• French 3 Percent Tax on Distributed Income - Noncompliant with EU Law?
  • May 15, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • For distributions paid out from 2012 onward, France has introduced a 3 percent tax due, with certain exceptions, by corporate taxpayers (including under certain conditions French branches of foreign companies) that distribute dividends. Given that the French corporate tax is based on a territorial basis (rather than a worldwide basis), the introduction of the 3 percent tax was a way for the government to effectively tax income that would otherwise have been out of its reach. NB: No 3 percent tax is due, inter alia, on distributions made within the members of a French tax grouping or if (subject to certain anti-evasion rules) the relevant dividends are paid in the form of additional shares of the distributing entity.

    The European Commission has launched an infringement procedure against the 3 percent tax as being noncompliant with the relevant EU rules.

    The two potential grounds of breach are as follows:

    (i) Violation of the EU parent-subsidiary rules: If the 3 percent tax may be assimilated to a withholding tax (which the 3 percent tax is not formally), or as a form of additional taxation of a French parent company on the dividends received from an EU subsidiary.

    (ii) Violation of the freedom of establishment: Given that the intra-group dividends, within a French tax grouping, are exempt from the 3 percent tax, the application of the 3 percent tax to distributions made by a French entity to an EU entity (which would be eligible to be part of the French grouping if it were not for its non-French tax residency and establishment) may be discriminatory.

    As with any infringement procedure, the Commission may, eventually, request France to amend its 3 percent legislation, and, in case of noncompliance, refer the case before the European Union Court of Justice.