Incompatibility of the 3% additional contribution to corporate income tax

In its decision of May 17th, 2017 (no. C-365/16, AFEP), the Court of Justice of the European Union considered that the 3% additional contribution to corporate income tax provided for in Section 235 ter ZCA of the French Tax Code was contrary to the provisions of the Parent-Subsidiary Directive (no. 2011/96/EU of November 30th, 2011) when this contribution applies to redistributions of profits from subsidiaries established in a Member State of the European Union.

Pursuant to Section 235 ter ZCA of the French Tax Code (hereinafter “FTC“), the 3% additional contribution to corporate income tax (hereinafter the “3% Contribution“) is due by the companies liable to corporate income tax with respect to profits distributed (within the meaning of Sections 109 to 117 of the FTC).

The French Supreme Court, on June 27th, 2016, questioned the constitutionality of this 3% Contribution and its compatibility with the Parent-Subsidiary Directive. In this context, the French Supreme Court (decision of June 27th, 2016, no. 3999024, AFEP) has referred the matter to the Court of Justice of the European Union (hereinafter “CJEU“).

In its decision of May 17th, 2017, the CJEU considers that:

Article 4(1)(a) of Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended by Council Directive 2014/86/EU of 8 July 2014, must be interpreted as precluding a tax measure laid down by the Member State of a parent company, such as that at issue in the main proceedings, providing for the levy of a tax when the parent company distributes dividends and the basis of assessment of which tax is the amounts of the dividends distributed, including those coming from that company’s non-resident subsidiaries“.

However, according to the CJEU, the 3% Contribution does not constitute a withholding tax.

In the light of this decision, for the past, taxpayers who challenged the 3% Contribution could be successful in their request for the portion corresponding to the redistributions of profits from European subsidiaries.

Regarding the redistribution of profits generated by subsidiaries from France or a third state to the European Union, taxpayers should be able to challenge the application of the 3% Contribution on the basis of “reverse discrimination”. The Constitutional Council could be questioned on this issue by the French Supreme Court, which is now called upon to rule on the appeal introduced by the AFEP.

Moreover, for the future, the question of the abolition of the 3% Contribution would arise again, even if its scope had been amended as from January 1st, 2017.