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Beneficial Ownership Jurisprudence – An Application to the Real Estate Industry
Tax e-Alert
A decision of the Administrative Court of Appeal of Paris of 7 December 2022 (Foncière Vélizy Rose, n° 21PA05986) clearly illustrates the application of the beneficial ownership requirement to dividends distributed by a French property company subject to corporate income tax to its Luxembourg parent. The applicable rules are not the same for tax translucent entities like SCI and SNC, commonly used in the real estate industry.
In this decision, the Luxembourg parent was not considered as the beneficial owner of the dividends to the extent (a) it did not carry out any activity other than receiving and on-distributing dividends; (b) it distributed to its Luxembourg parent the entire amount of the dividend one day after receipt; (c) all the entities in the chain of ownership were 100% held; and (d) the two Luxembourg entities had common directors. The fact that the Luxembourg parent was initially a joint venture and that a fiduciary agreement has been entered into between the partners after all shares have come to be held by a single shareholder has not been considered relevant.
The financial consequences of a withholding tax reassessment are aggravated by the calculation of the withholding tax based on the net amount received by the parent (i.e. if a distribution of 100 was made free of withholding tax, the French tax authorities consider that for the parent to receive a net amount of 100, the distributing company should have levied withholding tax of 42.85% based on the 30% withholding tax rate in force at that time – today 25%).
The beneficial ownership requirement is not new under French tax law but has been increasingly used by the French tax authorities, supported notably by the 2019 Danish cases of the CJEU, often replacing reassessments based on lack of substance or abuse of law.
An important decision rendered by the French Supreme Administrative Court on 22 May 2022 (Planet, n° 444451) could reduce the adverse tax consequences of tax reassessments made by the French tax authorities based on the beneficial owner requirement. In the Planet case law, the Court ruled that the “true” beneficial owner of a royalty payment can rely on the tax treaty between its country of residence and France to benefit from a reduced rate of (or an exemption from) withholding tax. This argument has not been tested in the Vélizy case law.
Despite the decisions rendered by the French courts, the beneficial owner requirement therefore continues to raise questions and other court cases should be expected in the coming months, adding to the uncertainty that holding companies face with the ATAD 3 proposal.
In practice, the French tax authorities scrutinize the following criteria to assess whether a recipient is the beneficial owner of a payment: (a) existence of a legal or a contractual obligation to repay the passive income it received; (b) immediate repayment of the entire amount of the passive income it received or at least partial reinvestment ; (c) carrying out of another activity (even ancillary) rather than mere conduct of flow of passive income; (d) negligeable level of taxable income; (e) receipt of income from countries other than France; (f) staffing with qualified professionals and benefit of material resources, in particular in case of royalty income; (g) identity of directors between the recipient and the company to which it repays the passive income it received.
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