Brussels, 13/03/2014 (Agence Europe) - On 12 March, the European Court of Justice ruled in Case C-375/12 that in order to calculate the tax cap which gives the right to a tax refund in France after a certain percentage of income has been paid in tax, the French tax office must take account of tax paid at source in another member state. The French rules, which currently only allow the award of a tax credit for an amount equivalent to the tax paid abroad, are an unjustified restriction on the freedom of movement of capital and the freedom of establishment, explains the Court of Justice.
A French administrative court asked the Court of Justice whether the French rules complied with EU rules on the freedom of movement of capital and the freedom of establishment. Under French law, if a French resident is a shareholder in a company in another member state and receives dividends that are taxed in both member states, then the income tax cap takes partial or no account of the tax paid abroad, only allowing the reduction of a tax credit equivalent to the tax paid in the country where the company is registered - in order to avoid double taxation. This means that in effect, the mechanism penalises people with income arising from dividends paid in other member states compared with dividends paid in France, thus preventing the taxpayer from reaching the cap in France that would entitle him or her to a tax refund.
In the ruling, the Court of Justice says that the different treatment under French law for dividends from abroad compared with dividends in France in objectively comparable situations is a restriction on the freedom of movement because it makes it less attractive for French residents to live in another member state. The Court of Justice says that the restrictions are not justified by any need to ensure a coherent tax system or ensure a fair balance of taxation powers among the member states, as neither of these criteria apply in the case in question. (FG)