Funds win ECJ case against discriminatory French withholding tax

The European Court of Justice (ECJ) has ruled that foreign investment funds that invest in French companies should not be liable to pay a discriminatory withholding tax on dividends.

Prior to the judgment, under French corporate tax law France levied a withholding tax of 15%, or in some cases 25%, on foreign investment funds investing in French companies while French investment funds were exempt.

The European Commission (EC) has already forced some European countries such as Sweden and Spain to change their rules so that they do not levy discriminatory withholding taxes against foreign investors and France will now be expected to do the same.

A summary of the ruling said EU law prohibits all restrictions on the movement of capital between Member States and between Member States and third countries.
That prohibition does not affect the right of Member States to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested.

However, such national provisions must not constitute a means of arbitrary discrimination or a disguised restriction of the free movement of capital and payments.

At issue are the French tax rules applicable to dividends distributed by companies resident in France to Ucits (Undertakings for collective investments in transferable securities) not resident in that State.

Under French tax legislation, dividends paid to Ucits which are not resident in France are taxed at source at the rate of 25%, whereas dividends are exempt from tax when paid to resident Ucits.

Ten Ucits from Belgium, Germany, Spain and the United States which invest inter alia in shares in French companies and receive dividends from those shares which are subject to withholding tax, contested the French legislation. They argued there is a breach of the free movement of capital guaranteed by EU law.

The case was brought before the Tribunal Administratif de Montreuil (France). Essentially, it asked the Court of Justice whether EU law precludes French legislation, which taxes nationally sourced dividends distributed to Ucits differently according to the residence of the recipient.


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