Parent companies, foreign subsidiaries and tax credits: towards greater tax neutrality?

Parent companies, beware, you will finally be able to deduct your tax credits from your shares of costs and charges on dividends received from your foreign subsidiaries. 

In general, when a company receives dividends from its foreign subsidiary, these are taxed first by the tax authorities of the country of the subsidiary, then a second time by the tax authorities of the country of the parent company. . 

In order to avoid this double taxation, the provisions of international tax treaties, which are based on Article 23 B of the OECD model convention, as well as 1 of Article 220 of the General Tax Code ( " CGI "), provide for a tax credit mechanism chargeable to the amount of corporation tax (" IS ”) payable by the parent company, without the deduction being able to exceed the fraction of corporate tax corresponding to the amount of income received. Therefore, in the event of total exemption of the dividend received, which is generally the case for dividends benefiting from the parent-daughter regime, the tax credit cannot be charged.

If this mechanism is used and well known, the terms of its application to the mechanism of quota shares of costs and charges (“ QPFC ”) were more uncertain. 

Originally, article 216 of the CGI exempted from corporate income tax participation products meeting the parent company regime, subject to the reinstatement of a QPFC fixed at a flat rate of 5% of the amount of dividends received. However, the beneficiary company had the option of capping the taxable QPFC at the level of the costs and charges it had incurred. In this respect, the Conseil d'Etat had affirmed in a SA Fournier Industrie et Santé decision of April 23, 1997, that the reintegration of the QPFC was not intended to ensure residual taxation of profit-sharing, so that the tax credit received by a parent company could not be deducted from the taxation of this QPFC. 

Therefore, the tax authorities considered for a long time that, since the imposition of the QPFC did not amount to a partial taxation of the dividends, the tax credit could not be set off against the QPFC. 

The finance law for 2011 removed this possibility, and since then, all parent companies must reinstate a fixed QPFC of 5% without being able to take into consideration the amount of costs and charges actually incurred. 

In addition, the finance law for 2013, resulting in the creation of a QPFC of 12% on capital gains from the sale of equity securities, did not provide for a mechanism for taking into account actual costs (art. 219 CGI). 

However, the tax authorities continued to indicate in their doctrine that the taxation of the QPFC was not assimilated to any taxation of dividends, which has the consequence that the tax credit, generated by the taxation of dividends from the company issuing them, could not be used. 

However, since 2021, the Council of State has begun to reconsider its case law SA Fournier Industry and Health. Thus, in a decision SA Air Liquide of November 15, 2021 relating to the QPFC relating to capital gains from the sale of equity securities (art. 219 CGI), it ruled that this QPFC of 12% of the gross amount of capital gains sale was a tax, at a reduced rate, on the capital gains on the sale of equity securities.

The administrative court of appeal of Lyon had the opportunity to rule on a similar dispute in a judgment dated January 27, 2022, Raymond et Cie, and thus to deepen the logic of the L'Air Liquide decision. It judges that the submission to the IS of the QPFC, fixed at a flat rate, of 5% of the dividends, was analyzed as a method of taxation of all of these incomes in France. 

This reasoning was confirmed in a SA AXA decision of July 5, 2022 (no. 463021). The Council of State thus annulled the decision of the Minister of the Economy refusing to repeal the administrative doctrine considering that the QPFC provided for in article 216 of the CGI does not constitute a taxation of dividends.

In this appeal for excess of power brought by the company AXA, the question was to know the nature of the reinstatements of this QPFC in the result submitted to the IS. 

According to the public rapporteur, Romain Victor, the reintegration must be analyzed: 

• either as the neutralization, up to an amount defined on a flat-rate basis by tax law, of charges which must not be deducted from the profit, since they relate to products which are not taxed;
• or as a tax on all or part of the dividends from foreign sources.

The public rapporteur concluded in the direction of AXA in view of recent case law, as well as the argument that the QPFC being fixed, it does not take into account the costs actually incurred. In effect, " if the charges and costs reintegrated into the results were strictly equal to the amount of the charges and general costs incurred for the acquisition and management of the securities of the distributing subsidiaries, according to a logic of actual costs, or if, failing to be strictly equal, the reinstated amount was judged to be close to or sufficiently representative of the expenses and costs actually incurred, then there would be no obstacle to seeing in the QPFC a pure mechanism for neutralizing the deduction of costs incurred for the acquisition or retention of income relating to a transaction which is itself exempt ». 

Thus, the Council of State ruled that the provisions of article 216 of the CGI " must be regarded not as having the sole purpose of neutralizing the deduction, made in respect of its general expenses, of the charges relating to the equity securities whose income is exempt from corporation tax, but as intended to submit to this tax, when the amount of the costs is less than this lump sum, a fraction of the income from participations benefiting from the parent company regime ». 

According to him, the QPFC constitutes, at least in part, a taxation of dividends and therefore, the tax credit can be applied against this QPFC. 

However, the terms and conditions for charging the tax credit are still uncertain, in the sense that the QPFC was created with the aim of covering the costs generated by the collection of dividends. The question is therefore whether the tax credit can be applied to the entire QPFC or only on a part of it. 

The first perception, mentioned by the public rapporteur, consists in assimilating the taxation of the reinstated QPFC to taxation levied on a total base, equal to the amount of income received, less all the costs actually incurred. Therefore, there would be no exemption, and therefore no reason to reinstate the charges. However, this design is not in accordance with European Union law since it provides that dividends cannot be taxed in the State of the parent company. 

The public rapporteur then evokes a conception which consists in viewing the reinstatement of the QPFC as resulting in juxtaposing an exemption and a tax, in the sense that the reinstatement would result in neutralizing the charges and taxing beyond this amount. 

The Council of State should clarify this question in the context of the appeal lodged by the public prosecutor against the judgment of the CAA of Lyon, Raymond et Cie. 

To be continued…….