Investment funds prevail in French withholding tax case before ECJ

World Tax Advisor:

In a wide-reaching decision, the European Court of Justice (ECJ) ruled on 10 May 2012 that foreign investment funds that invest in French companies should not be liable to withholding tax on dividends. Currently, French investment funds are exempt from French tax on dividends received from a French company, while foreign funds are subject to a 30% withholding tax (25% before 1 January 2012), unless the tax rate is reduced under an applicable tax treaty.

The ECJ held that the discriminatory treatment of dividends paid to foreign investment funds violates the free movement of capital principle under the Treaty on the Functioning of the EU (TFEU) and that the discrimination cannot be justified in either an EU or a third country context. The Court also said there is no reason to apply a temporal limitation on the effects of its decision.

This is a significant victory for investment funds, and the expected cost of the decision to the French tax authorities is in excess of approximately EUR 4 billion. The decision also will have implications for similar challenges against several other EU member states by portfolio investors, such as investment funds, pension funds and charities investing in those other member states.

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