Withholding taxes : refunds available following a decision of the Court of Justice of the European Union
In a judgment released on 22 novembre 2018 (Sofina SA, Rebelco SA, Sidro SA, C-575/17), the Court of Justice of the European Union has decided that European Union law precludes a legislation pursuant to which the dividends paid by a resident company are subject to a withholding tax when they are received by a loss-making non-resident company, while a resident company in the same situation would not have been subject to tax in the year of the dividend payment.
The Court’s reasoning
This judgment has been released in a case where Belgian companies owning less than 5% of the capital of French companies were subject to a 15% withholding tax in accordance with the tax treaty between Belgium and France.
The Court has considered that by withholding such a tax, France had infringed the freedom of capital movement. Indeed, whereas the dividends paid to a non-resident company are subject to immediate and definitive taxation, the tax imposed on dividends paid to a resident company depends on whether the latter’s financial year is net loss-making or net profit-making. Thus, where losses are made, the taxation of those dividends is not only deferred to a subsequent profit-making year, thus procuring a cash-flow advantage for the resident company, but is also thereby uncertain, since that tax will not be levied if the resident company ceases trading before becoming profitable.
Having established that levying a withholding tax under such circumstances infringed EU law, the Court was not obliged to answer the French referring Court’s question whether the withholding tax should have borne on a gross or a net basis.
The consequences of the judgment
Loss-making non-resident companies placed in the situation above may request the refund of the withholding taxes which have been levied in France. In order to prevent any dispute on the existence of a loss-making situation, the non-resident company should establish that the loss also exists under French tax rules.
This solution, which relies on the freedom of capital movement, is applicable to companies located in the European Union. It should also be applicable where the beneficiary of the payment is established in a third country, as long as the conditions for the application of the freedom of capital movement are met.
According to the French legislation on tax procedures, the request must be filed before 31 December of the year following the year where the withholding tax has been paid. The French tax authorities however admit that this deadline may be extended one more year where the request is presented by the payor of the withholding tax.
Considering that the wording of the Court’s judgement is relatively broad, all non-resident loss-making companies should be allowed to present similar requests where a withholding tax has been levied, regardless of the nature of the income at hand.
Lastly, loss-making companies may also file similar requests in other countries of the European Union if they have been subject to withholding taxes levied under similar circumstances.