France: French WHT on dividends - Banking institutions and beneficial ownership

The French tax administration tried to increase the scope of French withholding tax by increasing the beneficial ownership requirements in cases where French banks acquire shares temporally from foreign shareholders. The French Banking Association challenged the tax administration position successfully before the highest French tax court (Conseil d’Etat).

In its comments, the tax administration had expanded the implicit beneficial owner requirement by stating that the withholding tax provided for in Article 119 bis-2 of the French General Tax Code “applies even when the recipient has their tax domicile or registered office in France, provided that the beneficial owner of the income in question, i.e. the person who has the right to dispose of it freely, has their tax domicile or registered office outside France” (BOI-RPPM-RCM-30-30-10-10 no. 1). This instruction (as well as the 2 rulings reported in the June 2023 Newsletter) particularly targeted certain activities of banking establishments concerning temporary acquisitions of shares in French companies and certain derivatives transactions. The administrative instruction was issued in connection with a tax probe conducted on banks operating in this market.

The Fédération Bancaire Française (FBF) brought an ultra vires action before the Conseil d'Etat challenging this instruction and the two rulings of 15 February 2023, which were aimed at providing banks with clarifications on the application of the beneficial owner requirement. The FBF obtained an annulment of the expansive comments made by the administration in these three publications.

On 8 December 2023, the Conseil d’Etat ruled the following. The Court firstly limited the scope of Article 119 bis 2 of the General Tax Code which provides for a WHT to distributions when they benefit persons who do not have their tax domicile or registered office in France. The Court clearly stated that “said provisions cannot be construed as providing that a withholding tax should apply to distributions made to a right holder who has their tax domicile or registered office in France, when the sums in question are remitted, in whole or in part, to a person who does not satisfy this condition and who is considered by the tax administration to be the beneficial owner”.

On the other hand, the Court ruled that “apart from the situations provided for by Article 119 bis A of the General Tax Code, the tax administration cannot, unless it implements the anti-abuse of rights procedure provided for by Article L. 64 of the Tax Procedure Code, dismiss as unenforceable the interposition, between the paying establishment and the non-resident person it considers to be the beneficial owner of the income in question, of a resident person who holds the right to receive the distributions”.

Article 119 bis A set up the Article 119 bis 2 WHT to payments made by a French domiciled person to a foreign one when the following conditions are met: The payment is made as part of a temporary transfer or of any transaction giving the right or obligation to return or resell these shares or rights relating to these shares; the transaction mentioned above is carried out during a period of less than forty-five days including the date on which the right to a distribution of income from shares or similar income arises.

Consequently, in stating that the withholding tax provided for in Article 119 bis 2 of the General Tax Code “applies even when the recipient has their tax domicile or registered office in France, provided that the beneficial owner of the income in question, i.e. the person who has the right to dispose of it freely, has their tax domicile or registered office outside France”, the comments at issue are ultra vires additions to the legislative provisions which they are supposed to clarify. Clearly, the French tax administration is no longer allowed to claim the WHT in such a situation, when not covered by Article 119 bis A provisions unless they carry out the anti-abuse of right procedure.

If you wish to discuss these topics, please contact: FIDAL