B Law & Tax
22 May 2023

Tax Advisor: The CJEU establishes case law regarding the exemption of dividends received by a resident parent company which is not part of a group in tax consolidation.

The referring court seeks to clarify the implications of the judgment of the Court of Justice of the European Union (CJEU), known as Groupe Steria. In this judgment, the CJEU ruled that Article 49 of the Treaty on the Functioning of the European Union (TFEU) precludes a regulation of a Member State relating to a tax consolidation regime, in which a parent company that is part of such regime benefits from the neutralization of the integration of a proportional part of the expenses and charges set at 5% of the net amount of the dividends received from the resident subsidiaries that are part of the consolidation. However, this neutralization is denied under the same rules in relation to the dividends distributed by its subsidiaries located in another Member State, which would have been objectively entitled to benefit, optionally, from the consolidation regime if they had been resident.

In light of the Groupe Steria judgment, it is concluded that dividends received by a resident parent company that is part of a group under tax consolidation, both from its resident subsidiaries within the same tax group and from non-resident subsidiaries that would have been entitled to optionally be part of that tax group had they been resident, are fully deducted from the parent company’s net profits and are therefore fully exempt from corporate income tax in that Member State.

On the other hand, dividends received by a resident parent company that is not part of a consolidated tax group, whether from resident or non-resident subsidiaries, are only partially exempt from such tax due to the integration of a proportional part of the expenses and charges set at 5% in the parent company’s profits.

The entities involved in the case in question, unlike the situation addressed in the Groupe Steria judgment, are not part of a tax consolidation group. However, due to the capital links they have with other companies resident in France, they would have the option to form a group in tax consolidation with those companies. Since a parent company resident in France cannot form a group in tax consolidation with subsidiaries established in another Member State, the fact that it has not formed such a group with at least one of its possible subsidiaries or resident entities qualifying for the tax consolidation regime does not demonstrate that the parent company does not intend to create such a group or benefit from such a regime with one or more of its non-resident subsidiaries.

In the cases in question, the situation of companies belonging to a group in tax consolidation must be considered comparable to that of companies not forming part of such a group as regards the rules providing not for tax consolidation, but for full exemption from tax on dividends received, by virtue of the tax advantage challenged in the main proceedings. Therefore, the difference in treatment observed in the main cases concerns objectively comparable situations.

The Court considers that Article 49 TFEU must be interpreted as precluding legislation of a Member State relating to a tax consolidation scheme, under which a resident parent company which has opted for tax consolidation with resident companies may benefit from the neutralization of the integration of a proportional part of the expenses and charges set at 5% of the net amount of the dividends received from its subsidiaries located in other Member States, which would have been objectively entitled to opt to benefit, optionally, from the tax consolidation scheme. In turn, this neutralization is denied to a resident parent company that has not opted for such tax consolidation despite having capital links with other resident companies that would allow that option.

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