Brussels, 02/09/2015 (Agence Europe) - The French rules which establish differentiated treatment for tax exemptions on dividends received between parent companies whose subsidiaries exist solely on French soil and those in other member state is incompatible with EU law, as it runs counter to the principle of the freedom of establishment, the Court of Justice of the EU ruled in a judgment dated Wednesday 2 September (case C-386/14).
The law in question stipulates that the dividends received by a parent company on the grounds of the stakes it holds in other companies may be deducted from its total net profits and thereby exonerated from tax, subject to a share of 5% corresponding to the charges and costs related to the state holdings. However, when the dividends are generated by companies belonging to an integrated tax group, the share of charges and costs may be deducted from the profit, meaning that the dividends are not subject to any taxation.
The European judges reached the same conclusion as Advocate General Juliane Kokott did previously (see EUROPE 11334). In its judgment, the Court takes the view that this rule disadvantages parent companies which own subsidiaries in establishing other member states. This is unjustified, the judges conclude, as the situation of companies within an integrated tax group is comparable to that of companies which are not, as in both cases, the parent company has to bear the costs and charges related to its holding in the subsidiary.
The Court therefore took the view that the need to preserve the sovereignty of taxation matters between member states cannot be invoked in this case as a “overriding reason of public interest” which would justify this difference in treatment. The reason for this is that it concerns only incoming dividends received by a resident parent company and consequently involving the fiscal sovereignty of one and the same tax authority. The argument that this rule is necessary in order to “preserve the coherence of the tax system” is also inadmissible, as the French rules in question do not cause any tax disadvantage to the parent company of the integrated tax group, which would offset the tax advantage it receives. (Jan Kordys)