French Withholding Tax on Capital Gains by Non-French Companies Illegal

Monday, December 14, 2020

The French Supreme Tax Court docket (Conseil d’État) dominated that the French withholding tax on the capital acquire derived from the disposal of a considerable shareholding in a French firm by a non-resident firm shouldn’t be compliant with EU regulation.

IN DEPTH

Background

Beneath the French participation exemption regime, the capital acquire realized by a French mother or father firm topic to French company tax upon the sale of a qualifying shareholding is exempt from taxation, topic to the inclusion of a lump sum representing 12% of the capital acquire (which makes for an 88% exemption). This 12% inclusion doesn’t represent a partial taxation of the capital acquire, however a solution to recapture previous deductible bills in relation to the qualifying shareholding.

Shareholdings could qualify for the participation exemption regime if, inter alia, (i) the French mother or father firm holds at the very least 5% of the excellent share capital and voting rights of the subsidiary on the time of the sale, (ii) the French mother or father firm has held the related shareholding for at the very least two years, and (iii) the shareholding doesn’t qualify as a French actual property curiosity for French tax functions.

Topic to the provisions of relevant double tax treaties, the capital acquire realized by a non-French firm upon the sale of a considerable shareholding in a French firm (apart from a French actual property curiosity) is topic to a 28% withholding tax. This withholding tax will lower to 26.5% for fiscal years starting from January 1, 2021, and to 25% for fiscal years starting from January 1, 2022. French firm shares qualify as a considerable shareholding if the non-French firm has owned greater than 25% of the monetary rights within the French firm, straight or not directly, at any time throughout the 5 years previous the switch.

In observe, solely corporations established in jurisdictions with no tax treaty with France, or in jurisdictions with a tax treaty with France that features a substantial shareholding clause, are topic to the French withholding tax on substantial shareholdings (see a non-exhaustive checklist on the finish of this text).

Even then, in accordance with administrative tips, EU corporations can profit from an 88% exemption on their capital positive factors realized on shareholdings owned for greater than two years. This 88% exemption goals to copy the French participation exemption regime relevant to French corporations so as to neutralise a possible illegal discrimination towards EU corporations in comparable conditions.

The Choice of the French Supreme Tax Court docket

The French Supreme Tax Court docket held that the French withholding tax offers rise to a distinction of therapy between French corporations and non-French corporations with respect to the taxation of capital positive factors derived from the disposal of considerable shareholdings in a French firm. This distinction of therapy constitutes an unlawful restriction to the liberty of multinational and the free motion of capital protected by EU regulation (Conseil d’État, 14 October 2020, n° 421524, AVM Worldwide Holding).

The French Supreme Tax Court docket thought of that the French tax authorities couldn’t treatment this infringement of EU regulation by way of administrative tips, since solely Parliament could achieve this. Thus, the claimant (an Italian firm) was entitled to a full exemption of its capital acquire on the sale of its substantial shareholding.

The Versailles Court docket of Enchantment subsequently held that the French withholding tax shouldn’t be lined by the standstill clause of the TFEU that may permit France to take care of an in any other case unlawful restriction to the free motion of capital (CAA Versailles, 20 October 2020, n° 18VE03012, Runa Capital Fund I LP).

Course of Motion

Non-French corporations that paid a French withholding tax in 2018, 2019 or 2020 on the sale of a considerable shareholding in a French firm they’d owned for greater than two years might declare a refund (until this shareholding qualifies as a French actual property curiosity for French tax functions). Claims should be submitted earlier than 31 December 2020 for positive factors realised in 2018.

In observe, this potential refund would concern corporations established within the following jurisdictions:

EU or EEA Member States with a treaty that features a substantial shareholding clause (i.e., Austria, Bulgaria, Cyprus, Hungary, Iceland, Italy, Malta, Spain and Sweden)

Non-EU or EEA States with a treaty that features a substantial shareholding clause (e.g., China, Israel, Japan, Kuwait, New Zealand, Saudi Arabia, South Korea, United Arab Emirates)

Another state with no treaty (e.g., Denmark, Liechtenstein).