French withholding tax - new reclaim rules

15 October 2019

France’s draft Finance Bill 2020 will allow foreign entities in a tax loss position to claim a refund of certain withholding taxes on dividends, and certain capital gains levies on property disposals.

Changes to French tax legislation

Under current French tax legislation, withholding tax is levied on dividends paid to loss-making non-resident companies while dividends paid to loss-making French resident companies are not subject to tax. The Court of Justice of the European Union (CJEU) ruled in a case on 22 November 2018 that this difference in treatment was contrary to the free movement of capital, following this decision France has proposed changes in its draft Finance Bill 2020 to address the issue.

The draft clauses propose that certain foreign entities in a tax loss position may claim a refund of certain withholding taxes on dividends, and certain capital gains levies on property disposals. These changes would apply to financial years starting on or after 1 January 2020.

To be eligible for the repayment of withholding taxes on dividends, the foreign entities would need to be resident in a jurisdiction which cannot be considered as a non-cooperative jurisdiction (as defined in the French Tax Code). The jurisdiction of residence must also have a double tax agreement with France that contains both an anti-fraud/evasion administrative assistance clause and a tax collection mutual assistance clause similar in scope to the EU directive.

However, to claim a repayment of other eligible withholding taxes and levies, the foreign entity would need to be a resident of another EU Member State or EEA member state.

Where a foreign entity benefits from a refund of tax withheld in France, the tax will become payable when the entity becomes profitable.

Wider EU application

Although France has recently made a step to legislate for the disparity in tax treatment of dividends for resident and non-resident companies, a number of cases have been previously heard by the CJEU establishing European case law that enables companies to lodge a claim with tax authorities of an EU Member State where the tax law of that state treats domestic and overseas recipients of dividends differently.

UK considerations

The changes proposed in the French draft finance bill would allow companies resident in the UK that are in a loss making position but have received dividends net of withholding tax to reclaim the withholding tax suffered from the French tax authorities. It should be noted that under the France/UK double tax treaty, there is no requirement for tax to be withheld on dividends from France where the UK entity is liable to corporation tax and holds 10% or more of the capital in the French company issuing the dividends.

There may also be scope to make a claim for a refund of withholding tax in other EU Member States where a similar discriminatory tax treatment has arisen. Claims should be made in the Member State in which the dividend paying entity is resident.

It should be noted that the results of Brexit may limit the scope of claims in EU Member States moving forward, given that the UK will no longer be considered an EU Member State. However, as long as the UK continues not to be considered a ‘non-cooperative jurisdiction’, the ability to claim a refund of French tax should continue.

If you have any concerns over your withholding tax position following Brexit, you can check your position using our Withholding tax after Brexit tool or get in touch with your usual BDO contact.

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