An amendment was adopted by the National Assembly on 2 December 2015 to abolish the neutralization within tax consolidated groups of the 5% add-back on dividends qualifying for the participation exemption. The add-back will therefore be reduced to 1% in the case of certain dividend payments.
Generally under the French tax law dividends that qualify for the participation exemption are exempt from tax apart from a 5% add back that represents a proportion of the costs and expenses. Previously this add-back did not apply in the case of dividends paid within a tax consolidated group and these dividends were therefore fully exempt from tax. A tax consolidated group can be formed by a company and its French subsidiaries.
The European Court of Justice (ECJ) in the Groupe Steria case held that the neutralization of the add-back within consolidated groups was not compatible with the principle of freedom of establishment in EU law because only French companies could be included in a consolidated group. For this reason the law has now been amended in France.
Following the amendment dividends qualifying for the participation exemption and received by a French company that is a member of the same tax consolidated group will not be fully exempt and instead the dividends will be subject to a 1% add-back. Dividends received from a subsidiary in an EU or EEA country that would qualify to be a member of a tax consolidated group if resident in France will also be subject to the 1% add back. The amendment takes effect for financial years beginning on or after 1 January 2016.
