French legislation taxing
dividends paid to non-resident collective investment funds at 25 percent, while
exempting domestic funds from the tax, violated EU law prohibiting restrictions
on the movement of capital between Member States and between Member States
and the US ,
ruled the European Court of Justice. A difference in the tax treatment of dividends
according to an investment fund’s place of residence
may discourage non-resident funds from
investing in French companies and also
discourage French investors from buying shares in non-resident funds. In
addition, the court said that there was no overriding public interest that
justified the difference in tax treatment of resident and non-resident undertakings for collective investments in
transferable securities funds (UCITS). The
case was brought by collective investment funds from the United States and three EU Member
States that had invested in
shares in French companies and received dividends from those shares subject to the
withholding tax. Santander Asset Management SGIIC SA, et al. v. Ministre
du Budget, des Comptes publics, de la Fonction publique et de la Réforme de l’État,
European Court of Justice, May 10, 2012, Cases C-338/11 to C-347/11.
The difference in treatment introduced by the legislation
could not be justified by the need to preserve the coherence of the French tax
system in the absence of any direct link between the exemption from withholding
tax on nationally sourced dividends received by a resident UCITS and the
taxation of those dividends as income received by the shareholders. Similarly,
the French Government failed to put forward any evidence to substantiate
its claim that taxation affecting solely and specifically non-resident UCITS is
justified by the need for effective fiscal supervision.
The Court also rejected the argument that bilateral conventions
on the avoidance of double taxation concluded between the French Republic and
the Member State or non-Member State concerned ensure that shareholders in
resident and non-resident UCITS receive similar tax treatment. That argument,
said the Court, is based on the incorrect premise that shareholders in resident
UCITS are themselves resident for tax purposes in France, whereas the
shareholders in US and other non-resident collective funds are resident for tax
purposes in the US or other State in which the UCITS concerned is established.
In fact, said the Court, it is not unusual for a shareholder
in a UCITS which is not resident in France to be resident for tax purposes in
France or for a shareholder in a UCITS resident in France to be resident for
tax purposes in the US or another EU country. Under the contested legislation,
nationally-sourced dividends paid to a resident distributing UCITS are exempt
from tax even in cases in which the French
Republic does not exercise its tax
jurisdiction over the dividends redistributed by such a UCITS, in particular
when they are paid to shareholders who are resident for tax purposes in the US or another Member State
At the same time, nationally-sourced dividends paid to non-resident
distributing UCITS are taxed at a rate of 25 percent irrespective of the tax
situation of their shareholders. The Court concluded that the criterion for
determining the tax treatment established by the legislation at issue is not
the tax situation of the shareholder but solely the resident status of the
collective investment fund.