Certain deductions and withholding taxes brought into compliance with European Union law

The legislator intended to draw the implications of several recent decisions by the Conseil d’État (French administrative supreme court), whereby certain withholding tax rules were found to be contrary to European Union law. However, these moves do not eliminate the possibility of contesting those rules.

1. Changes to Article 244 bis B of the French General Tax Code

Subject to tax treaties, Article 244 bis B of the French General Tax Code provides for the taxation in France of capital gains from the sale of substantial shareholdings[1] in a French company carried out by shareholders resident for tax purposes outside France.

Article 2 of the 2021 Amending Finance Act[2] introduced two separate measures to bring this withholding tax in line with EU law for the sale or buyback of corporate rights and distributions made on or after 30 June 2021.

1.1. Exemption from capital gains realised by foreign UCIs

In order to take into account a formal notice sent by the European Commission[3], the legislator has introduced an exemption from the deduction for foreign UCIs located in an EU Member State or in another State or territory that has concluded an administrative assistance agreement with France with a view to combating tax fraud and evasion and which are not Non-Cooperative Jurisdiction (NCJ) within the meaning of Article 238-0 A of the French General Tax Code. The benefit of this exemption is subject to the dual condition that the foreign UCI has similar characteristics to those of UCIs (organismes de placements collectifs in french) governed by French law, under the French Monetary and Financial Code, and that it raises funds from a certain number of investors in order to invest them. UCIs established in a third country must also not participate effectively in the management or control of the company whose shares are the subject of the sale or buyback.

1.2. The granting of a right to a partial refund of the tax in the event of a sale of equity securities

Since the introduction of the long-term capital gains exemption on disposal of equity securities held in non-property companies (subject to the reinstatement of a share of costs and charges), the application of the tax to foreign companies has become open to challenge on the basis of EU law.

To ensure the compliance of French law with European law, administrative guidelines allowed non-resident companies to request a refund of the difference between the amount of tax incurred by a foreign companies and the theoretical tax that they would have paid in France, up to the share of costs and charges, if they had been able to benefit from the long-term capital gains exemption regime[4].

However, in its AVM International decision on 14 October 2020, the Conseil d’État ruled, on the grounds of the freedom of establishment which can be invoked by companies established in the EU, that in such a case the tax should be fully returned – rather than only partially as provided for in the administrative guidelines[5]. Furthermore, the Administrative Appeal Court (CAA) of Versailles extended the reasoning to companies established in a third country on the basis of the free movement of capital (considering in particular that the standstill clause[6], preventing that freedom from being invoked for the measures existing on 31 December 1993, was not applicable), in a Runa Capital ruling on 20 October 2020[7]. However, an appeal by the Minister against that ruling is currently being considered by the Conseil d’État and this solution is therefore not final.

The legislator aimed to transpose the implications of this case law by allowing non-resident companies to obtain a refund for the share of the tax which exceeds the corporation tax for which they would have been liable if they had been established in France.

Legal entities or bodies, whose registered office is located in a Member State of the EU, the EEA or in a State or territory that has concluded a tax treaty with France containing an administrative assistance clause for the exchange of information and to combat fraud and tax evasion, may benefit from this partial refund mechanism, provided that such legal entities or bodies do not participate effectively in the management or control of the company whose securities are the subject of the sale or buyback[8].

As the law does not specify the partial refund procedure, in principle it will be necessary to wait for any comments from the administration on the procedure to be followed. However, as the measure was presented during parliamentary proceedings as a legalisation of the procedure already provided for by administrative guidelines, it seems to suggest that the practical arrangements will be similar to those set out in those guidelines[9].

1.3. Opportunities for challenges still available to taxpayers

The amendments made to the text of Article 244 bis B of the French General Tax Code do not end any potential disputes relating to the partial or total refund of that tax.

For sales or buybacks of corporate rights carried out before 30 June 2021:

• non-resident companies established in a Member State of the EU or EEA that have paid the tax and obtained a refund of the difference between the ordinary tax rate and the effective tax rate applicable to resident companies as provided for in the administrative doctrine may in theory claim a refund of the balance on the basis of the above-mentioned AVM International decision;
• companies established in a third country (not covered by the doctrine) may claim the full refund of the deduction they have paid, on the basis of the free movement of capital, by invoking the above-mentioned Runa judgement.

For sales or buybacks of corporate rights completed after 30 June 2021, in principle companies established in a third country would be entitled to request a partial refund of the withholding tax, on the basis of the free movement of capital, if the solution adopted by the Runa ruling is confirmed by the Conseil d’État, even if they do not fulfil the condition of absence of effective participation in the management or control laid down by law.

Indeed, it would only be if, in the context of the appeal against the Runa ruling, the Conseil d’État were to find that the standstill clause could be opposed by France, that companies established in a third country would have to demonstrate that this participation does not meet the definition of a direct investment within the meaning of CJEU case law, as cited by the legislator[10].

2. The planned amendments to the provisions of Articles 119 bis, 182 A bis and 182 B of the French General Tax Code

Article 24 of the 2022 Finance Act continues to bring the withholding tax applicable to non-resident companies into line with EU law. The Conseil d’État has held on several occasions that the establishment of a withholding tax on a gross base, whereas a French company in the same situation would be taxable on a profit established after deducting the expenses incurred for the acquisition and retention of such income, was contrary to the principles of freedom of movement of capital and the free provision of services[11].

In order to comply with this case law, the provisions state:

• on the one hand, that legal entities and bodies established in the EU or in the EEA, which receive income from French sources falling within the scope of Article 182 B, benefit from an allowance representing expenses equal to 10% of the sums or income received; and,
• on the other hand, the beneficiaries of the income and sums subject to withholding tax provided for in Articles 182 A bis, 182 B and 119 bis, 2 may claim a subsequent refund of the difference between the tax paid and the tax determined on the basis of a net base of acquisition and retention expenses directly related to such income and sums, subject to certain conditions.

This refund procedure, introduced in Article 235 quinquies of the French General Tax Code, would be open to legal entities established in a Member State of the EU or EEA which has concluded an administrative assistance agreement with France to combat tax fraud and evasion and is not a NCJ. It would also be open to those established in a third country and subject to withholding tax under paragraph 2 of Article 119 bis, provided that that country is not an NCJ and that the participation in the distributor company or body does not allow the beneficiary to participate effectively in the management or control of that company or body. This is the same reservation as the one already analysed concerning Article 244 bis B. However, since Article 119 bis already existed on 31 December 1993, the standstill clause precludes the challenge of this reservation.

In any event, the refund would also be conditional on the acquisition and retention costs of those products and sums being deductible if the beneficiary were located in France. Finally, the refund would only apply if the tax rules in the country of residence do not allow deduction of the withholding tax by the beneficiary.

Article published in Option Finance on 22/11/2021

[1]A direct or indirect holding of more than 25% of the rights in the company’s profits at any time during the five-year period preceding the sale.

[2]2021 Amended Finance Act no. 2021-953 of 19 July 2021.

[3]European Commission, formal notice no. 2020/044 of 30 October 2020.

[4]BOI-IS-RICI-30-20, 01/08/2018, no. 125 to 129.5

[5]Conseil d’État, 14 October 2020, no. 421524, AVM International Holding.

[6]TFEU, Art. 64.

[7]CAA Versailles, 20 October 2020, no. 18VE03012, Runa Capital Fund I LP.

[8]However, legal entities or bodies whose registered office is located in a NCJ within the meaning of Article 238-0 A of the French General Tax Code are excluded from the scheme.

[9]BOI-IS-RICI-30-20, 01/08/2018, no. 129.5.

[10]ECJ 12 December 2006 case 446/04, Test Claimants in the FII Group Litigation, no. 177-182.

[11]See Conseil d’État , 11 May 2021, no. 438135, UBS Asset Management Life Ltd.