the relevant provisions of the PSD. Had the ECJ had concluded otherwise, it would have been possible to lodge SAS-related claims under the Merger Directive, which was introduced in 1990, but did not include the SAS form in its annex until the Directive was updated in 2006. This is not the case, however, with respect to the Interest and Royalties Directive (IRD) adopted in 2003. Although the SAS form was created in 1994, to this day it is still not listed in the IRD (even after the amendments to the other two Directives), which may constitute grounds for a claim against the validity of the relevant IRD provisions.