Withholding tax on dividend paid to loss-making nonresident company is constitutional

This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.

France’s Constitutional Council ruled on 6 October 2023 that the withholding tax applicable to French-source dividends paid to a loss-making nonresident company complies with the French Constitution (decision n° 2023-1063 QPC).


According to article 119 bis, 2 of the French tax code (FTC), French-sourced dividends paid to a nonresident company are subject to a withholding tax in France (at a 25% rate as from 1 January 2022, although this rate may be reduced under an applicable tax treaty).

The Court of Justice of the European Union (CJEU) ruled in 2018 (C-575/17, 22 November 2018, Sofina, Rebelco, Sidro) that the different withholding tax treatment under French domestic law between loss-making nonresident companies and loss-making French companies violated the free movement of capital in the Treaty on the Functioning of the European Union. Indeed, a loss-making nonresident company that pays the withholding tax at the treaty rate on French-source dividends received from companies that are less than 5% owned suffers a cash flow disadvantage compared to French loss-making companies.

The tax rules applicable to loss-making nonresident companies were modified by the 2020 finance law, which granted a temporary withholding tax refund to loss-making nonresident companies (see article 42 of the 2020 finance law and article 235 quarter of the FTC).

Companies located in the EU or the European Economic Area (EEA) may benefit from this mechanism, as may companies located in a third country when:  

  • The country is not a non-cooperative state, as defined in article 238-0 A of the FTC, and has concluded a treaty on administrative assistance and a mutual assistance agreement with France; or
  • The entity does not have a sufficient participation in the distributing company to allow it to have an effective role in the distributing company’s management or control, i.e., it does not hold a participation that is considered a “direct investment.”

Facts of the case

A company challenged the provisions of article 119 bis, 2 of the FTC, claiming that such provisions would have a discriminatory effect on loss-making nonresident companies established in a non-EU/EEA country, depending on whether a “direct investment” is involved.

The Supreme Administrative Court ruled that article 119 bis, 2 of the FTC established a discriminatory treatment to the detriment of loss-making companies established outside the EU that receive a distribution of income from French sources when the participation in the distributing company is considered to be a direct investment (Conseil d’Etat, 13 July 2023, n° 455810).

Consequently, the taxpayer requested a “priority preliminary ruling on the issue of constitutionality” (QPC) from the Constitutional Council as to whether the provisions of article 119 bis, 2 of the FTC comply with the principle of equality before the law (article 6 of the “Déclaration des Droits de l’Homme et du Citoyen de 1789” (Declaration of the Rights of Man and of the Citizen, in French only)).

Decision of the Constitutional Council   

The Constitutional Council considered that, at the time of their adoption, the disputed provisions were intended to guarantee the collection of the tax due on French-source distributed income received by individuals/entities who do not have their tax residence or registered office in France. However, according to the Constitutional Council, those provisions, by maintaining the application of a withholding tax to distributed income received by a loss-making company established in a non-EU state where it involves a direct investment, merely adapted the scope of the withholding tax in compliance with EU law.

Thus, the Constitutional Council upheld the constitutionality of the withholding tax on French-source dividends paid to a nonresident company.

Alice de Massiac

Alice de Massiac, Partner, has developed extensive expertise in supporting major French and foreign multinational companies, both in consulting and tax controversy, anticipating the impact of the proposed recommendations in […]

Clara Maignan

She joined Deloitte Société d’Avocats (French law firm of the Deloitte network) in 2011. She is a manager in the Knowledge Management department.