The French 3% dividend contribution challenged by the Constitutional Council!
Paris, le 5 October 2016
The French Constitutional Council published on September 30 its decision concerning the French 3% dividend contribution.
As a reminder, the question was whether this 3% dividend contribution provided for by Article 235 ter ZCA of the French tax code is compatible or not with the Constitution in so far as it does not apply among companies of the same tax group as defined under Article 223 A, while it applies to intra-group distributions made between companies which are not tax consolidated, and notably to the ones made in favor of a foreign parent company.
The Constitutional Council has ruled that the difference of treatment between related companies which made distributions whether they are under the tax consolidation regime or not is not justified by either a difference of situation nor by a reason of public interest. The Constitutional Council has thus stated that the French 3% dividend contribution is contrary to the Constitution under its current wording.
The Constitutional council has postponed the effect of its decision till 1st January 2017, as an immediate repeal would have had for consequence to extend the French 3% dividend contribution to situations which have been exempted by the law makers, and leaves to the law makers the responsibility to fix this issue before year end. At this stage, the invalid texts are still in force and, as such, the decision of the Constitutional Council is not of any help for the dividend distributions which will take place until 31 December 2016. The outcome of this contribution might therefore be part of the finance bills discussion of year end.
At this stage, several options are open to solve this issue:
- Removal of the contribution: Nothing is less certain given the profitability of this contribution. As a reminder, this contribution of 3% was set up to compensate the loss of income resulting from the decision of the Court of Justice of the European Union dated May 10, 2012 stating the non-conformity with the Treaty of the withholding tax which was levied by France on dividends distributed to UCITS located in another EU state.
- Application of this additional contribution of 3% to distributions made between tax consolidated companies: In this case, considering the cost amounting to over one billion euros induced for French large groups, it is possible that the rate of contribution might be decreased.
- Extension of the exemption to all distributions made between companies in a same group whether tax consolidated or not.
Finally, it should be reminded that the compliance of this 3% contribution with the EU legislation is also challenged, as an infringement procedure (procedure No 2013/4329) was notified to France by the European Commission on April 28 2015. Further, we are waiting for a case law of the Court of justice of the European Union on this issue.
Olivier Mesmin Christine Daric
Avocat-Associé Avocat-Associé
