Withholding tax on dividends: application of the European and treaty notion of beneficial owner

French version

The facts submitted to the French Supreme Court were as follows: in 2014, Foncière Vélizy Rose (hereafter “FVR”), a French company engaged in real estate leasing, paid an interim dividend of 3.6 million euros to its parent company Vélizy Rose Investment (hereafter “VRI”), a Luxembourg company, which redistributed the same amount the following day to its sole shareholder, Dewnos Investment, a second Luxembourg company. The interim dividend was not subject to any withholding tax, as FVR claimed exemption under Article 119 ter of the French Tax Code (hereafter “FTC”).

When the tax authorities challenged this exemption from withholding tax during a tax audit, the Montreuil Administrative Court and then the Paris Administrative Court of Appeal validated its position.

In its decision of November 8, 2024 (no. 471147), the French Supreme Court confirmed the decision of the Paris Administrative Court of Appeal of November 7, 2022 (no. 21PA05986) and rejected the company’s appeal on several grounds.

• On the absence of implicit abuse of law 

While the claimant company argued that the tax authorities had implicitly engaged the abuse of law procedure, the French Supreme Court ruled that this could not be the case when the tax administration simply considered, without setting aside any act as not being enforceable against it, that the taxpayer could not be considered as the beneficial owner of a sum of money.

• On the compatibility of the beneficial owner condition for the benefit of the withholding tax exemption with EU law

The French Supreme Court rejected the applicant company's argument that the provisions of articles 119 bis and 119 ter of the FTC were contrary to the freedom of establishment (TFEU, arts. 49 and 54), given that:

1. According to the claimant, the condition relating to the beneficial ownership of dividends applied to parent companies established in a Member State other than France is not required for the application of the parent-subsidiary regime to distributions between companies established in France.

The French Supreme Court ruled that the parent-subsidiary regime set out in Articles 145 and 216 of the FTC must be seen as transposing the objectives of Article 4 of the Parent-Subsidiary Directive (Dir. 2011/96/EU, Nov. 30, 2011), and that these provisions must be read in the light of these objectives. It concludes that, since French law complies with the objectives of the Directive, it cannot be argued that the provisions of the FTC would create a difference in tax treatment contrary to the freedom of establishment between parent companies - established in France or in another EU Member State - receiving dividends from a subsidiary established in France without being the beneficial owners ;

2. According to the claimant, the withholding tax exemption under article 119 ter of the FTC can only be put into question at the level of the French distributing subsidiary, whereas a French parent company alone bears the burden of the challenge to the parent-subsidiary regime from which it would have unduly benefited.

The French Supreme Court dismissed this argument, ruling that the fact that a distributing subsidiary established in France is liable for the withholding tax provided for in article 119 bis, 2 of the FTC is inherent to this taxation technique and has no bearing on the taxpayer status of the non-resident recipient company from which the subsidiary may claim restitution of the tax paid on its behalf;

3. According to the claimant, the tax rate applied to this subsidiary is higher than the one that would be applied to a French parent company.

The French Supreme Court dismissed this argument, ruling that the method used to calculate the withholding tax base had neither the purpose nor the effect of applying to this reconstituted base (the “gross base”) a rate higher than the one provided for in article 187 of the FTC (i.e. 30% at the time of the events), which is, moreover, lower than the corporate income tax rate that would have been applied, in the year of taxation in dispute (i.e. 33.1/3% at the time of the events), to a French parent company not benefiting from the parent-subsidiary regime, in respect of the same gross amount of dividends received.

• On the application of the tax treaty between France and the country of residence of the beneficial owner

With respect to the application of the tax treaties, the French Supreme Court ruled that the absence of a clause reserving the benefit of the treaty advantage to the beneficial owner of the income does not prevent the tax authorities (at least in a situation such as that in the present case, where the treaty predates the introduction of this provision in the OECD Model - see, in this regard, French Supreme Court, Opinion, March 31, 2009, Section des finances, no. 382545) from refusing this treaty advantage to its recipient who is only the apparent beneficiary. Thus, where it appears that the recipient of a dividend paid from France cannot be regarded as the beneficial owner, the treaty with the State of residence cannot be applied to this income. However, the provisions of the treaty can apply to the beneficial owner of such income residing in a contracting State, even if it has been paid to an intermediary established in a third State (solution already acknowledged for royalties in French Supreme Court, May 20, 2022, no. 444451, Sté Planet).

In the case at hand, the French Supreme Court recognized that the beneficial ownership status of Dewnos Investment and Mr. A was clear from the documents submitted to the Administrative Court of Appeal. However, it refused to apply the benefits of the tax treaty between France and the State of residence of the beneficial owner because the latter did not provide proof of residence in the Contracting State. The Court also relied on the absence of a certificate from the tax authorities certifying that the income would be taxed in the State of residence, as required by article 10 bis of the Franco-Luxembourg tax treaty then applicable. The judges thus refused to apply the advantage of the tax treaty, i.e. the reduced withholding tax rate of 15%.