In January 2018, the French Parliament formalized – as part of the 2018 Finance Act – several tax changes likely to impact companies including the repeal of the 3% additional tax on redistributions from the French Tax Code. This suppression, estimated to cost €9bn to the Government in claims for reimbursements, follows rulings asserting its contrariety with both the E.U. Parent-Subsidiaries Directive (PSD) and the French Constitution and highlights the phenomenon of Europeanization of national law.
Introduced in the French Tax Code in 2012, the 3% tax on the distribution of dividends is levied on French entities subject to corporate income tax (including French permanent establishments of foreign companies), redistributing profits received – inter alia- from their subsidiaries. Its purpose, beyond budgetary concerns, is to deter companies from distributing dividends to their shareholders and to induce them to reinvest their profits back into their businesses. From the outset, an intense debate has surrounded the tax’s implementation and particularly its compliance with the PSD.
Established in 1990 to facilitate E.U. cooperation, the PSD was designed to address tax complications in the context of distributions between a parent company and a subsidiary, located in different EU Member states. In particular, article 4(1) of the directive provides that where a parent company receives distributed profits from its European subsidiaries, the Member State of the parent company shall either refrain from taxing such profits or tax such profits while authorizing the parent company to deduct from the amount of tax due the amount paid by the subsidiary. France has opted for a system of exemption of the dividends paid by subsidiary companies to their parents’ companies.
E.U. law’s main impact was triggered by the CJEU’s preliminary ruling as to the 3% Tax’s conformity with the PSD. Member States are constrained by the decisions of the CJEU, which is required to ensure that national legislation comply with E.U. law and judgments of the CJEU. Specifically, preliminary rulings are a key element of European law supremacy and highlight Member States’ deference to the European judge in construing E.U law. In 2016, the main professional organization representing large French listed companies (AFEP) filed a lawsuit against the French Minister of Finance and Public Accounts challenging the legality of the tax’s administrative guidelines as infringing the PDS. On June 27th, 2016, France’s highest Administrative Court, having serious doubts as to the conformity of the 3% Tax with the PSD, referred the matter to the CJEU for a preliminary ruling.
The CJEU was asked whether Article 4 of the PSD must be interpreted as precluding the levy of a tax against a parent company’s distribution of dividends, which includes profits coming from that company’s subsidiaries established in other Member States. On May 17th, 2017, the CJEU ruled that dividends distributed by a French parent company including amounts that the company had previously received from its E.U. subsidiaries, cannot be subject to the 3% Tax on profit distributions, as this would be equivalent to a deferred taxation of such dividends. The court held, that regardless of whether the taxable event is the receipt of the profits by the Parent company or the subsequent redistribution, subjecting such dividends to the 3% Tax would be a form of a double taxation prohibited by PSD.
Bound by the CJEU’s preliminary ruling, the Conseil d’Etat yielded to the CJEU’s interpretation of the 3% Tax and emphasized its limited scope of application. It held that the CJUE’s preliminary ruling solely encompasses redistributions expressly addressed by the PSD. It, however, stated that taxation is not precluded when such dividends are received from domestic or non-E.U. based subsidiaries.
Arguing that the Conseil d’Etat’s ruling resulted in discrimination among taxpayers depending on the source of the profits distributed to shareholders, the constitutionality of the tax was challenged before the French Constitutional Council (Conseil Constitutionnel). In particular, it was alleged that the discrimination constituted reverse discrimination, which violates the principle of equality in terms of public burdens guaranteed by the French Constitution.
The Conseil Constitutionnel, on October 6th, 2017, held that by introducing different categories of treatment, based on the source of the redistributions, the 3% Tax violates the constitutional principles of equality before the law and equality in the context of public expenditure. In reaching its decision, the Conseil Constitutionnel relied on the intent of the law, which was to provide significant tax revenue, regardless of the origin of the distributed income. Following its ruling, the 3% Tax was officially abolished in January 2018 as part of the 2018 Finance Act and two temporary taxes were introduced to finance the reimbursement of the 3% Tax refund claims filed by taxpayers.
This decision is noteworthy in two respects. First, it underlines the intermingling of both legal orders as, by holding that the tax breached the equality principle – which commands to treat likes alike- the Conseil Constitutionel explicitly acknowledged that E.U and domestic situations must be deemed similar. Second, it highlights the emergence of a growing phenomenon of harmonization as between domestic and European legal situations for equality purposes. It appears that, upon the recognition of evident discrimination and absent any specific intent of the lawmaker as to a voluntary differing treatment, France’s domestic law should be in line with E.U. law.
To conclude, European law’s impact on Member States’ legal systems can be assessed in two respects: a quantitative impact that manifests itself in the increased number of E.U. directives that need to be transposed; and a qualitative impact that is seen in how E.U. law trickles into domestic legislation. The twists and turns of the French 3% Tax illustrate how E.U. law can trigger significant changes in a Member State’s national legal system. Following the CJEU’s decision, not only did the French legislature need to rethink its tax regime to comply with E.U law, but ultimately had to remove it completely from its legislation in the name of equality. In this specific case, the E.U. has been influential in shaping French legislation. Whether this influence benefits Member States or not is a different question. Yet, this decision has been welcomed by French companies.
Ines Soumhi (France) is a fresh LL.M. graduate of the University of Pittsburgh School of Law. She received a double master’s degree in business law and strategic management from the University of Paris I – Pantheon Sorbonne in 2017. She has interned in the business law department of the Weil & Associes law firm in Paris, France, and has been active in moot court, legal aid clinic and the university human rights organization during her studies.