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16/05/2012

Decision of the European Court of Justice on UCITS taxation

The European Court of Justice has ruled in favour of foreign funds that disputed the withholding tax applied under French law.

The European Court of Justice has ruled in favour of foreign funds that disputed the withholding tax applied under French law. European Union law opposes French legislation instituting a different tax treatment depending on whether dividends from a French source are received by resident or non-resident UCITS

The European Court of Justice has decided that the 25% withholding tax (30% since 1 January 2012) deducted by France on dividends paid to foreign UCITS is contrary to EU law, as it institutes a different tax treatment depending on whether UCITS are residents or non-residents.

At the end of 2011, around 2,500 withholding tax reclaims were presented before the Administrative Lower Court of Montreuil. The Court then referred 10 cases to France's Supreme Administrative Court (including Santander AM, Allianz Global Investors, KBC, Generali, and Societe Generale funds). These foreign UCITS had invested in shares of French companies, and thus incurred this withholding tax on dividends paid to them, disputed the French legislation by alleging discrimination with regard to the free movement of capital guaranteed by EU law.

In view of this decision, the public authorities have a choice between two points of view:
1/ Elimination of the withholding tax to the sole benefit of foreign UCITS, with a need to offset the fiscal loss resulting from this elimination.
2/ Expansion of application of the withholding tax to all shareholders, both French and foreign.

In this second case, the performance of French funds would be impacted, as the dividends would be taxed at the rate in effect. This disadvantage could be partially made up for, as other countries of the European Union are also affected (Germany, for example). But the risk would be to favour foreign shareholders and further increase non-resident holding of the capital of French companies.

The withholding to be reimbursed by the Public Treasury in accordance with this decision is expected to total ?4.2 billion, and the annual cost of eliminating the withholding should amount to around ?1 billion per year.


SGSS will work with its clients to deal with the consequences of this decision, the details and procedures of which are not yet known.

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