Council of States decides on the beneficial owner of Dividends

Benefits of lower withholding tax under tax treaty available to only beneficial owner of dividends: Rules French Council of States [Decision of 8 November 2024].

The Court denied the recipient company benefits under the Franco-Luxembourg tax treaty, and the next day, it passed on all its dividends to its sole shareholder.

French Court confirms that the benefits of a reduced rate of withholding tax on dividends under French tax law and tax treaty with Luxembourg are available to recipients who are beneficial owners of such income.

Council of State (Conseil d’état), in its decision of 8 November 2024 (Case No. 471147), has held that the benefits of a tax treaty regarding payment of dividends by a French company to its parent company in Luxembourg cannot be allowed because the Luxembourg company was the apparent beneficial owner, as the dividends received were transferred the next day to another company in Luxembourg.

A French company, Foncière Vélizy Rose (FVR, taxpayer), was subjected to an accounting audit for the financial years ending 31 December 2014, 2015, and 2016. The tax authorities challenged, in particular, the company's exemption from withholding tax claimed pursuant to Article 119 ter of the General Tax Code concerning interim dividends of EUR 3.6 million paid in 2014 to Luxembourg company Velizy Rose Investment (VRI).

The taxpayer requested discharge from the withholding tax liability and, as an alternative, a reduction of the withholding tax to a 5% rate as provided in Article 8 of the Franco-Luxembourg tax treaty.

On 2 July 2014, the Luxembourg company VRI received an interim dividend of EUR 3.6 million from its wholly owned subsidiary in France. The following day, when no other funds were available, it paid the same amount to its sole shareholder, Devnos Investment, another Luxembourg company. VRI had no other activity besides holding the securities of the French company FVR.

Article 119 of the General Tax Code provides withholding tax on specified income that benefits persons without tax domicile or registered office in France. However, withholding tax does not apply to dividends distributed to a legal person subject to corporation tax at the standard rate. It must prove to the debtor or the person who ensures the payment of the dividend that it is the beneficial owner of the dividend. It has its effective place of management in a Member State of the European Union or a Member State of the European Economic Area.

The tax authorities confined themselves to considering that the Luxembourg company VRI could not be regarded as the beneficiary effective within the meaning and application of Article 119 of the General Tax Code.

The taxpayer's appeal to the Montreuil Administrative Court was rejected on 23.09.2021, and the Paris Administrative Court of Appeal (order of 7.12.2022) also dismissed the taxpayer's further appeals.

The taxpayer appealed to the Council of States.

On appeal, the Court held that the requirement of Article 119 of the General Tax Code that for benefitting from the exemption of withholding tax, the recipient of dividends provide proof of it being the beneficial owner to the person distributing the dividends is not incompatible with the requirement of the EU Directive dealing with the freedom of establishment. The Court held that the French law is consistent with the objectives of the Directive concerning freedom of establishment.

The Court rejected the claim based on the French General Tax Code application.

Regarding the claim of application of tax treaty between France and Luxembourg and allowing benefits of lower rate of withholding tax, the Court referred to paragraph 2 of Article 8 of the Convention of 1 April 1958 between France and Luxembourg that provided for a reduced rate of withholding tax of 5% of the gross amount of dividends ( in the source state) if the dividend beneficiary is a capital company that directly holds at least 25% of the share capital of the company distributing the dividends. However, Article 10a of the Convention provided that a reduced tax rate would only apply if the recipient provided a certificate from its tax authorities that received income would be subject to direct tax under the conditions of ordinary law under the state where it has tax domicile.

The Court held that to benefit from the reduced withholding tax rate on dividend income paid to the resident of the other contracting state, the resident in question must be the beneficial owner of such income.

Consequently, the France-Luxembourg Convention is not applicable when the recipient of dividends from a French source, who is a resident of Luxembourg, is only the apparent beneficiary thereof.

Therefore, the claim of lower withholding tax under the tax treaty was denied because the dividend recipient was only an apparent beneficiary. After all, the dividend was passed on the next day to its parent company, and VRI had no business other than holding an investment in a French company.