The non-deductible portion of dividends distributed within the same tax consolidated group will no longer be neutralised for corporate tax purposes.

The French government has just moved an amendment to the Draft Amending Finance Bill for 2015 in order to abolish the existing rule allowing the French parent receiving dividends from one of its French subsidiaries belonging to the same tax consolidated group to neutralise their remaining non-deductible portion of 5% for corporate tax purposes. As a compensation, such non-deductible portion will be reduced to 1%. This new rule will enter into force for the fiscal years opened from January 1, 2016.

These new provisions come from the Groupe Steria SCA case law issued by the CJEU on September 2, 2015. This jurisdiction confirmed that the different treatment applied to the dividends received by a French parent, depending on the state where the distributing subsidiary was resident, was a breach to European law, and in particular to the freedom of establishment.

As a consequence, the French governement had no other choice than adapting the existing rules to let them become compliant with the European guiding principles. When a given subsidiary pays dividends to its French resident parent company, they are exempt from corporate tax according to the so-called « parent-subsidiary regime ». However, the French tax code provides that 5% of such dividends must be restated, i.e. added back to the taxable income of the parent, for corporate tax purposes. Up to now, this restatement was wholly neutralised to determine the taxable income of the tax consolidated group, when the dividends were distributed by subsidiairies belonging to the same tax group than their parent beneficiary.

According to these provisions, the treatment applied to dividends received from subsidiaries resident in other EU member countries was less favourable than the treatment applied to distributions coming from French subsidiaries, members of the same tax consolidated group than their parent, keeping in mind that EU resident companies are not entitled to become members of a French tax group.

In the Group Steria SCA case, the CJEU has ruled that these provisions were against the freedom of establishement. Opting for a balanced alternative, the French authorities have therefore decided to modify the existing legal framework : for all fiscal years opening from January 1, 2016, the non-deductible portion of all dividends received by French parent companies will no longer be neutralised for French tax consolidation purposes, wherever they come from ! But such portion will be reduced frrom 5% to 1% only…