This new dividend distribution tax has two main goals:
- To compensate the French treasury for a loss of revenue resulting from the repeal of a prior withholding tax. The Court of Justice of the European Union (CJEU) in the Santander case (C-338/11 to C-347/11 (10 May 2012)) concluded that then-effective French withholding tax levied on dividends distributed by French corporate issuers to EU and non-EU investment vehicles was contrary to the free movement of capital (pursuant to EU law).
- To encourage French resident companies to reinvest their profits.
KPMG observation
Tax professionals in France, according to STC Partners*, believe that the validity of the new dividend distribution tax could be challenged both under EU law and under income tax treaty provisions.
Summary of new tax
The new dividend distributions tax is levied at the level of the distributing company, provided that it is subject to French corporate income tax.
Technically, the tax differs from a withholding tax, insofar as the taxpayer is the distributing company itself—and not its shareholders.
The tax is not deductible from the taxable income of the distributing company.
The 3% rate applies to the amount of the distributed dividends (including hidden profits). The tax is effective for dividend distributions made from 17 August 2012.
The tax targets distributions made to shareholders, no matter whether they are individuals or corporations, or French residents or non-residents.
The tax also targets income that is realized in France by foreign companies through permanent establishments, and that is deemed to be distributed to non-resident shareholders, when such income is not reinvested in the French enterprise.
Read an October 2012 report [PDF 316 KB] prepared by prepared by STC Partners in France: New French 3% tax on dividend distributions: discriminatory aspects (October 16, 2012)
*STC Partners is a French law sublicensee of KPMG International in tax.