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Brexit: the tax administration demonstrates pragmatism

March 08, 2019

With a “hard” Brexit becoming a likely scenario, the French tax administration is adopting a pragmatic approach by taking positions that offer some reassurance to economic actors.

The administration has just taken a position on the treatment of dividend income received from UK companies during the financial year of the United Kingdom’s exit from the European Union and from the agreement on the European Economic Area.

If its exit from the EU at the end of the month was to be confirmed, the United Kingdom would become a third country to the European Union and to the European Economic Area. As a result, companies established in the UK would lose European company status within the meaning of the tax rules relating to groups of companies.

Consequently, the dividends distributed by such companies would no longer satisfy the conditions of eligibility for the parent-subsidiary and tax consolidation regimes applicable to such groups. Practically speaking, the mechanism exempting such distributions from taxation on all but a “1% portion of expenses” (quote-part de frais et charges) would no longer be applicable, and they would therefore be taxed at the standard rate.

However, the tax administration is allowing a continuation of the “1% portion of expenses” mechanism for UK-source dividends received by French companies until the end of the financial year in progress at the time of Brexit. This will therefore apply whether Brexit occurs on 29 March or later if another round of negotiations was to be undertaken.

The Administration is expected to issue further commentary on the tax consequences of the United Kingdom’s exit from the European Union and the agreement on the European Economic Area.

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