The withholding tax levied on income paid to a foreign loss-making company can be subject to a refund claim

27 november 2018

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In a decision of 22 November 2018 (C-575/17, Sofina SA, Rebelco SA, Sidro SA), the Court of Justice of the European Union (ECJ) ruled that France had infringed the free movement of capital by levying a withholding tax on dividends paid to loss-making Belgian companies on the grounds that, in the same situation, a resident shareholder company would not have borne any taxation in respect of the year in which the dividend was distributed.

The ECJ found that dividends paid to a non-resident company give rise to immediate and definitive taxation by means of a withholding tax under the conditions laid down by national law and by the bilateral tax treaty applicable to the case, regardless of the tax result of the foreign company, whether profitable or loss-making. Yet, a resident company that receives dividends is immediately taxable on this income only if its tax result is a profit. If its result is a deficit, the French company will only be subject to taxation at a later date, when it returns to profit, or will even benefit in practice from an exemption if the company is indefinitely loss-making or ceases its activity before it returns to profit. As a result, the withholding tax system currently provided for by French law, which does not allow non-resident companies to benefit from such a tax deferral, introduces a difference of treatment contrary to the free movement of capital between loss-making companies receiving dividends depending on whether they are resident or not.

Actions to be carried out

All foreign loss-making companies, whether resident in a Member State of the European Union or resident in a third country under certain conditions, which have borne a withholding tax on dividends paid by their French subsidiary, may request the refund of the withholding tax levied.

Beyond the withholding tax on dividends, we believe it is also possible to claim the refund of withholding taxes levied on other types of income insofar as the free movement of capital is concerned.

Claims for the refund of the withholding tax wrongly paid must be filed no later than 31 December of the year following the one in which the withholding tax was levied, if they are submitted on behalf of the foreign company, or, by administrative tolerance, no later than 31 December of the second year following the one in which the withholding tax was levied, if they are submitted by the paying party (distributing company or financial institution).

In addition, loss-making French companies whose income from other Member States has been subject to withholding tax may also consider claiming its refund from the relevant tax authorities on the basis of the judgment of 22 November 2018.