A significant French tax burden on services provided by Danish groups to their French affiliates due to the absence of a tax treaty since 2009…
According to article 182 B of the French tax code (FTC), services provided by a non-resident corporate entity theoretically subject to corporation tax due to its legal form but not established in France to a person carrying on business in France are subject in France to a withholding tax (WHT) whose rate is equivalent to the corporation tax rate applicable in France if the services are provided or used in France. The tax liability is assessed on the gross amount of the services which are payable.
In a lot of situations, this WHT is not applied indeed because it is not allowed by the relevant tax treaty between France and the State of the service provider. The tax treaty between France and Denmark has been abolished as from 2009 and now the Danish groups providing services such as management services, administrative support services, IT services etc. have to struggle with this WHT.
A tax burden which can be made lighter but through a burdensome process…
Fortunately, the French administrative doctrine allows the Danish companies facing this situation and liable to the French WHT to claim, when they are not able to offset the full amount of this tax against their corporate tax liability in Denmark (this is always the case in principle since the Danish corporate tax rate is lower than the French one), all or part of the WHT which has been suffered. In practice, the amount which may be claimed is equal to the difference between the WHT due and the amount of the corporate tax the Danish service provider would have suffered in France, had it been a French tax resident. This amount is based on a net profit.
As a result, wherever the Danish service provider recharges the services at cost, without any mark-up, it should be able to claim the full amount of the WHT. When the services are charged on a cost plus 5% basis, more than 90% of the WHT is likely to be refunded.
But the process is burdensome and takes time before the refund is granted. It is not always easy either to justify the amount of the expenses which directly connected to the service fee. In addition, this process requires in theory the Danish provider to make to the Public treasury the cash advance corresponding to the WHT calculated on a gross basis for a period which often exceeds 6 month. It is true that when the excess WHT is repaid, the late interest are due at a monthly rate of 0,2%. This may be seen as a good yield for a financial investment but the Danish groups often have a better use in mind for this cash.
A recent court decision is likely to improve this situation
The CJEU has often held that the provisions of the EU Treaties on the freedom to provide services and the freedom of establishment precludes national tax legislation which, as a general rule, takes into account gross income when taxing non-residents, without deducting business expenses, whereas residents are taxed on their net income, after deduction of those expenses (CJEU, 13-08-2016, C-18/15, Brisal – Auto Estradas do Litoral SA; CJEU, 15-02-2007, C-345/04, Centro Equestre da Lezieia Grande; CJEU, 3-10-2006, C-290/04, FKP Scorpio Konzertproduktionen).
The Court of Justice of the European Union (CJEU) has also ruled that the exclusion of a cash-flow advantage in a cross-border situation when it is granted in an equivalent situation on national territory constitutes a restriction on the free movement of capital (CJEU, 22-11-2018, C-575/17, Sofina SA, Rebelco SA, Sidro SA; CJEU, 13-12-2005, C-446/03, Marks & Spencer).
In France, the administrative court of appeal of Versailles ruled, in a Franco-Danish context, on November 15, 2016, that the WHT provided by Article 182 B of the FTC infringes the principle of freedom to provide services guaranteed by the EU treaty to the extent that it imposes the royalties paid to a Danish service provider under on their gross amount, whereas the same income would be taxed, in the case of a French service provider on an amount net of costs directly linked to the activity generating the taxable income (CAA de Versailles, 15-11-2016, n° 15VE01251, Sté Vétoquinol SA).
This decision was confirmed on November 22, 2019, where the French supreme tax court held that the WHT provided by Article 182 B is contrary to the freedom of services guaranteed by the EU treaty to the extent that the WHT liability exceeds the corporate income tax liability the service provider would have suffered had it been a French resident (CE, 22-11-2019, n° 423698, SAEM).
This is what we claimed for since the beginning of the litigations we handled on behalf of Danish groups. The facts and circumstances of the SAEM case have nothing to do with the kind of services provided by Danish entities to their French affiliates but the principle held by the judge may be easily transposed to the situation set out above.
We expect that this decision should:
- facilitate and accelerate the treatment by the tax authorities of the outstanding claims which have been filed because in our recent experience, the authorities were still hesitating due to the fact that the Constitutional Court held in May 2019 that the WHT was not contrary to the constitutional principles of equality of the taxpayer in respect of the tax law or the public spending (CC, 24-5-2019 n° 2019-784 QPC);
- limit the interest for the tax authorities of reassessing, within the frame of a tax investigation, the French company having paid service fees to a Danish service provider without having paid the corresponding WHT;
- lead the French lawmaker to amend the existing provisions of Article 182 B to make it compatible with the freedom of services. These provisions have already been modified as from January 1st, 2020 for the Danish service providers which are in a loss-making position and are thus entitled to get the full refund of the WHT. But the benefit of this refund is in most cases only temporary.