France: Withholding tax on capital gains of nonresident shareholders; refund opportunities

France: Withholding tax on capital gains

The French Supreme Administrative Court (“Conseil d’Etat”) held that the French tax authorities cannot limit the amount of French withholding tax on capital gains realized by nonresident shareholders on substantial participations in a French resident entity. The high court, finding that the French withholding tax treatment was not compatible with EU law and was contrary to certain EU freedoms, concluded that the withholding tax must be fully refunded.


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The case identifying number is: n° 421524


Under French law, capital gains derived by resident companies on the sale of subsidiaries are generally subject to corporate tax. An 88% exemption, however, applies with regard to gains on the sale of certain shareholdings if held for more than two years and subject to certain other conditions.

Nonresident companies selling shares in French companies are subject to French tax (at the standard rate of French corporate income tax, currently 28% (article 244 bis B of the French tax law)) if the participation exceeds, or exceeded at any time in the previous five years, a 25% threshold.

In order to make this French domestic legislation compatible with EU law, French administrative regulations (BOI-IS-RICI-30-20-01/08/2018) allow parent companies that are residents in another EU Member State to qualify for the French participation exemption, provided certain conditions are met. Specifically, these companies may claim a partial refund of the capital gains tax withheld—equal to the difference between the tax due by nonresident companies and the amount of the French corporate income tax that would have applied under the participation exemption regime had the seller been a French resident entity—leaving the final tax burden to be approximately 3.36% (28% multiplied by the 12% taxable portion).

Court decision

In this case, the taxpayer—a company that was a tax resident of Italy—sold its French subsidiary and requested a full refund of the capital gains tax withheld in France.

An appeals court found that the French legislative provisions breached the EU freedom of establishment and free movement of capital because under this measure of French tax law, nonresident EU companies are taxed on a different basis when compared to the tax rules that apply to French resident sellers. Nevertheless, the appeals court held that the tax authorities appropriately did not allow a refund for the portion of tax corresponding to what would have been paid by a French resident seller.

The Supreme Administrative Court (Conseil d’Etat) concluded that because the French domestic withholding tax on capital gains was incompatible with EU law, the French tax authorities could not rely on their own regulatory guidance in granting only a partial refund. The high court further held that the taxpayer was entitled to a full refund of the French withholding tax.

KPMG observation

Tax professionals have noted that because the French Parliament alone can revise and pass legislation to bring French tax law into compliance with EU law (even if the French tax authorities are able to address the situation through regulations), it appears that the French withholding tax on capital gains would no longer apply with regard to parent companies that are residents in other EU Member States and that qualify for the participation exemption regime—as long as the law itself does not limit the withholding tax to the amount of French tax that would have applied under the participation exemption regime had the seller been established in France.

For amounts of French withholding tax already paid, it appears EU residents would be entitled to claim a refund of the full amount of withholding tax paid on the sale of French qualifying participations since 2018 (provided the refund claim is filed before 31 December 2020). In addition, taxpayers involved in judicial proceedings for refunds of withholding tax could invoke the decision of the Conseil d’Etat in their pending litigation.

A claim for refund of withholding tax also may need to be considered in situations when the parent companies are residents in other EU Member States that have concluded an income tax treaty with France—an income tax treaty that provides a right to impose tax on capital gains realized on substantial shareholdings attributed to France (for instance, the tax treaties with Austria, Italy, Spain, and Sweden) or in another EU Member State that does not have a tax treaty in place with France (such as Denmark). A potential extension of this opportunity to parent companies resident in EEA Member States (such as Iceland or Liechtenstein) also may need to be considered.

For more information, contact a tax professional with KPMG Avocats in France:

Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 |

Patrick Seroin Joly | + 33 (0) 1 55 68 48 02 |

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