The legislator intended to draw the consequences of several recent decisions of the Board of state (French Supreme Administrative Court), in which certain withholding tax rules were found to be contrary to European Union law. However, these measures do not eliminate the possibility of challenging these rules.
1. Amendments to Section 244 bis B of the General Tax Code
Subject to tax treaties, section 244 bis B of the CGI provides for the taxation in France of capital gains from the sale of large holdings in a French company exercised by shareholders domiciled outside France for tax purposes.
Article 2 of the 2021 amending finance law introduced two separate measures to bring this withholding tax into line with EU law for the sale or redemption of shares and distributions made on or after 30 June 2021.
1.1. Exemption of capital gains realized by foreign UCIs
In order to take account of a formal notice sent by the European Commission, the legislator has introduced an exemption from withholding tax for foreign UCIs located in an EU Member State or in another State or territory that has concluded an administrative assistance agreement with France with a view to combating fraud and tax evasion and which are not Non-Cooperative Competent Jurisdiction (NCJ) within the meaning of Article 238-0 A of the General Tax Code. The benefit of this exemption is subject to the double condition that the foreign UCI has characteristics similar to those of UCIs (collective investment schemes in French) governed by French law, within the framework of the French Monetary and Financial Code, and that it raises funds from a certain number of investors with a view to investing them. UCIs established in a third country must also not participate effectively in the management or control of the company whose shares are the subject of the sale or redemption.
1.2. The granting of a right to partial reimbursement of the tax in the event of the sale of capital securities
Since the introduction of the exemption of long-term capital gains on the sale of equity securities held in non-real estate companies (subject to the reinstatement of a share of costs and charges), the application of the foreign company tax has become questionable on the basis of EU law.
In order to ensure the conformity of French law with European law, administrative guidelines have enabled non-resident companies to request reimbursement of the difference between the amount of tax borne by a foreign company and the theoretical tax that she would have paid in France, up to and including costs and charges, if they had been able to benefit from the long-term capital gains exemption scheme.
However, in its AVM International decision of October 14, 2020, the Board of state decided, on the grounds of the freedom of establishment which can be invoked by companies established in the EU, that in such a case the tax should be refunded in full – and not only partially as provided for in the administrative directives. Furthermore, the Administrative Court of Appeal (CAA) of Versailles extended the reasoning to companies established in a third country on the basis of the free movement of capital (considering in particular that the standstill clausepreventing this freedom from being invoked for the measures existing on December 31, 1993, was not applicable), in a Runa Capital judgment of October 20, 2020. However, an appeal by the Minister against this decision is currently being examined by the Board of state and this solution is therefore not definitive.
The legislator wanted to transpose the implications of this case law by allowing non-resident companies to obtain reimbursement of the share of tax exceeding the corporate tax for which they would have been liable if they had been established in France.
Legal persons or legal persons, whose registered office is located in a Member State of the EU, the EEA or in a State or territory which has concluded a tax treaty with France containing an administrative assistance clause for the exchange information and the fight against fraud and tax fraud, may benefit from this partial refund mechanism, provided that these legal persons or entities do not effectively participate in the management or control of the company whose securities are the object of sale or redemption.
As the law does not specify the procedure for partial reimbursement, it will in principle be necessary to wait for any comments from the administration on the procedure to be followed. However, as the measure was presented during the parliamentary proceedings as a legalization of the procedure already provided for by the administrative directives, it seems to suggest that the practical arrangements will be similar to those provided for by these directives..
1.3. Challenge opportunities still available to taxpayers
Changes to the text of Article 244 bis B of the General Tax Code does not put an end to any disputes relating to the partial or total refund of this tax.
For transfers or redemptions of social rights made before June 30, 2021:
non-resident companies established in an EU or EEA Member State which have paid the tax and obtained reimbursement of the difference between the ordinary tax rate and the effective tax rate applicable to resident companies as provided for by administrative doctrine may in theory request reimbursement of the balance on the basis of the aforementioned AVM International decision;
companies established in a third country (not covered by the doctrine) can claim full reimbursement of the deduction they have paid, on the basis of the free movement of capital, by invoking the aforementioned Runa judgment.
For transfers or redemptions of social rights made after June 30, 2021, companies established in a third country would in principle be entitled to request partial reimbursement of the withholding tax, on the basis of the free movement of capital, if the solution chosen by the The Runa decision is confirmed by the Board of stateeven if they do not fulfill the condition of absence of effective participation in management or control provided for by law.
Indeed, it would only be if, in the context of the appeal against the Runa judgment, the Board of state had to note that the standstill clause could be opposed by France, that companies established in a third country would have to demonstrate that this participation does not meet the definition of a direct investment within the meaning of the case law of the CJEU, as cited by the legislator.
2. Proposed amendments to the provisions of Articles 119 bis182A bis and 182 B of the General Tax Code
Article 24 of the finance law for 2022 pursues compliance with Community law on the withholding tax applicable to non-resident companies. the Board of state has ruled on several occasions that the establishment of a withholding tax on a gross basis, when a French company in the same situation would be taxable on a profit established after deduction of expenses incurred for the acquisition and retention of such income, was contrary to the principles of free movement of capital and freedom to provide services.
In order to comply with this case law, the provisions provide:
on the one hand, that legal persons and organizations established in the EU or in the EEA, which receive income from French sources falling within the scope of Article 182 B, benefit from compensation representing charges equal to 10% of the sums or income received; and,
on the other hand, the beneficiaries of income and sums subject to withholding tax provided for in Articles 182 A bis182 B and 119 bis2 may claim subsequent reimbursement of the difference between the tax paid and the tax determined on the basis of a base net of acquisition and retention costs directly linked to this income and sums, under certain conditions.
This reimbursement procedure, introduced in Article 235 quinquies of the General Tax Code, would be open to legal persons established in an EU or EEA Member State which has concluded an administrative assistance agreement with France in the fight against tax fraud and tax evasion and which is not a JNC. It would also be open to persons established in a third country and subject to withholding tax under Article 119(2). bis, provided that this country is not an NCJ and that the participation in the distribution company or organization does not allow the beneficiary to participate effectively in the management or control of this company or organization. This is the same reservation as the one already analyzed concerning article 244 bis B. However, since Article 119 bis already existed on December 31, 1993, the standstill clause excludes the challenge of this reservation.
In any event, the reimbursement would also be subject to the costs of acquisition and conservation of these products and deductible sums if the beneficiary was located in France. Finally, the reimbursement would only apply if the tax rules of the country of residence do not allow the deduction of the withholding tax by the beneficiary.
Article published in Option Finance on 22/11/2021