In the years 1998 to 2000 Accor received dividends from its subsidiaries established in other member states. Under French law it was liable to pay an advance tax charge (précompte mobilier) on the further distribution of those profits. This advance charge applied irrespective of the origin of the dividend. However, where a dividend was received from a French taxpayer out of that taxpayer’s fully taxed distributable profits, this charge could always be offset by a applying the tax credit (avoir fiscal) attaching to such distributions. No such credit attached to dividends received from a subsidiary based in another member state or beyond. This inevitably had the effect that, unless Accor increased the size of its dividends out of its own distributable reserves, the dividends received by Accor’s shareholders would be reduced by the amount of the advance charge.
The questions referred
The French Conseil d’État referred three questions to the European Court.
The first question asked whether the legislation at issue was precluded by the provisions relating to freedom of establishment (article 49 TFEU – Treaty for the Functioning of the European Union) and free movement of capital article 63 TFEU).
The French government accepted that dividends paid by subsidiaries established in France and those paid by a subsidiary in another member state were subject to a different treatment insofar as the advance charge could only be set off by a tax credit when domestic dividends were paid-on. However, it contended that this did not amount to a restriction of the treaty freedoms as far as the parent company was concerned.
In its view the fact that Accor had to pay an advance charge was a consequence of it deciding to distribute its foreign sourced dividend income to its shareholders, which constituted a decision by it which was so hypothetical that the provisions giving rise to that charge could not be considered to constitute an obstacle to the freedoms of movement provisions. It further contended that non-resident shareholders could obtain the reimbursement of the advance payment under the double tax conventions which France had entered into with every other member state, so their situation was not affected. As far as resident shareholders were concerned, the French government considered that the situation did not come within the scope of EU law, as the absence of a credit would merely constitute an obstacle to raising capital from French shareholders which it considers to be a purely domestic issue.
The Court rejected all of these arguments. It held that the fact that no tax credit was available and the ability to set off any tax credit against the advance charge stemmed directly from the legislation at issue. The possibility of receiving a tax credit and therefore of applying it against any future redistribution did not depend on any future decision by the parent but on its exercise of treaty freedoms. The fact that the rules did not have a negative effect on foreign shareholders was irrelevant, as it was sufficient that Accor may have encountered difficulties in raising capital from resident shareholders, which was clearly the case. As no possible justification for that restriction was raised the Court held that the French law was contrary to articles 49 and 63 TFEU.
The second question asked whether EU law precluded the French government from refusing to reimburse the unlawfully levied tax, based on the fact that, though the legislation did not lead to the charge itself being passed on to a third party, reimbursing the company would lead to it being unjustly enriched or that the advance payment did not constitute an accounting or tax charge for the company and was set off against the total of the sums which may be redistributed to the shareholders.
The Court found that EU law precluded the French government from refusing to reimburse Accor. Though EU law recognised an unjust enrichment defence this had to be narrowly construed. Re-affirming its judgment in Lady & Kid and Others [C-398/09], which was handed down nine days earlier than Accor, on September 6, it held that the only exception to the right to repayment of taxes levied in breach of EU law was in cases in which a charge that was not due had been directly passed on by the taxable person to the purchaser. Of course Accor was concerned with dividend taxation and not with sales of goods, so that this condition was not met. It should also be noted that the Court also ruled out any other defences to EU repayment claims such as change of position, as it clearly stated that the change of position defence was the only defence available.
In its third question the referring court inquired to what extent the French government could make the repayment of the unduly levied sums conditional on the taxpayer showing the rate of tax applied to and the amount of tax actually paid by its foreign subsidiary on the profits out of which the dividends where paid, though no such requirement applied domestically as in that situation the information was already known to the relevant authorities.
The Court held that while a member state could require proof of the underlying tax it could only do so where it was not virtually impossible or excessively difficult for the taxpayer to obtain such information, in particular in the light of the legislation concerning the avoidance of double taxation of the member state in which the distributing company was established, the registration of corporation tax to be paid and the retention of administrative documents or accounts.
This clarification of the criteria to be taken into account by the national court in assessing whether it would be possible for a taxpayer to adduce the required proof is an important development and will assist taxpayers, in particular in portfolio dividend matters or in matters going back beyond the statutory document retention date.
Philippe Freund (freund.philippe@dorsey.com) is a barrister in the London office of Dorsey & Whitney
