Irregularity of the 3% contribution on distributions?

April 28th 2015

Action by Ydès

Alert to the European Commission of the irregularity of the 3% Contribution on distributions established by France in August 2012.

Like all the tax specialists attentive to the scope of the principles of the European Union on the taxation of the member States, we were shocked by the circumvention of the Directive 90/435/EEC on the common system of taxation applicable to the parent companies and subsidiaries that the French government attempted by instituting, since August 16, 2012, a new taxation under the name of “Additional contribution on corporate tax on the amounts distributed” (new Article 235 ter ZCA of the French General Tax Code) to be assumed by companies which are subject to corporate tax  and the size of which is greater than those of SME as meant by the EC legislation.

1. In order not to remain with a speechless outrage, we carried out an in-depth critical analysis of this legislation which has allowed us to make the following findings:

The economic effect of the Contribution, on the consolidated group formed by the subsidiary distributor and the parent company beneficiary, appears to be clearly contrary to the provisions of the aforementioned Directive 90/435/EEC which:

- on the one hand, eliminates any taxation on income distributed at the level of the parent company which receives such income, subject to the reintegration of the share of expenses and charges equal to a maximum of 5% of the distribution (Article 4),
- and, on the other hand, proscribes the application of withholding tax on distributions by a company of a member State to its parent company, member of another member State, when the latter holds at least 25% of the capital of their subsidiary for a period of two years (Article 5).

2. Furthermore, when the unlawful nature of the Contribution is proven with regard to the relations with the parent companies located in other member States (hereafter European parent Companies), the principle of equality and
non-discrimination within the Union also renders unlawful the collection of the Contribution on distributions for the benefit of the French parent companies.

3. Finally, when it gives rise to an economic taxation of parent companies collecting the dividends of their French subsidiaries, the Contribution constitutes a dissuasion on investment in France and thereby contravenes the prohibition of any restriction on the freedom of establishment (Art. 43 TFEU) and the movement of capital (Art. 26 and 63 TFEU).

The Contribution results in a real circumvention of the fundamental rules for the elimination of double economic taxations in company groups; its collection at the level of the distributor subsidiary is insufficient for it to avoid a flagrant discrepancy with the rules of the superior authority laid down by the law of the European Union.

On the basis of this analysis, we filed a complaint before the European Commission for infringement proceedings against France.

This complaint met with a favourable response from the Commission which informed us in a letter dated April 28,2015 which you will find attached that it had “initiated infringement proceedings against the French Republic under Article 258 of the Treaty on the functioning of the European Union, by sending a letter of formal notice on February 26, 2015”.

It specifies that “it gave the Member state two months to respond. In the absence of a satisfactory response, the Commission may send a reasoned opinion to the Member state” and that we would be kept informed of any subsequent development of the proceedings.

Clearly, we will not fail to mention on our website the information that we receive in this regard.

Jean-Claude Cavaillé