The French tax authorities have issued new guidelines (Instruction 4 J-1-02, January 3 2002) on the provisions of the Finance Bill 2001 that reduced the rate of the avoir fiscal for tax credits used in 2001 and 2002. In particular, the authorities comment on these provisions with regard to the situation of non-French residents.
It is important to note that the avoir fiscal may be transferred to a non-French resident receiving a dividend from a French company only if the applicable international tax treaty provides for such a transfer. As far as the amount of the avoir fiscal is concerned, two categories of companies are distinguished under the new guidelines:
companies that meet the requirements set for the participation exemption regime if they were French resident companies; and
companies that do not meet these requirements.
The French Finance Bill 2001 amended the participation exemption regime insofar as the Ffr150 million ($20 million) threshold was eliminated and the 10% threshold was reduced to 5%. In addition to holding at least 5% of the share capital of the French distributing company, companies have to subscribe to the French shares when they are issued or commit themselves to holding them for at least two years.
With regard to non-French companies that would meet the requirements set for the participation exemption regime if they were French resident companies, they are entitled to an avoir fiscal equal to 50% of the amount of the received dividends, subject to the deduction of the withholding tax provided by the applicable tax treaty. Contrary to their former position, the French tax authorities now consider that non-French companies are entitled to the entire transfer of the avoir fiscal at the rate of 50% even if they have not held the shares of the French distributing company for two years.
This new position applies with regard to avoirs fiscaux effectively reimbursed from January 15 2001 onwards, provided non-French companies commit themselves to holding their 5% participation for at least two years and give the French tax authorities the name of a tax representative who will be liable for the reimbursement of the excess fraction of the avoir fiscal received, should they fail to hold their 5% participation for two years. In practice, this provision mostly applies to parent companies owning between 5% and 10% in the subsidiary. As a matter of fact, most tax treaties do not entitle companies owning 10% or more to any transfer of avoir fiscal.
As for non-French companies that would not meet the requirements set for the participation exemption, they are entitled to an avoir fiscal equal to 25% or 15% of the dividends – subject to the deduction of the withholding tax provided by the applicable tax treaty – provided these avoirs fiscaux are used or effectively reimbursed respectively in 2001 or from January 1 2002 onwards.
If the French distributing company had to pay equalization tax (précompte) on the distributed dividend, the 25% or 15% avoir fiscal attached is increased by an amount equal to respectively 50% or 70% of the equalization tax paid on each dividend by the French distributing company. However, the portion of the equalization tax for the payment of which tax credits were used, ie for which no payment was made, and the portion of equalization tax due as a result of a distribution paid from the long-term capital gain reserve, are not taken into account to increase the amount of the avoir fiscal.
This increase, computed on the basis of the equalization tax paid by the French distributing company, is treated as part of the avoir fiscal for the application of tax treaties.
Specific provisions are provided for pension funds. Japanese pension funds benefit from the transfer of an avoir fiscal equal to 15% of the distributed dividends. US and Dutch pension funds benefit from the transfer of an avoir fiscal equal to 30/85 of the applicable avoir fiscal rate, reduced by the 15% withholding tax rate, ie for a dividend of 100 paid in 2000, the refund is equal to 7.5 in 2001, and is equal to 4.5 in 2002 for a dividend paid in 2001. Austrian or English pension funds benefit from the transfer of an avoir fiscal equal to 25% in 2001 and 15% in 2002, on which the 15% withholding tax is levied.
Robert Tarika
