France: Exemption from 3% tax unconstitutional | KPMG | GLOBAL
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France: Exemption from 3% tax unconstitutional; French group dividend distributions

France: Exemption from 3% tax unconstitutional

The French Constitutional Court (Conseil Constitutionnel) issued a judgment concluding an exemption from a 3% tax that normally is imposed on dividend distributions (the exemption from the 3% tax applies for dividends distributed within French tax groups) is unconstitutional.


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A 3% tax generally applies to distributions of dividends made by French companies (with few exceptions). This 3% tax typically is not reduced by the provisions of a relevant income tax treaty. However, the 3% tax does not apply to dividend distributions made within French tax groups (but does apply when a distribution is made to the shareholders of the tax group).

At present, there is on-going litigation about this 3% tax pending at the European level, and the grounds for challenging this tax include a claim that it is an infringement of either the EU principle of “freedom of establishment” or an infringement of the EU Parent/Subsidiary Directive. 

A foreign EU parent company cannot benefit from the exemption from the 3% tax, even if it holds at least 95% of the share capital of the French distributing company (i.e., one of the conditions to set up a tax group) since a foreign company cannot be the head of a French tax group.

Effective date of the decision

The French Constitutional Court’s decision (issued 30 September 2016) concludes that the exemption from the 3% tax that is available for distributions within a French tax group is unconstitutional because the exemption fails to afford equal tax treatment to taxpayers—that is, inequality of treatment.

The Constitutional Court further decided that the unconstitutionality of the tax provision (this finding results in a cancellation of the provision) is effective 1 January 2017. Accordingly—unless the French government decides to change the scope and / or the rate of the 3% tax with retroactive effect—distributions made within a French tax group until the end of December 2016 would, in all likelihood, continue to be exempt from the tax whereas they would be subject to the 3% tax if made as of 1 January 2017.

KPMG observation

According to tax professionals with Fidal,” the French tax authorities are considering their reaction to this decision. Given that there is pending litigation about the tax exemption at the European level, there are several possible actions by the tax authorities. They could:

  • Decide to retain the 3% tax and make all distributions (regardless of the recipient) subject to the 3% tax—if the exemption no longer applies to French tax groups, there would no longer be any discrimination with respect to disallowing an exemption for foreign parent companies of French tax groups (the question of the compatibility with the EU Parent-Subsidiary would continue but, in all likelihood, with lower chances of success)
  • Decide to allow the exemption for all distributions, but at a lower rate (this was the French government’s reaction to the Steria case regarding the corporate taxation of dividends received by French parent companies)
  • Decide to repeal and “cancel” the tax—a step that tax professionals think would not be very likely, given the amounts of tax revenue at stake

The draft Finance Bill currently is being discussed before the French Parliament (read TaxNewsFlash-Europe). If a “rectified” version of the legislation presumably is released in November, there is a likelihood that revised rules relating to the 3% tax could be implemented before year-end. This is, of course, mere speculation at this point, but if this were to happen, there is a question whether the new provisions would apply retroactively—or not.

Given the current uncertainty, taxpayers with a French tax group and that are intending to make upstream distributions of dividends within their French tax group in the near future, may want to consider how best to prepare to make such distributions before year-end (and thus how to start the necessary legal processes now for such distributions).


For more information, contact a tax professional with Fidal* in France or with KPMG in the United States:

Gilles Galinier-Warrain | +33 1 55 68 16 54 | 

Olivier Ferrari | +33 1 55 68 18 14 |

Laurent Leclercq | +33 1 55 68 16 42 |

Patrick Seroin | +1 (212) 954-2523 |   


* Fidal is a French law firm that is independent from KPMG and its member firms.

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