Approximately 318 French companies will be subject to an extraordinary corporate tax surcharge (i.e. French companies with a turnover exceeding 1 billion euros) in 2018. Why has the surcharge been implemented and what are the implications?
In 2012, the European Court of Justice (“CJEU”) ruled that the withholding tax applicable on outbound dividends paid to nonresident undertakings for collective investment transferable securities (“UCITS”) shall be viewed as an infringement of the EU Treaty given that French investment funds were exempted from French taxes by contrast to EU similar investment funds.
The French Parliament decided to abolish this withholding tax in August 2012. However, given the amount at stake (the financial cost for the French budget was significant as it was estimated to 6 billion euros), it was decided to implement a new tax called the 3 percent corporate tax surcharge on dividends.
The principle underlying this tax is rather simple. Dividends distributed by a French company were subject to a 3 percent tax on such amount distributed. This tax was due by the French distributing entity subject to corporate income tax (rather than the shareholder) at the time of the distribution and assessed on the amount distributed. Therefore, this tax should not technically be viewed as a withholding tax and accordingly should be compatible with EU law and tax treaties signed by France.
Nonetheless, it appears very quickly that this 3 percent corporate tax surcharge could be challenged under EU law on the grounds of the EU treaty on the one hand and the EU Directive on the other hand.
A Partial Repeal of the 3 percent Corporate Surcharge in 2016
The first ground was rapidly viewed as promising in the situation where dividends were paid to an EU parent which owns more than 95 percent of its French subsidiary. Indeed, there were few exceptions applicable to this tax and in particular for dividends distributed between members of a French tax group. As the French tax group regime is applicable to companies subject to French corporate income tax, dividends distributed to an EU company were subject to this tax given that the EU parent cannot join a French tax group. This means that the 3 percent corporate tax surcharge created a potential discrimination against a French company depending on the tax residence of its parent company. A repeal of the 3 percent tax surcharge on this ground would have a limited impact as it would have only dealt with dividends distributed to EU parent by 95 percent owned French subsidiary which is the minimum threshold for companies to join a French tax group.
In September 2016, the French Constitutional Court ruled that this exemption only applicable to French parent company member of a tax group is unconstitutional as the difference of treatment is not justified on valid grounds. This leads the French parliament in the Finance Bill for 2017 to extend the exemption to EU companies which could have joined a French tax group if they were French tax resident.
A Fatal Blow by the Constitutional Court in 2017
The second ground which was more uncertain but also more promising was based on the EU parent-subsidiary directive. Indeed, pursuant to Article 4 of the EU parent-subsidiary directive, dividends received by a company from its EU subsidiary benefit from a tax exemption. However, the redistribution of dividends received from such EU subsidiary is subject to the additional corporate tax surcharge.
Accordingly, the CJEU, in a decision dated May 27, 2017, ruled that the corporate tax surcharge is contrary to the EU parent-subsidiary directive. This ruling only referred to the case where dividends are received from an EU subsidiary which are then redistributed. Other cases where the additional corporate tax surcharge (such as dividends received from a non EU or a French subsidiary which are redistributed or distribution of a company from its operating profits) were not included within the scope of this decision as it only deals with situations where the EU parent-subsidiary is applicable.
That being said, one may wonder whether this difference of treatment depending on the origin of the dividends was justified on valid grounds. This question was then referred to the French Constitutional Court.
In a landmark decision dated October 6, 2017, the French Constitutional Court ruled that the 3 percent tax creates a discrimination between taxpayers based on the origin of its distribution (distribution from EU/non-EU subsidiaries; distribution of its own operating profit) which does not comply with the equality of treatment principle guaranteed by the French constitution. Indeed, a French holding company with EU subsidiaries will be in a more favorable position than a French operating company when distributing dividends to its parent company. The cost for the French budget of claims made by taxpayers is, this time, even more very significant as it could be estimated to be 10 billion euros.
A New Tax to End (and Finance) this Saga
Given the amount at stake, the French government decided to implement a specific corporate tax surcharge in order to partially finance such reimbursement which would be applicable to French companies subject to corporate income tax with a turnover exceeding 1 billion euros (on a standalone basis or at the level of the French tax group if applicable). One may note that the companies falling within the scope of this tax is limited as 318 companies should be concerned.
This surcharge will be applicable on the corporate income tax due on the result of the financial year closing between December 31, 2017 and December 30, 2018 and would amount to 15 percent of the corporate tax (for companies with a turnover between 1 billion euros and 3 billion euros) and an additional 15 percent of the corporate tax charge (for companies with a turnover exceeding 3 billion euros). This means that a company with a financial year closing on December 31 will have a corporate tax liability for the current financial year higher than expected.
Indeed, this would entail an effective tax liability of such companies between 39.43 percent and 44.43 percent. In order for the French budget to meet the economic convergence criteria set out by the EU treaty (and in particular the fact that public deficit should not exceed 3 percent of GDP), the French government decided to request the payment of an installment payment equal to 95 percent of this corporate tax surcharge by December 20, 2017 for companies with a financial year closing from December 31, 2017 and January 31, 2018.
Members of Parliament raise the fact that this provision should also be viewed as unconstitutional for various reasons. First, they consider that this tax should be viewed as unconstitutional on the ground that it is contrary to the constitutional principles of equality before the law and of equal discharge of public burdens. Secondly, they consider that some of the taxpayer falling within the scope of this tax might not benefit (or very little) or the reimbursement of the 3 percent tax.
The Constitutional Court put an end to this debate and declared the law constitutional. As a final remark, it is interesting to note that the Finance Bill for 2018 modified a provision introduced in 2013 (“Carrez amendment”) targeting abusive tax structures because of its potential infringement with EU law. It seems that the EU principles have been understood by French lawmakers.