(CN) – The EU Court of Justice struck down a portion of France’s tax law that levies a 25 percent tax rate on dividends paid by French companies to foreign investment firms, while French investment firms don’t pay any taxes on dividends at all.
Ten firms from Belgium, Germany, Spain and the United States that invest in French companies and receive dividends objected to the tax, saying it violates the EU law which guarantees the free movement of capital. France’s administrative court asked the Luxembourg court for guidance as to whether charging non-French firms higher taxes really impedes the free movement of capital.
The securities firms are called undertakings for collective investments in transferable securities, or UCITS, in the European Union.
In siding with the international securities firms, the high court pointed out that restrictions on the free movement of capital include those that discourage non-residents from making investments in the member state or those that discourage its own residents from making investments elsewhere. The disparity in France’s tax code depending on residence may discourage both foreign investors from investing in French companies and French nationals from investing their own money in international securities firms, according to the court.
The court added that while the French government is correct in its argument that EU law allows each member state to establish its own tax guidelines, differences in the treatment of member state and international firms “cannot be justified by a relevant difference in their situations,” a court statement said.
The court also rejected France’s argument that its rule was needed to “preserve the coherence of the tax system.”
“[T]he exemption from withholding tax on dividends is not conditional on redistribution by the UCITS of the dividends received by it and on the shareholders in that UCITS being taxed in respect of the dividends as a means of compensating for the exemption from withholding tax. Consequently, there is no direct link within the meaning of the case-law … 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 in that UCITS,” the court ruled.
The court denied France’s request for a limitation of the temporal effects of its ruling, saying that budgetary consequences and fiscal uncertainty are not in themselves grounds for a temporal restriction. The case heads back to the French administrative court for a final ruling in light of the high court’s findings.