France was convicted of discrimination between dividends received from subsidiaries in France and other member states. This is contrary to the freedom of establishment and the free movement of capital.
Read attorney Hans Sønderby Christensen’s article published on Friday, November 9, 2018, on Jyllands-Posten’s website here.
In 2001, the French company Accor requested the French tax authorities to reimburse withholding tax that the company had paid in connection with the distribution of dividends received from its subsidiaries in other member states. The request was related to the fact that, according to French tax rules, a French company could get a refund of the withholding tax related to the distribution of dividends received from subsidiaries in France.
When the tax authorities rejected the request, Accor filed a lawsuit with the French administrative court. During the proceedings before the Conseil d’État (Supreme Administrative Court in France), the European Court of Justice was asked in 2009 to rule on the compatibility of the French tax rules with EU law.
In a judgment of September 15, 2011, the European Court of Justice ruled that the French tax rules were in violation of the freedom of establishment and the free movement of capital, which are guaranteed in EU law. In the judgment, the European Court of Justice noted that both the freedom of establishment and the free movement of capital require the abolition of restrictions that hinder free movement. In this regard, the European Court of Justice listed the conditions for the existence of a restriction on the freedom of establishment and the free movement of capital.
Firstly, there must be a different treatment of purely national situations and situations that have a cross-border character, and the situations must be objectively comparable. Secondly, in order to be compatible with the freedom of establishment and the free movement of capital, such a restriction must be justified by overriding reasons of public interest. Even if the restriction is justified, it must, thirdly, be kept within the framework of EU law’s requirements for proportionality. This means that it must be suitable for ensuring the implementation of the objective it pursues, and that it must not go beyond what is necessary to achieve this.
With regard to the first condition, the European Court of Justice stated that the French tax rules implied a different treatment between dividends originating from subsidiaries in France and other member states. Furthermore, that the situation for a company is the same, regardless of whether its subsidiaries, from which the dividend is received, are resident in France or in other member states. The fact that shareholders may be deterred from acquiring shares in a company because dividends from its subsidiaries in other member states will be less than if they originated from subsidiaries in France may deter the company from exercising its business through subsidiaries in other member states. The European Court of Justice ruled that there was thus a restriction.
As for the second condition, the European Court of Justice noted that France had not referred to overriding reasons of public interest that could justify the restriction, and it was therefore not necessary to examine the third condition. The European Court of Justice then ruled that the French tax rules were in violation of the freedom of establishment and the free movement of capital.
Based on the European Court of Justice’s statement in the judgment of September 15, 2011, the Conseil d’État issued two judgments in which it set out conditions for the reimbursement of the withholding tax paid by French companies that had received dividends from subsidiaries in other member states. Following this, the European Commission received several complaints regarding these judgments.
As the European Commission was of the opinion that the judgments were in violation of EU law because no account was taken of the tax already paid by sub-subsidiaries in other member states, it initiated infringement proceedings against France before the European Court of Justice. In this connection, the European Court of Justice was asked to comment on two issues. Partly regarding the disregard of the freedom of establishment and the free movement of capital, as these were interpreted by the European Court of Justice in the judgment of September 15, 2011. Partly regarding the disregard of the obligation of a national court, which makes a decision in the last instance, to bring a case before the European Court of Justice when there is doubt about the interpretation of EU law.
With regard to the first issue, the European Court of Justice ruled that France had maintained the discrimination that the European Court of Justice in the judgment of September 15, 2011, found to be in violation of EU law. The Conseil d’État’s implementation of the judgment implied that a French company that received dividends from subsidiaries in other member states was only granted a refund of withholding tax taking into account the taxation that had taken place in the subsidiary. On the other hand, no account was taken of the taxation of the same dividend in sub-subsidiaries in other member states, i.e. at a lower level in the capital chain. Only if the sub-subsidiaries were resident in France could taxation at this level be taken into account. This thus implied a different treatment solely on the basis of the origin of the dividend.
According to the European Court of Justice, in order to have brought the different treatment to an end, France should have taken into account the previous taxation of the dividend, regardless of the level in the capital chain at which the taxation had taken place. By not having done this, France has maintained a disregard for the freedom of establishment and the free movement of capital.
As for the second issue, the European Court of Justice ruled that the Conseil d’État had disregarded its obligation to submit the case to the European Court of Justice. A national court, such as the Conseil d’État, whose decisions cannot be appealed, is obliged to bring a case before the European Court of Justice when questions are raised about the interpretation of EU law. The purpose is to prevent a national practice from arising in a member state that is not in accordance with EU law. However, the obligation does not apply if the question raised is not relevant, if the question has already been interpreted by the European Court of Justice, or if there is no doubt about the correct application of EU law. The European Court of Justice emphasized that at the time when the Conseil d’État had delivered the two judgments, it could not be ruled out that there was reasonable doubt as to whether the conditions set for reimbursement were in accordance with EU law, and that the Conseil d’État should therefore have submitted the case to the European Court of Justice.
The judgment shows that although, at the current stage of development of EU law, no rules have been laid down that harmonize the tax systems of the member states, and the member states thus have the power to determine their own tax systems, the member states must exercise this right within the framework of EU law. The member states cannot, as France has done, maintain national tax rules that are in violation of the freedom of establishment and the free movement of capital, which are guaranteed in EU law.