The reimbursement to a Swiss company by a Luxembourg company of the entire dividends received from a French company does not exclude the status of the beneficial owner and the exemption of the French witholding tax.

This is what the Administrative Court of Appeal of Versailles has just ruled in a decision dated October 17, 2023.

• A French company underwent a tax audit, during which the tax authority imposed a withholding tax on dividends paid to a Luxembourg company, based on Article 119 bis, paragraph 2, of the French General Tax Code (CGI). The rationale was that the effective beneficiary of these distributions being a Swiss company, the conditions for exemption under the aforementioned article were not met.
• According to Article 119 bis, paragraph 2, of the CGI: The income referred to in Articles 108 to 117 bis is subject to withholding tax... when they benefit individuals who do not have their tax domicile or their registered office in France. According to Article 119 ter of the same code: The withholding tax provided for in Article 119 bis, paragraph 2, does not apply to dividends distributed to a legal entity... that demonstrates it is the beneficial owner of the dividends and fulfills the following conditions:  Having its effective management in a Member State of the European Union and not being considered, under a double taxation convention concluded with a third country, as having its tax residence outside the Union.
• The Luxembourg company acquired all the shares of the French company from a Swiss company for a certain price through a vendor credit payable over five years, with an interest rate. The repayment of this vendor credit was secured by the dividends of the French company and management fees charged by the Luxembourg company to its French subsidiary as management expenses. The French tax authorities challenged the exemption from withholding tax on the dividends distributed by the French company to its Luxembourg parent company, arguing that since these dividends were fully transferred to the Swiss company, a resident of a third country, it should be considered the effective beneficiary of the distributions, with the Luxembourg company being merely an intermediary.

However, the Luxembourg company received the dividends and used them to repay its vendor credit, allowing it to reduce its debt and increase its assets. It was through its own management decision that the Luxembourg company allocated these funds to debt repayment. Under these circumstances, the Luxembourg company effectively benefited from the dividends received from its subsidiary. The fact that no dividends were distributed by the French company during the Swiss company's ownership of these shares and that the Luxembourg company did not have the necessary equity for this acquisition, relying on a vendor credit for the entire price, were considered irrelevant by the Court of appeal, as none of these factual elements establishes that the Luxembourg company is merely an intermediary between the French company and the Swiss company, which, moreover, are not affiliated.

• The French tax authority also disputes the tax residence of the Luxembourg company. However, dividends distributed by French subsidiaries to their parent companies, also residents, are not subject to withholding tax. Therefore, even if the Luxembourg company benefiting from the dividends distributed by the French company were considered to have its tax residence in France and not in Luxembourg, the distributions in question would not have been subject to the withholding tax provided for in Article 119 bis, paragraph 2, of the CGI.
• It follows from the above that the French company was justified in claiming that it was not liable for the withholding tax to which it was subjected during its audit by the French tax authorities.