Surcharge of 3% on dividends: The exemption in favor of tax consolidated groups contrary to the French constitution

The constitutional Court rendered its decision n°2016-571 QPC on September 30, 2016 and decided that the exemption of the 3% tax for distributions made inside a tax consolidated group provided for in Article 235 ter ZCA I 1° of the French Tax Code is not constitutional. The Court considered that even though the shareholding requirement of 95% is fulfilled, the exemption cannot apply if the option for the tax consolidated group has not been made or could not been made, particularly in the case where the parent company is established outside France. On that last point, the Constitutional Court shares the position of our Law Firm which took part in the procedure. The Constitutional Court had repealed the exemption from January 1, 2017.

Consequences for the future

From January 1, 2017, the following scenarios are possible:

  • The legislator takes no measure: from January 1, 2017, the exemption is abolished. French companies which are members of a tax consolidated group will be submitted to the 3% tax.
  • The legislator takes measure before the end of the year in the Finance Laws that are being discussed. Several options are possible :
    • The complete abolishment of the Contribution seems unrealistic regarding the difficult budgetary back-ground in France;
    • A retroactive abolishment of the exemption is also unrealistic regarding the terms of payment of the contri-bution;
    • Abolishment of the specific exemption for distributions made after January 1, 2017 but reduction at a lower rate than 3% of the rate of the contribution to limit the impact of the end of the exemption for French tax consolidated groups. Dividends distributed to parent companies established outside France would therefore be less taxed. This option seems plausible (See the amendments made to the fixed proportion of the costs and expenses of the participation exemption regime further to the ECJ – Steria Case).

Status of ongoing procedures

Arguments based on International Law are still relevant since France’s Administrative Supreme Court (Conseil d’Etat) referred a case to the Court of Justice of the European Union (CJEU) on June 27, 2016, requesting a preliminary ruling on whether the 3% tax on dividend distributions is in line with the EU parent-subsidiary directive.

In addition, the infringement procedure launched by the European Commission is still ongoing and the Opinion of the Advocate General in the Belgium Fairness Tax case is expected by October 5, 2016.

Strategy for upcoming dividend distributions

There are convincing arguments in favor of repealing the 3% tax on dividend distributions due to its incompatibility with EU Law and International treaties and, in particular, where 95% or more of the capital of the distributing company is held by its parent company.

That being said, pending the CJEU’s decisions (preliminary rulings and procedure of infringement), it is important for the groups to review their distributions plan in the light of this decision and its likely consequences from January 1, 2017.

Depending on how the CJEU rules on the cases, potentially affected EU and non-EU group with French companies that have paid the 3% tax on dividend distributions in the past or will paid the 3% surtax on dividend distributions should consider filing – protective – claims based on EU Law and double tax treaties to protect their rights to reimbursement.

Claims to recover the 3% tax paid in 2014 must be introduced before December 31, 2016.

Thomas Perrin

Thomas Perrin, Partner, specializes in international tax. He has been involved in many transactions for international French and foreign groups. In 2004, he created the R&D department as well as […]

Michel Guichard

Michel Guichard, as a Partner, was responsible for the Indirect Tax (VAT Customs) practice and then for the Tax Litigation practice dedicated to assisting clients in national and EU litigation. […]