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Litigation dealing with the fair conditions to apply the parent subsidiary regime in domestic and international situations has become over the years a large area of debate, knowing that in most cases, tax courts read French parent subsidiary regime applied in domestic situations ‘in the light of European law’.
In a nutshell, the French tax code states that as long as a 5% minimum shareholding is owned for a period of more than 2 years, dividends eligible to the parent subsidiary regime can be excluded, upon election, from taxable earnings of the parent entity, except for a lump sum add back amount equal to 5% of the dividends received, including possible tax credits.
The 5% capital threshold to be qualified as a French parent company
French tax code currently states as a condition to be qualified as a parent company that shareholdings owned by the parent entity represent at least 5% of the capital of the issuing company.
French tax code also states that revenues from shareholdings with no voting rights are not entitled to the benefit of the parent subsidiary exemption, unless the parent company owns more than 5% of both the share capital and the voting rights in the issuing company.
Dividends out of voting rights shares may benefit from the parent subsidiary regime, even if less than 5% of the voting rights are owned by the parent company
Recent case law ruled out that a company owning more than 5% of the capital of its subsidiary, although only 3.63% of its voting rights, is entitled to benefit from the parent subsidiary regime exemption since it meets the 5% capital threshold. Accordingly, dividends stemming from shares with voting rights, even where voting rights in the subsidiary are less than 5% of the total voting rights of the distributing company, may be excluded from the taxable basis of the parent entity (French Supreme Court, 5 November 2014, Sté Sofina).
In another decision, the French Supreme Court ruled out that, provided that the 5% capital threshold is exceeded, any dividend distributed from voting right shares may benefit from the exemption, even where, due to multiple voting rights owned by other shareholders, the voting rights owned by the parent company amounted to less than 5% of the total amount of voting rights (French Supreme Court, 3 December 2014, Sté Financière Pinault).
Treasury shares would not entitle to the parent subsidiary exemption
In a decision of lower level (Cour administrative d’appel de Versailles, 29 January 2013, Sté Metro Holding France), the Appeal Court denied to consider that a company owning 20% of the shares of its controlling company (i.e. treasury shares with no voting rights) might benefit from the parent subsidiary regime, namely because the shareholder failed the voting rights test. The case law added that French law would voluntarily deviate from EU law in this respect and that domestic situations where only French entities are involved could accordingly not be read “in the light of European law”. A possible overruling of this decision is however now pending in front of the French Supreme Court.
Contrary to the EU Directive?
It must be noted that the Parent Subsidiary Directive states that “the status of parent company must be attributed to a company which has a minimum holding of 10 % in the capital of a company of another Member State […]” and that, “by way of derogation […], Member States shall have the option of replacing, by means of bilateral agreement, the criterion of a holding in the capital by that of a holding of voting rights”.
Thus, although the French 5% capital threshold is more favourable than the EU 10% minimum, French law appears to be more restrictive than the Directive insofar as the voting right condition is not a requirement to benefit from parent subsidiary regime according to the Directive.
In other words, at least when the subsidiary is not a French subsidiary but an EU subsidiary, European law would not authorize France to limit the benefit of the parent subsidiary regime to the sole shares with voting rights, unless a bilateral agreement would have been established between France and the State of the subsidiary, which has never been the case.
In this context, the French tax authorities recently announced that they intend to remove the restrictions existing in the French Tax Code to the benefit of the parent subsidiary exemption for distributions of profits deriving from non-voting right shares.
Concretely, if the law is passed, dividends out of non-voting rights shares as well as dividends out of voting rights shares would benefit from the parent subsidiary exemption, provided that the 5% capital holding threshold is exceeded for at least two years.
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2015 year end Finance bill discussions should include this topic among other adjustments dealing with the extension of the regime to shares held in bare ownership (“nue propriété”), follow-up of the ECJ Steria decision, as well as the treatment of dividends stemming from non-cooperative jurisdictions (“ETNC”).
For the past, French entities with treasury shares or non-voting rights shares in their European subsidiaries may consider the relevance of court litigation on these issues.