TAX NEWS - January 2010

France Tax Alert: Rules on dividends to foreign nonprofits changed

In France, the Amended Finance Bill for 2009 passed on 30 December 2009, makes important changes to the rules governing the tax treatment of dividends paid by French companies to foreign nonprofit organizations. Under the new rules, if certain conditions are satisfied, nonprofit organizations will be able to qualify for a new statutory withholding tax rate of 15%. In addition, dividends received by French nonprofit organizations will be subject to corporate income tax at the rate of 15%. The new rules are effective 1 January 2010.

The new regime was introduced as a result of the Stichting Unilever Pensioenfonds decision by the French Administrative Supreme Court on 13 February 2009. In this case, the Supreme Court ruled that applying a withholding tax on dividends paid by French companies to Dutch pension funds constitutes a restriction on the free movement of capital principle in the EC Treaty (article 56) when the Dutch pension funds are able to prove that they would benefit from the domestic exemption had they been established in France.

Scope of new regime: To qualify for the new 15% statutory withholding tax rate, the following requirements must be met:

- The foreign nonprofit organization must be established in an EU Member State or an EEA Member State, the latter of which must have concluded a tax treaty with France containing an administrative assistance provision to combat fraud and tax evasion (i.e. Norway and Iceland); and

- The foreign nonprofit organization would be subject to a 15% tax on dividends if its registered office was located in France. According to French Parliamentary pre-legislative reports and the decision issued by the French Administrative Supreme Court in the Stichting Unilever Pensioenfonds case, such a qualification would depend on the nonprofit nature of the organization or pension fund as defined under French rules. In particular, based on the Stichting decision, to be deemed to be comparable to a French pension fund, a foreign pension fund would need to:
     . Fund itself only through mandatory contributions by employers and employees and income from invested monies; and
     . Only use its funds to serve pensions and social benefits, all capital distributions being prohibited.

It is possible that the French tax authorities may try to impose more restrictive conditions as the new law does not specify the conditions to be satisfied to qualify as a nonprofit organization.

Implications: The adoption of the rules on nonprofits may be seen as the French government's acknowledgement that the previous regime was incompatible with EC principles.

Even though the change in legislation is not formally retroactive, we believe it is positive news for relevant claims already lodged and strengthens the case for submitting new claims as regards withholding tax suffered as from 1 January 2006.