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ECJ Rules Against France on Withholding Tax Rules Applied to Nonresident Funds

ECJ decides that French withholding tax rules are contrary to EU law regarding dividend payments to nonresident investment funds

Further to our alert on April 13, 2012, in a case brought by German, Spanish, Belgian, and U.S. investment funds (so called "Aberdeen or Fokus Bank claims") the ECJ has provided its ruling in favor of the funds. The claimants argued that the French rules which taxed dividends paid to nonresident funds, but exempted similar payments made to comparable French funds were contrary to EU law. The ECJ ruling confirms:

  • The French rules are a restriction on the free movement of capital between EU member states and between member states and third countries
  • There is no justification for France applying such discrimination in either an EU or third country context
  • In the case at hand, the position of the investors in the nonresident fund does not need to be taken into account when assessing the claims, as this is not a requirement of the French legislation; and
  • There is no reason to apply a temporal limitation to the case in this instance

This is a significant win for investment funds based in the EU and elsewhere. The expected cost of the judgment to the French tax authorities is in excess of $4bn. France and other EU member states will also take note of the ruling and we may see changes to withholding tax regimes in the EU as a result.

As with all EU cases, the judgment will now pass back to the French Court system so there is still a way to go in terms of final resolution of the cases, however the guidance from the ECJ is clear. The French tax authorities may now look to procedural grounds within French law to defend their position.

Recommended actions
  • Investment funds based in the EU and elsewhere with French Dividend income for the period January 1, 2010, to December 31, 2011, (whether within the EU or based elsewhere) that have not filed claims or considered filing claims in France, should review their position and file claims as soon as possible if relevant.
  • Portfolio investors based in the EU and elsewhere should assess the viability of EU claims across all EU markets and protect claims where sound arguments and value exists.

For additional information or questions, please contact Kit Dickson +44 (0) 7789 273879 and or for RIC specific questions, please contact Eric Byrnes +1 973 602 6710.

Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165

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