Judges reject the arguments put forward by France
ECJ's Hearings in joined cases C-338 to C-347/11
Following the opinion of the French Tax Supreme Court on 23 May 2011 regarding whether or not the French withholding tax complies with the free movement of capital, the French Administrative Court of Montreuil lodged a reference for a preliminary ruling before the European Court of Justice (ECJ) on 4 July 2011. The questions referred to the ECJ under the case numbers C-338 to C-347/11 were:
- "must the situation of the shareholders be taken into account together with that of undertakings for collective investments in transferable securities (UCITS)?", and
- "If so, what are the conditions under which the withholding tax (WHT) at issue may be regarded as consistent with the principle of free movement of capital?".
The hearings of the cases were held on 16 February 2012 before the 6 judges of the 3rd ECJ Chamber.
During his pleadings, the French representative underlined that comparability has to be assessed at the level of the investors, given that the tax treatment of French investment funds follows the principle of neutrality. Thus investing through investment funds should not trigger additional taxation for the investors as compared to a direct investment and that is why investment funds are tax exempt. As a consequence, and taking into account the close economic link that exists between the investment fund and its unitholders, tax burden should be compared between the global situations of a unit holder investing in French equities through, on one hand, a French investment fund and, on the other hand, a non-resident investment fund.
When comparing both situations, the representative of France concluded that investments carried by French unitholders via a non-resident investment fund would not automatically result in an overall higher tax burden than if the same investment would have occurred through a French investment vehicle. This is especially the case for distributing funds where French untiholders have the possibility in practice to credit their portion of the WHT suffered on the distribution made to the foreign investment vehicle against their income tax liability.
The claimants and the European Commission both rejected this reasoning, arguing that the comparison should take place at the level where a Member State has decided to tax the dividends. Indeed, in reference to the prevailing ECJ case law, both parties ascertained that a resident and a non-resident shareholder are not always in a comparable situation, but once a Member State decides to tax non-resident shareholders in respect of dividends which they receive from a resident company, the position of those non-resident shareholders becomes comparable to that of resident shareholders. As France had decided to impose taxation on non-resident investment funds, both parties concluded that the comparability should only be assessed at the level of the French company's shareholder, i.e. the investment fund (and not take into account the investor's taxation).
In this respect, it has to be noted that the judges questioned the possibility for French investors to neutralize the withholding tax suffered when investing in French securities via a non-resident investment vehicle. Even if in such a case French unitholders could obtain a tax credit, the latter would face additional administrative burdens, as compared to unit holders investing in French funds benefiting de facto from a tax exemption. The judges also pointed out that such difference in treatment would depend on the residency of the fund rather than on that of the unit holders.
Finally, the judges also suggested that in case of capitalizing funds, no possibility of credit exists at the level of the investor, since the income is not distributed. Rather the cost of the WHT directly reduces the value of the units held in the fund and constitutes a disadvantage compared to the same unitholders investing in a French investment fund, and benefiting from a WHT exemption.
In this respect, it is interesting to note that in its recent decisions regarding withholding tax cases (especially the Commission vs. Germany case C-284/09 dated 20 October 2011) the ECJ has been handling fast proceedings and rendered decisions without the opinion of an Advocate General, as in the case at hand. We consider that such short proceedings constitute a clear indication that the judges have now a comprehensive view on the discriminatory tax treatment of outbound dividend distributions to foreign shareholders and are not willing to overturn the pro taxpayer ECJ case law established since the Denkavit decision (C-170/05) in 2008.
It should be reminded that the French Supreme Tax Court already held in its opinion dated 23 May 2011, that in case the comparison would have to be made at the level of the funds only, then the French WHT would constitute an unjustified restriction on the free movement of capital. Therefore, the position expressed by the judges in the present hearing constitutes an additional positive step for Luxembourg investments to obtain reimbursement of WHT suffered in France.
For further information, we refer to the following information note - foreign-investment-funds.pdf (26.9 KB) - prepared by our colleagues of Fidal who are currently representing certain claimants in the present proceedings.
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