France Seeks to Salvage Dividend Tax After Court Decision Voids Exemption

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By Rick Mitchell

Oct. 6 — For the second time in a year, a court decision is forcing the French government to make a tough choice to salvage a key tax policy measure—in this case, a controversial 3 percent tax on dividends.

For companies subject to French corporate tax and with sales of more than 250 million euros ($279 million), a 2012 revised budget law imposed a 3 percent corporate surtax on dividends paid out. The government said it wanted to give a strong incentive for businesses to invest in production and employment.

However, the tax didn't apply to dividends paid within an integrated group, when both parent company and any subsidiary are integrated under France's tax unity regime, which is limited to French companies.

On Sept. 30, the French Constitutional Council voided that exemption, finding it “unconstitutional” because it doesn't apply equally to all taxpayers, with the ruling to take effect Jan. 1, 2017. Christian Eckert, the secretary of state for budget, said Oct. 3 that the government is considering its options in light of the council's decision and will include a new measure in its revised budget bill at year's end.

Romain Pichot, tax lawyer at Cazals Manzo Pichot AARPI in Paris, told Bloomberg BNA the exemption is also facing a pending challenge at the European Union Court of Justice.

A ‘Harmful' Tax

Guillaume Croullebois, a spokesman for the French employers' association, the Mouvement des Entreprises de France, told Bloomberg BNA that MEDEF considers the tax itself the problem, rather than the exemption. He said one of President Francois Hollande's “demagogic” campaign promises in 2012 was to go after shareholders and dividends, the world of finance.

As Hollande struggled to boost the country's stagnant economy, he later changed his tune about the role of business, but by then the tax already existed. “From the beginning we warned that this complex tax was not only harmful to companies and to France's image abroad, it is also difficult to implement from the legal point of view,” Croullebois said.

The European Union Court of Justice case contends that the exemption undermines the freedom of establishment for business under the European Union treaty, Croullebois said.

Pichot said the council's decision creates an “identical scenario” to the policy dilemma created by the ECJ's Steria decision in September 2015, which held that a French unity regime measure prohibiting French companies from claiming a deduction of up to 5 percent of certain expenses linked to share distributions from subsidiaries based in other EU member states violated the EU freedom of establishment rule (171 TMIN, 9/3/15).

After that decision, the government decided to extend the deduction to all companies, but reduced it to 1 percent, he said.

Three Tough Choices

An Oct. 3 joint note from KPMG LLP and French law firm Fidal described three “tough”choices the government has:

  • It could keep the 3 percent tax but apply it to everyone. That would hit French groups with a big tax hike.
  •  It could keep the tax while allowing all groups to apply the exemption, but at a lower rate, as it did after the Steria ruling.
  •  It could get rid of the tax altogether, which is the least likely option because it would be a big hit to the French budget.

“the government will ensure that companies don't pay more, but don't pay less either,” Eckert said

Pichot said the ECJ decision could end up completely voiding the tax and exemption. But because the French presidential election is coming early next year, the government will probably not want to wait, and will amend the measure before that. “The campaign will discuss 2016 public accounts, not 2017 accounts,” he said.

Companies Should Claim Reimbursement

“In any case, big companies should continue to claim their reimbursement of the 3 percent tax, to preserve their rights, on the possibility that the ECJ will decide that the tax is incompatible with EU law,” Pichot said.

Croullebois cited speculation circulating among companies that the ECJ ruling could force the government to reimburse billions of euros to companies. “It's only a rumor, but it shows the kind of muddle that has been linked to this tax.”

To contact the reporter on this story: Rick Mitchell in Paris at

To contact the editor responsible for this story: Rita McWilliams at

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