ECJ to rule on withholding tax

On Friday the European Court of Justice will rule whether France’s withholding tax regime discriminates against foreign investment. A ruling against the current tax code could lead to sizeable rebate claims from funds and portfolio investors.

The withholding tax ruling from the European Court of Justice (ECJ) could lead to investment funds receiving a €4.2 billion tax rebate, according to business advisory firm Deloitte.

The decision will be watched closely by investors who have mounted challenges to other EU member states that apply a similar regime.

France and several EU member states charge a withholding tax on dividend payments to some foreign investment funds, including private equity vehicles, while equivalent domestic investors are exempt from the fee. 

Investors argue that the tax rule violates the EU law that allows for the free movement of capital across member states while French authorities justify the tax on the grounds it prevents cross-border tax avoidance.

The ECJ must ask itself whether foreign investment funds are sufficiently comparable to French investment funds and whether non-EU funds should be entitled to the same tax exemption, said in a statement Kit Dickson, tax partner at Deloitte. 

“If the ECJ rules in favour of the claimants, investors will need quickly to consider whether they have valid claims in France and elsewhere.”

The total value of claims by European and non-European investors across the EU could total more than €20 billion, given the general principles can apply to various types of portfolio investors in the EU and elsewhere, Dickson added.