• Specific Anti-Abuse Provision Attached to the Dividend Withholding Tax Exemption: Preliminary Ruling Requested
  • February 12, 2016 | Authors: Nicolas Andre; Siamak Mostafavi; Alexios Theologitis
  • Law Firm: Jones Day - Paris Office
  • On December 30, 2015, the Conseil d’Etat decided to request a preliminary ruling from the European Court of Justice ("ECJ") in respect of a case that is part of a series of cases involving the same group and pertaining to operation of the specific anti-abuse provision (i.e., different from the general abuse of law theory) attached to the dividend withholding tax exemption provided, in accordance with the EU Parent-Subsidiary Directive, by Articles 119 bis and 119 ter of the FTC.

    Following an audit performed in 2010, the FTA challenged the withholding tax exemption applied by a French company ("FrenchCo") in respect of the dividends it distributed in 2007 to its sole shareholder, a company located in Luxembourg ("LuxCo"). All of the shares of LuxCo but one was held by a company located in Cyprus ("CypCo"), itself held by a company located in Switzerland ("SwissCo").

    Under Article 119 bis of the FTC, the standard 25 percent withholding tax applicable to dividends is in essence eliminated, provided inter alia that the recipient of the dividends is not part of a holding structure that is constitutive of an artificial arrangement whose main purposes is the benefit of the withholding tax exemption. The burden of the proof is generally on the taxpayer.

    As described in our Update for August 2015, the Administrative Court of Appeal of Versailles ("Versailles CAA") reviewed the elements provided by FrenchCo and ruled that they were all insufficient to demonstrate that the main purpose of the holding structure was not the benefit of the withholding tax exemption provided by Article 119 bis of the FTC. In order to deny the benefit of the official guidelines published by the FTA in respect of such withholding tax exemption, the Versailles CAA further elaborated that the interposition of LuxCo, which had neither premises nor staff in Luxembourg, and CypCo, which had no real economic activity and was an artificial arrangement aimed at concealing the identity of the actual recipient of the dividends.

    The taxpayer appealed before the Conseil d’Etat, which has decided to request a preliminary ruling from the European Court of Justice as to whether the above-described anti-abuse provision complies (i) with Article 1-2 of Directive 90/435/CE (to the extent that such compatibility may be reviewed), and (ii) EU freedoms.

    Interestingly, the ECJ ruling could provide guidance not only in respect of the above-described anti-abuse provision (i.e. in relation to withholding exemption) but also in respect of the new anti-abuse provision (i.e., in relation to the parent-subsidiary regime.