Corporations - Doing business - Dividend

This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.  
 
 
 Dividend
 Tax credit "Avoir fiscal"
 Equalization tax called "precompte"
 25% exceptional tax on dividend paid in 2005 
 

 Dividend

Dividend paid by a subsidiary to a French mother company may benefit from a participation exemption regime when the recipient qualifies as a parent company.

To qualify, the parent company must hold at least 5% of the share capital of the subsidiary and the shares must have been originally subscribed by the parent company or, if acquired, the parent company must commit itself to hold the shares for at least two years.

Moreover, the parent company must be subject to corporate tax. When qualifying for this regime, dividend received are only taxable on 5% of their gross amount i.e. tax credit included.

Advice: Do not forget to comply with the formal obligation i.e. filing the parent company commitment to hold the shares for two years.

Dividend distributed by the parent company to its own shareholders before December 31, 2004 are subject to the equalization tax "precompte". No "precompte" is due for dividends paid as of January 1st, 2005 onwards.

As of January 1st, 2005, companies are no longer entitled to use the "Avoir fiscal" to pay their corporate income tax i.e. "Avoir fiscal" received by companies in 2004 will be lost most of the time.
 
 

 Tax credit "Avoir fiscal"

"Avoir fiscal" is abolished as of January 1st, 2005.

Until December 31, 2004, a tax credit called "avoir fiscal" is granted when dividends is are paid by French companies.

The "Avoir Fiscal" carried by dividends received by individuals in 2004 are deductible from their personal income tax (Income tax paid in 2005), any excess will be reimbursed.

Companies which received "avoir fiscal" carried by dividends in 2004 and whose financial year ends on December 31st, will no longer able to use such "avoir fiscal" as a tax credit against their 2004 corporate income tax calculated in 2005.

As of January 1st, 2005 dividends paid by French companies no longer carry any "Avoir fiscal".

IMPORTANT: European Court of Justice “ECJ” (Petri Manninen C-319/02 7/9/04) ruled that tax credits granted by EU country, in order to avoid the double taxation of distributed earnings, are conflicting with the rule on free movement of capital within the European Union when these tax credits are only granted when the distributing entity and the beneficiary are established in the same jurisdiction, but denied when the distributing entity and the beneficiary are established in two different EU member countries.

This decision confirmed that the French “Avoir Fiscal” (and therefore the “précompte”) abolished as of January 1st, 2005, are incompatible with EU rules. Taxpayers who did not benefit of the “Avoir Fiscal” on dividends received from other EU countries, or who paid some “précompte” on the redistribution of EU sourced dividends, should consider to claim successfully a reduction of their tax bill with respect of these 2 issues.

 Equalization tax called "precompte"

"Precompte" is abolished for dividend paid as of January 1st, 2005. A 25% exceptional withholding tax very similar to the "Precompte" will apply on all dividends paid by French companies in 2005 "25% dividend tax".

"25% dividend tax" will generate a tax receivable of the same amount. 1/3 of this tax receivable may be used to pay corporate income tax each year during the 3 following years. The excess will be reimbursed.

IMPORTANT: The definition of "dividend" for the "25% dividend tax" will be broader than the definition applicable for "Precompte". It will include not only regular dividend but also exceptional dividend following a share by back, payment of a liquidation profit or irregular distribution. Companies planning to distribute large exceptional dividends in 2005 should consider postponing until 2006 or anticipate in 2004.

Until December 31, 2004, dividends paid by French companies may be still subject to "precompte". The related dividends still carry an "Avoir fiscal".

The objective of the avoir fiscal is to eliminate the double taxation at the level of the shareholder.

The "avoir fiscal" system eliminates double taxation when the profits from which the dividends are derived have been taxed at the standard corporate tax rate. If the profits have not been taxed or have been taxed at a reduced rate, granting the "avoir fiscal" creates a tax discrepancy. Equalization tax called "precompte" is a correction mechanism which occurs when profits from where the dividends are derived have not been taxed at a standard corporate tax rate or when dividends have been withdrawn from earnings and profits older than 5 years The equalization tax rate is 50% of the net distributions and is capped when the dividends derived from profits were already taxed in France at a reduced rate e.g. reduced rate applicable to small and medium size businesses, long term capital gains... "Avoir fiscal" and "Precompte" are abolished as of January 1st, 2005.

IMPORTANT: European Court of Justice “ECJ” (Petri Manninen C-319/02 7/9/04) ruled that tax credits granted by EU country, in order to avoid the double taxation of distributed earnings, are conflicting with the rule on free movement of capital within the European Union when these tax credits are only granted when the distributing entity and the beneficiary are established in the same jurisdiction, but denied when the distributing entity and the beneficiary are established in two different EU member countries.

This decision confirmed that the French “Avoir Fiscal” (and therefore the “précompte”) abolished as of January 1st, 2005, are incompatible with EU rules.
Taxpayers who did not benefit of the “Avoir Fiscal” on dividends received from other EU countries, or who paid some “précompte” on the redistribution of EU sourced dividends, should consider to claim successfully a reduction of their tax bill with respect of these 2 issues.



 
 25% exceptional tax on dividend paid in 2005

Precompte" is abolished for dividend paid as of January 1st, 2005. A 25% exceptional withholding tax very similar to the "Precompte" will apply on all dividends paid by French companies in 2005 "25% dividend tax".

The 25% dividend tax is due when dividend are paid out of results which were not previously taxed at the regular corporate income tax rate, or out of profit generated by tax years older than 5 years, or also profit included in the computation of a carry-back receivable.

“25% dividend tax” will generate a tax receivable of the same amount. 1/3 of this tax receivable may be used to pay corporate income tax each year during the 3 following years. The excess will be reimbursed.

As provided for the “Précompte”, corporation will have to fully distribute first the benefits not liable for the 25% tax and then they will be allowed to select in their best interest the type of profit they will distribute.

IMPORTANT: The definition of "dividend" for the "25% dividend tax" will be broader than the definition applicable for "Precompte". It will include not only regular dividend but also exceptional dividend following a share by back, payment of a liquidation profit or non regular distribution. Companies planning to distribute large exceptional dividends in 2005 should consider postponing until 2006 or anticipate in 2004.