The Concept of Beneficial Ownership in French Case Law: An Independent Condition in Relation to the Repression of Tax Avoidance

The French Council of State’s decision of November 8, 2024 (n° 471147), rigorously highlights the challenges associated with withholding tax (WHT) on cross-border dividends, particularly when determining whether the income recipient can benefit from exemptions or reductions in WHT provided by national, European, and international tax rules. Reviewing an appeal filed by the company Foncière Vélizy Rose, this case raises essential questions regarding the interplay between domestic tax law, bilateral tax treaties, and European Union law.

The case concerned a €3.6 million dividend prepayment made by a French subsidiary to its Luxembourg parent company. The French tax administration contested the exemption, arguing that the Luxembourg company, having immediately transferred these funds to its sole shareholder, could not be considered the beneficial owner.

The Council of State upheld that the nearly immediate transfer of dividends to its sole shareholder and the absence of significant economic activities of the parent company strongly indicated the lack of beneficial ownership (BO). It emphasized that the exemption provided by Article 119 ter of the French Tax Code (Code général des impôts, or CGI) requires a clear demonstration of beneficial ownership, consistent with the objectives of European directives and international tax treaties.

Through this decision, the Council of State clarified three major points: first, the autonomy of BO verification from anti-abuse procedures; second, the compliance of French rules with European fundamental freedoms, particularly the freedom of establishment; and third, a teleological interpretation of tax treaties that incorporates the guiding principles of the OECD Model, even in the absence of explicit provisions.

This analysis aims to outline this decision in light of applicable rules, the arguments raised by the claimant, and the jurisprudential contributions of the Council of State, while shedding light on its practical implications for economic operators in a cross-border context.

‍

1. Domestic Law Rules and Their Interplay with European Law

The withholding tax (WHT) regime on French-source dividends paid to non-resident parent companies is based on the combined provisions of Articles 119 bis and 119 ter of the French Tax Code (CGI), which transposes Directive 90/435/EEC of July 23, 1990, known as the "Parent-Subsidiary Directive."

General Principle (Article 119 bis, 2 CGI):

Dividends paid to recipients without fiscal domicile or headquarters in France are subject to a WHT in France unless a treaty or legal provision provides for an exemption or reduction in the rate.

Exemption (Article 119 ter CGI):

An exemption from WHT is granted when certain conditions are met, including:

• The dividend recipient is a parent company located in an EU Member State or the European Economic Area, provided an administrative assistance agreement against fraud exists.
• The company demonstrates it is the beneficial owner (BO) of the dividends.

This mechanism, aligned with the goals of the Parent-Subsidiary Directive, aims to avoid double taxation of intra-group dividends while preventing tax abuse.

‍

2. Contestation of Implicit Use of Anti-Abuse Rules

The claimant argued that the tax administration, by challenging the BO status of the Luxembourg company VRI, had implicitly invoked the anti-abuse procedure provided by Article L. 64 of the French Tax Procedure Code (Livre des procédures fiscales, or LPF) without adhering to the associated procedural safeguards.

Article L. 64 LPF:

This article allows the administration to disregard acts constituting artificial arrangements or solely motivated by tax avoidance objectives. When invoking this rule, the administration must comply with essential procedural guarantees, including:

• Prior notification to the taxpayer of the use of this procedure;
• Consultation with the Committee on Tax Abuse.

The Council of State’s Position:

The Council of State rejected this argument, affirming that the challenge to the BO status did not constitute implicit recourse to Article L. 64 LPF. The tax administration merely applied the conditions of Article 119 ter CGI without disregarding any legal act. Consequently, it was not required to observe the procedural safeguards specific to anti-abuse rules.

This clarification strengthens the autonomy of the BO concept, distinguishing it from the concepts of artificial arrangements or abuse of law.

‍

3. Contestation of Violation of the Freedom of Establishment

The claimant also argued that Articles 119 bis and 119 ter CGI infringed the freedom of establishment (Articles 49 and 54 of the Treaty on the Functioning of the European Union - TFEU) by imposing more restrictive conditions on non-resident parent companies than on domestic distributions under the parent-subsidiary regime of Articles 145 and 216 CGI.

Reference to European Jurisprudence:

The Council of State relied on the judgments of the Court of Justice of the European Union (CJEU) of February 26, 2019, in Skatteministeriet v. T Danmark and Y Denmark Aps (C-116/16 and C-117/16). These decisions confirm that BO status is an essential condition for benefiting from the WHT exemption provided by the Parent-Subsidiary Directive.

The Council of State’s Analysis:

The Council of State held that the BO condition applied to cross-border distributions is inherent to taxation mechanisms and consistent with the directive’s objectives. The difference in treatment between domestic and cross-border distributions does not constitute discrimination, as these situations are inherently different.

Additionally, the French distributing subsidiary, although liable for WHT, can request a refund on behalf of the non-resident parent company, ensuring no undue burden is created.

‍

4. Application of Bilateral Tax Treaties

Finally, the claimant invoked the provisions of the France-Luxembourg and France-Germany tax treaties, which provide for reduced WHT rates on dividends without explicitly mentioning the BO condition.

Absence of Explicit Clause in Treaties:

These treaties, predating the introduction of the BO clause in the 1977 OECD Model, do not explicitly require this condition.

The Council of State’s Position:

The Council of State ruled that the absence of an explicit clause does not preclude the application of the BO criterion. It interprets treaties in light of their general objective to combat tax abuse, rejecting a literal reading. Thus, only the beneficial owners of dividends are entitled to reduced rates.

This position confirms the primacy of the OECD Model’s guiding principles over the textual stipulations of older tax treaties.

‍

Conclusion

This decision reaffirms several fundamental principles in international taxation:

• Primacy of the Beneficial Owner Concept: BO status is essential for benefiting from the exemptions provided by the Parent-Subsidiary Directive and tax treaties, reinforcing the fight against abuse.
• Autonomy of BO Verification: This verification does not involve anti-abuse procedures, facilitating the tax administration’s actions.
• Teleological Interpretation of Tax Treaties: The Council of State favors an interpretation consistent with anti-abuse objectives over a strict textual approach.

This decision provides legal certainty to tax administrations managing cross-border flows while reminding taxpayers of the importance of structuring their operations in compliance with substantive rules and economic substance.

4o

‍