Parent-subsidiary regime: the 5% share of costs and expenses has the nature of a taxation
Philippe Pescayre, Julien Lebel and Juliette Allot
By a decision of July 5, 2022 (SA AXA, no. 463021), the Conseil d'Etat (French highest administrative court), seized within the framework of an appeal on the ground of abuse of authority (ultra vires), invalidates the French tax authorities’ commentaries (referenced in France under BOI-IS-BASE-10-20 n°100). It acknowledges that the 5% share of costs and expenses that French parent companies receiving dividends within the framework of the parent company-subsidiary regime have to add-back into their taxable income, has the nature of a taxation.
Under the parent-subsidiary regime, dividends received by a parent company are exempt from corporate income tax (CIT), except for a share of costs and expenses set at 5% of their gross amount (or 1% in certain situations) which must be added back to the taxable income of the parent company (Article 216 of the French Tax Code).
If a parent company receives dividends from a foreign subsidiary, which have been subject to withholding tax in the subsidiary's country, this withholding tax gives rise to a tax credit in France, which is however limited to the amount of French tax due on these dividends. According to the French tax authorities, investment income is deemed to be tax-exempt, implying that the CIT paid on the share of costs and expenses cannot be considered as a taxation of the dividends as it is intended to cover the costs and expenses incurred by the parent company. In practical terms, it means that the foreign tax cannot be set off against the CIT paid in respect of the share of costs and expenses.
According to the Conseil d'Etat, the provisions of article 216 of the French Tax Code are not solely intended to neutralize the deduction of expenses relating to equity investments whose income is tax-exempt. Their purpose is to tax a fraction of the investment income benefiting from the parent-subsidiary regime. The Conseil d'Etat draws this conclusion from the flat-rate nature of the share of costs and expenses, which does not authorize the parent company to limit the amount to be added back to the actual amount of the costs and expenses incurred in order to acquire or retain the income.
This position was expected since the Conseil d'Etat applied to dividends the solution it had already adopted with respect to capital gains on the sale of equity securities (November 15, 2021, Air Liquide, no. 454105). Indeed, in opposition to the French tax authorities' commentaries, the Conseil d'Etat stated that the 12% share of costs and expenses on the sale of foreign equity securities had the nature of a taxation against which a foreign tax credit could be set off.
While this ruling lays the groundwork for the offset of foreign tax credits against CIT paid in respect of the 5% share of costs and expenses, clarification would be welcome as to the terms and conditions of such offset, and in particular as to the amount of the foreign tax credit that can be offset against the French corporate income tax. In particular, guidance is required as to whether the full amount or only a portion of the CIT incurred should be considered as a taxation. Despite these uncertainties, it is nevertheless important to anticipate the situation by filing claims. Our teams remain at your disposal to discuss these issues and assist you in this process.