La Revue Squire

Freedom of establishment and deduction at source


Rédigé par Philippe de Saint-Bauzel le 20 Juin 2007


The European Court of Justice (“ECJ”) has recently handed down a judgment which may potentially have significant consequences on the application of deduction at source for the distribution of dividends by a French subsidiary to its parent company set up in another EU Member State (C-170/05, 15 December 2006).

The decision sets out (at point 56) that the principle of freedom of establishment is infringed by national laws that are aimed solely at non-resident parent companies seeking to tax by way of a deduction at source the dividends that are distributed by domestic subsidiaries where the parent company does not benefit from such a deduction in the other Member State. This applies whether or not there exists a tax treaty between France and the Member State in question which authorises deduction at source and provides for the option of deducting the tax due in this other Member State where the charge is permitted under that jurisdiction’s legislation.

As a result, French tax authorities will no longer be entitled to deduct at source dividends paid by a French body corporate to its parent company which is registered in another Member State where the parent company would not be able to make a similar deduction at source in its own jurisdiction (which may notably be the case should the parent company have a tax deficit).

In practice, the reimbursement of monies deducted at source can be requested for amounts deducted in relation to 2005 (until 31 December 2007) and 2006 (until 31 December 2008).

Accordingly, it now appears necessary to expressly refer to this judgment to justify, in legal terms, the reason for not deducting dividend payments at source abroad.





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