In light of these comments, multinational entities need be aware of the potential effect of the 3% surcharge in various situations when a European company is involved.
Legislation enacted in 2012 (i.e., the second amended Finance Act for 2012) imposed a corporate income tax surcharge of 3% on distributions.
The surcharge is codified as Article 235 ter ZCA of the French tax code, and is assessed on “distributed income” as defined under the tax code’s Articles 109 to 117.
The following discussion focuses on the effects of the 3% surcharge on distributions in situations involving European companies.
Situation 1 - European company with a French branch
In this situation, no surcharge is due on amounts allocated to the European company, provided that this company is subject to corporate income tax in its country of residence (and is not exempted from tax and does not have an opportunity to “opt out” of its tax liability).
Situation 2 - European company with a French subsidiary in which the European company directly holds at least 95% of the capital
In this situation, the 3% surcharge would be assessed on the French subsidiary’s dividend distributions, except when specific exemptions apply (e.g., stock dividends).
Tax professionals with Fidal* have observed that this situation appears to discriminate against European groups vis-à-vis French groups, since the same dividend distributions made by the French subsidiary of a company holding at least a 95% interest in the subsidiary and belonging to the same tax consolidated group would be exempt. Also, an applicable tax treaty might potentially provide the basis for a taxpayer challenge to the surcharge—although this position is currently viewed as being rather uncertain.
Situation 3 - European company with a French subsidiary in which the European company holds less than 95% of the capital
In this situation, the 3% surcharge also would be assessed on French subsidiary’s dividend distributions, except when specific exemptions apply.
In this instance, tax professionals with Fidal* believe that the prospects of challenging the 3% surcharge on the basis of EU law or tax treaty provisions law appear to be of greater uncertainty.
Companies potentially affected by imposition of the 3% surcharge need to evaluate the effect of the surcharge and consider their options—at the very least, prudent companies would examine the consequences of alternative strategies, including whether to mount a legal challenge to the surcharge.
For more information, contact a tax professional at Fidal Direction Internationale* in Paris or the French KPMG Tax Center in New York:
Gilles Galinier-Warrain, French Tax Center, KPMG LLP, New York
Olivier Ferrari, Tax Partner
+33 (0)1 55 68 14 76
Patrick Seroin, Tax Partner
+33 (0)1 55 68 15 93
*Fidal Direction International is a French law firm that is independent from KPMG and its member firms.