Parent-subsidiary regime on dividends : to what extent are foreign tax credits offsettable ?

French parent companies (i.e. companies incorporated in France and holding qualifying shares that represent at least 5% of the issued capital of subsidiaries, French or foreign) can, upon election, exclude 95% of the subsidiaries net dividends from corporate income tax. Accordingly, 5% of the gross dividend amount, reduced to 1% in certain circumstances, must be added back to parent company’s taxable results.

The French tax authorities used to consider that this add-back was materializing the disallowance of the costs incurred in relation to tax exempt dividend income. According to their position, no foreign tax credits could be set-off against the corresponding corporate income tax.

The French Supreme Administrative Court has had to rule on this matter.

In its recent Axa case (French Administrative Supreme Court, July 5, 2022, No. 463021), it cancelled the administrative regulation which stated that the add-back “cannot be analyzed as leading to the taxation of part of the dividends" (BOI-IS-BASE-10-10-20, No. 100). This decision thus suggested the possibility for companies to offset foreign tax credits relating to dividends against the French corporate income tax relating to the add-back on those same dividends. However, the question of the amount of imputation remained unresolved.

On 7 April 2023 (No. 462709, Sté A. Raymond et Cie), the French Supreme Administrative Court held that the imputation was only possible in the event that the "amount of the expenses effectively incurred by the taxpayer for the purpose of acquiring or retaining the dividend income doesn’t exceed the add-back”.

The Court stated that in such a case, the amount of the imputation must be equal to “the product of the French tax rate by the difference between the amount of the add-back and the amount of expenses incurred for the purpose of acquiring or retaining the dividend income”. This decision thus allows the offset of foreign tax credits concerning foreign-source dividends from the corporate income tax paid on the 5 % (or 1 %) add-back, provided the amount of the expenses effectively incurred does not exceed the amount of the add-back.

Companies will nevertheless need to be able to determine the "expenses effectively incurred for the purpose of acquiring or retaining the dividends " to justify that they don’t exceed the amount of the add-back.

Companies which have not yet claimed tax credits related to foreign taxes withheld on dividends received from foreign subsidiaries, can consider filing a claim for the refund of  the excess corporate income tax paid. Unless otherwise specified, companies whose FY closes on 31 December will have until 31 December 2023 to file the 2020 corporate income tax claim.