In 2014, Sté Foncière Vélizy Rose paid an advance dividend to its sole shareholder, the Luxembourg company Vélizy Rose Investment SARL. Foncière Vélizy Rose claimed exemption from withholding tax under Article 119 of the General Tax Code.
However, following an audit, the tax authorities concluded that Vélizy Rose Investment SARL was not the beneficial owner of the dividends and therefore the exemption from withholding tax did not apply. A tax assessment was issued for the resulting withholding taxes.
Sté Foncière Vélizy Rose lodged an appeal, which was rejected by the Administrative Court and subsequently by the Administrative Court of Appeal in December 2022. A final appeal was then lodged with the Conseil d’État.
Judgment
The Court upheld the judgment of the Administrative Court of Appeal and the assessment of the tax authorities.
In its decision, the Court referred to the fact that Vélizy Rose Investment SARL held the entire capital of Foncière Vélizy Rose and that the advance dividend received was paid the following day to the sole shareholder of Vélizy Rose Investment SARL (the Luxembourg company Dewnos Investment). In addition, Vélizy Rose Investment SARL had no other funds or activities other than holding the shares of Foncière Vélizy Rose.
Excerpt in English
“14. Neither the provisions of Articles 8 of the Franco-Luxembourg Convention and 9 of the Franco-German Convention, which predate the introduction of a so-called beneficial owner clause in Article 10, entitled “‘dividends'”, of the model tax convention on income and on capital established by the Organisation for Economic Co-operation and Development, in the version adopted by its Council on 11 April 1977, nor any of the elements relating to the context or purpose for which these conventions were established, prevent the benefit of the application of the reduced rate of withholding tax provided for therein for dividend income paid to a resident of the other State party to the convention from being subject to the condition that the resident in question is the beneficial owner of such income. Consequently, these conventions are not applicable when the recipient of dividends from French sources, who is a resident of Luxembourg or Germany, is only the apparent beneficiary thereof. On the other hand, they are likely to apply when the beneficial owner of such income resides in one or other of these States, even if they have been paid to an intermediary established in a third State.
15. While the status of beneficial owner of the interim dividend in dispute of the Luxembourg company Dewnos Investment and MA.., in the respective amounts of EUR 360,000 and EUR 24,192, is clearly apparent from the documents in the file submitted to the trial judges, in particular the rectification proposal of 21 December 2017, the same is not true of their status as tax residents of Luxembourg and Germany respectively, nor, as regards the company Dewnos Investment, of compliance with the condition provided for in Article 10 bis of the Franco-Luxembourg tax convention cited in point 13. Consequently, and in any event, the applicant company is not justified in arguing that the withholding tax rate of 15% provided for in the provisions of 2. a) of 2 of Article 8 of the Franco-Luxembourg tax convention and Article 9 of the Franco-German tax convention.
16. It follows from all of the above that Foncière Vélizy Rose is not entitled to request the annulment of the judgment it is contesting.”
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The final recipient of dividends was Davnoss Investment, a Luxembourg tax resident. Could the taxpayer in France have still claimed the benefit of a tax treaty for a lower rate of withholding tax?
The immediate recipient was not the beneficial owner, as it transferred the dividends the next day. Had it kept the money for some days before transferring, whether the decision could have been different?