Taxpayers helped by the free movement of capital
The European Court of Justice ruled in a judgement its decision concerning the compatibility of French dividend withholding tax with the EU principle of free movement of capital in Article 56 of the EC Treaty. A withholding tax was applied to dividends paid by French companies to foreign investment funds, whereas the same dividends paid to French funds were free of tax. This is a breach of the free movement of capital.
Despite the fact that this judgement by the European Court of Justice (ECJ) only deals with the situation of ten Belgian, German, Spanish and American funds that filed a suit, this decision also applies to Luxembourg funds. It means that they are now at a level playing field with local French products. Laurent de La Mettrie is a Partner at PwC Luxembourg. He says that the decision made on May 10, 2012 by the ECJ, which is based in Luxembourg, is good because it builds on previous decisions and continues the progress made in that direction.
He referred to two judgements taken in the past. In 2004 there was the Fokus Bank case, a case of discrimination in the European Court of the European Economic Area, whose rules are basically the same as the ones for the European Union. It was about a dividend payment made by a Norwegian company to another one, which was exempt of any withholding tax. If the same payment had been made to a German company and one in the UK, the former owners of the Norwegian distributing company, that time a 15% withholding tax would have been applied.
“This case in 2004 was the starting point of our thoughts at PwC on this concept”, said Laurent de La Mettrie. Then came the Aberdeen case by the European Court of Justice in 2009. “You had a Luxembourg SICAV (mutual UCITS fund) investing in a Finnish company and the court decided it was a breach of European law because if the dividend had been paid to the Finnish equivalent of a Luxembourg investment fund, no withholding tax would have been levied. It was a strong incentive for us to move ahead, as it was clearly established that this should be applicable irrespective of the tax position of the recipient of the dividends”.
All types accepted
The decision, made in 2012 by the European Court of Justice is in line with previous judgements, but it also addresses the appropriate level of comparability, a point that has not been examined in the past. In order to determine whether there is a difference in the treatment provided by French tax legislation, we may wonder if the analysis should be undertaken at the level of the fund only or also at the level of the investors.
The Court clearly stated that the French provision is based on the residence of the fund only because the way the French law was drafted didn’t provide any link to the taxation of the investors. Another interesting point: the Court made no distinction regarding the type of investment vehicles. “In the French version, the Court refers to “investment funds”, a very generic term, while in the English version of the decision it refers to it, using the term UCITS. However, we consider that the French version prevails, as it includes both UCITS and non UCITS funds”.
The discrimination of a foreign product implies a competitive disadvantage in terms of performance because of this withholding tax. Income of foreign funds will be lower than the net income of comparable local investment funds. Laurent de La Mettrie illustrates this fact with an arithmetical example. “In some cases we have made some valuation and depending on the country of investment or the investment strategy, the difference was between 10 and 20 basis points.”
The devil is in the detail
The reason why the focus of the European Court of Justice was on France is because the preliminary ruling was raised by the French court. The administrative tribunal of Montreuil was overloaded with several thousands of claims and it asked the French Supreme Court for its advice on how to proceed, especially in respect to the European law. Laurent de La Mettrie underlines that there is an overall trend of a decrease in cases of tax discrimination across Europe. But because the devil is in the detail, you still have some minor discrimination.
For instance, there’s “ the French PEA, Plan d’épargne en actions (Share Savings Plan). Initially, this plan was only open to investments in French securities, but now it is open to European securities. However, there are several conditions that must be met for foreign funds to qualify for this tax regime. One of those conditions is that it must be a UCITS fund. In the case of French funds there is no such requirement."
"I will give you another example, from Poland this time. There was clear discrimination in the payment of Polish dividends depending on whether they were paid to Polish funds or foreign ones. Poland stopped the discrimination. However, in order to achieve the exemption of Polish withholding tax when dividends are paid to a foreign fund, there is a specific form to be filled out. Under the conditions raised by this form is the fact that the fund must certify that the Polish source income will be taxed in the hands of the fund, which obviously will not be taxed. This is, to some extent, an indirect form of discrimination of the foreign fund”.
Regarding the 2012 judgement by the ECJ, tax refund claims made after the judgement, i.e. May 10 2012, will be perfectly valid, so there are no statutes of limitations. There was a request by the French government to limit the judgement to a certain period of time, mainly because of budget reasons. The Court, however, decided not to grant this limitation in the end. CW
© PricewaterhouseCoopers S.à.r.l – Photographer : Luc Deflorenne