Under article 115 quinquies of the French Tax Code, the profits of a French branch of a foreign company are deemed to be distributed to non-residents, and are therefore liable to a 25% withholding tax, known as the branch tax. However, the branch may make a claim for a refund of the branch tax computed on the French branch's profits exceeding the actual amount of dividends distributed by the foreign entity to non-French residents.
A Swiss company, Winterthur SA, claimed that as the profits of its French branch only contributed one-third of its total profits, the limitation of the withholding tax should be computed on a pro rata basis.
The Conseil d'Etat ruled on January 7 2000 that, under the French Tax Code, the distribution of the foreign entity's profits is deemed to be paid out of the French branch's profits. Therefore, there is no basis for a pro rata approach. The Conseil d'Etat also confirmed that the branch tax applies to capital gains as well as to ordinary business profits.
(Since fiscal year ending December 31 1997, the branch tax no longer applies to French branches of companies with their actual place of management located in member states of the EU. Some tax treaties may override the enforcement of the branch tax, eg the treaty between France and Switzerland as amended on July 22 1997.)
209B and the France-Switzerland treaty
The Swiss authorities question whether the France-Switzerland treaty as amended allows France to apply section 209B of the French Tax Code. Since the language of the treaty was purposely obscure, there is certainly room for discussion.
