New EUCJ Case On Dividend Withholding, Q2 Noteworthy Case Law, Amending Finance Law For 2014, And Parent-Subsidiary Directive Modification

Author:Mr Siamak Mostafavi, Nicolas André and Lodewijk Berger
Profession:Jones Day

The present French Tax Update will look over (i) a new case pending before the European Union Court of Justice ("EUCJ") that involves the dividend withholding applied under Dutch tax law ("SG Case"), (ii) recent case law decisions issued by the EUCJ, the French Constitutional Court (Conseil constitutionnel) and the French Administrative Supreme Court (Conseil d'Etat), (iii) the main provisions of the first Amending Finance Law for 2014 (Première loi de finances rectificative pour 2014, "2014 Amending Finance Law"), and (iv) an update with respect to the modification of the EU Parent-Subsidiary Directive ("PSD"). NEW EUCJ CASE TARGETING WITHHOLDING TAX ON DIVIDENDS FACTS In the years 2000 through 2008, an equity derivatives unit of the taxpayer was trading in Dutch equities derivatives. It also acquired underlying equities to hedge equity derivative positions. Significant amounts of dividends were received on the equities, but these dividends were in part priced into the equities and the related derivatives. On balance, the taxpayer generated trading margins from these activities that were relatively small compared to the Dutch withholding tax incurred on the gross dividend income, which exceeded100 million (the dividends were subject to 15 percent Dutch dividend withholding tax. Prior to 2007, the Dutch domestic dividend tax rate was 25 percent, but the taxpayer was entitled to a reduced 15 percent rate under the tax treaty between France and the Netherlands). In the years 2000-2007, the taxpayer was able to credit the Dutch dividend withholding tax against French income tax, but due to losses realized in 2008, it was unable to benefit from a credit in France in 2008. BACKGROUND Dutch tax law background: Dutch dividend withholding tax. Dividend distributions by Dutch companies are subject to a 15 percent Dutch dividend withholding tax over the gross amount of the distribution. Subject to conditions, reduced rates and/or exemptions are available for qualifying Dutch and/or foreign shareholders under Dutch domestic law, tax treaties, and the PSD. A Dutch taxable corporate shareholder that receives a dividend from a Dutch company and that is not entitled to an exemption may credit the Dutch withholding tax incurred on the dividend against Dutch corporate income tax due over its net taxable income in the relevant taxable year. This credit may result in a tax refund if and to the extent the dividend tax incurred on the gross dividend exceeds the corporate income tax due over the taxpayer's net taxable income, i.e., the taxable income after deduction of costs. The effective Dutch tax due by a Dutch shareholder in relation to the dividend income may thus be lower than 15 percent. A foreign shareholder, however, is under comparable circumstances generally not entitled to a refund of (part of) the 15 percent Dutch dividend tax, regardless of whether it is able to fully credit the Dutch dividend tax incurred against income tax in its country of residence. In the SG Case, the taxpayer is challenging this difference in tax treatment between Dutch and foreign shareholders that incur Dutch withholding tax. French tax law background: French tax credit for foreign dividend withholding tax. In the case at hand, one may wonder why the taxpayer could not fully benefit in France from all of the Dutch tax credit. To the best of our knowledge, this could be due to either (i) its loss-making position or (ii) the (then-applicable) French rules governing the amount of tax credit awarded to French taxpayers receiving dividend payments. Article 220 1-b of the French tax code (Code general des impôts, "FTC") provides the general principle whereby, inter alia, when a foreign source dividend is received by a French corporate taxpayer, and such dividend has been subject to a foreign withholding tax, such withholding tax amounts to a tax credit to the extent the tax credit is recognized in the double tax treaty entered into between France and the source country of the dividends. Article 11 2-b of the double tax treaty entered into between France and the Netherlands in 1973 (the "FR/NL Treaty") provides that Dutch-source dividends may be subject to a maximum 15 percent withholding tax, and Article 24 B-a of the FR/NL Treaty further provides that Dutch-source dividends that have been subject to a Dutch withholding tax...

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