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'Tax shield’ ruling success


Article by Arnaud Jouanjan (Introduction by K.M)

In the current issue of our Newsletter we have great pleasure to present the success of Arnaud Jouanjan and his team of Jouanjan & Partners, that in March, acting on behalf of their client, won a case at the European Court of Justice in the matter concerning ‘tax shield’ principle (Case C– 375/12). 
After a battle with the French administration (Direction départamentale des finances publiques de la Drôme), then at the French court (Tribunal Adminsitratif de Grenoble), finally ECJ was asked for a preliminary ruling on cap tax to be applied in France taking into account the foreign investment of a French taxpayer. Contrary to the standpoint of French administration, ECJ shared the arguments concerning the free movement of capital, persons and enterprises within the EU. In the verdict issued in the case, ECJ stated that the EU Internal Market rules preclude French tax provisions that fail to fully take into account taxes on foreign dividends already paid in another EU Member State. It ensured that the tax shield was effectively working and caused the partial return of the tax paid in France. This made the client happy and the firm proud. Now I am happy and proud to present the report of Arnaud Jouanjan and his partners on that case.
Though the case concerned the French tax system, the issue is of European dimension and can be of interest to any investor or professionals advising clients on cross-border investments. No doubt then it is worth sharing such success for at least two reasons; first, it can be used as a kind of precedent, secondly to highlight the success of Arnaud Jouanjan also the success of IPG for having such brilliant members.
Here comes the story….
“In a preliminary ruling, the European Court of Justice (ECJ) has decided on March, 13th 2014 that French legislation, by preventing a French resident from including the withholding tax paid on dividends received from a company based in another Member State when calculating the tax cap at a certain percentage of income (60% or 50%), was in breach of the free movement of capital and the freedom of establishment guaranteed by the European Treaty.
Concerning the facts of the case, Margaretha Bouanich (MB), a French resident who received dividend income from a company established in Sweden, had faced the refusal of the French tax authorities to include the withholding tax she paid in Sweden, in accordance with the Franco-Swedish Double Tax agreement of November, 27th 1990, in the total amount of direct taxes taken into account for the calculation of the Tax 'shield' (TS).
The Court ruled : "Articles 49 TFEU, 63 TFEU and 65 TFEU must be interpreted as precluding legislation of a Member State under which, where a resident of that Member State who is a shareholder of a company established in another Member State receives dividends taxed in the two Member States and the double taxation is regulated by the imputation in the Member State of residence of a tax credit of an amount corresponding to the tax paid in the State of the distributing company, a mechanism capping various direct taxes at a certain percentage of income received during a year does not take into account, or takes only partially into account, the tax paid in the State of the distributing company".
At the time, the TS operated in France meant that if an individual's direct tax liability (personal income tax, wealth tax, property tax and local residential tax for the principal residence) exceeded 60% per cent, or in later years 50% per cent of his revenue of the preceding year, that person could apply for a refund of the total amount levied above the threshold. Therefore, if the tax paid in the other Member State is excluded from the taxes taken into account in the TS, there would necessarily exist a difference between the treatment of the French dividends and dividends from another Member State received by a French resident which would constitute a restriction on the free movement of capital.
The Court also ruled in favour of MB on the grounds that the different tax treatment makes it less attractive for the national to establish himself in another Member State which amounts to a potential restriction of freedom of establishment.
On the question of whether the restrictions could be justified, the ECJ decided that there was no link with the coherence of the tax system and that neither of these restrictions was needed as a safeguard to balance the allocation of powers of taxation between the Member States.
Finally, this case was not the first for which Ms. Bouanich has benefited from the Court's ruling. As a matter of fact, the previous judgment ECJ Bouanich C-265/04 of January, 19th 2006 is rather famous concerning mainly the free movement of capital.”
Arnaud Jouanjan & Sophie Fouquet- Chabert
More on that case can be read at:; A more substantial report containing details of the ECJ's decision will be published subsequently in the ECJ Case Law collection.

Arnaud Jouanjan
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