A recent update published by the French tax authorities (FTA) on the 12th of August 2020 offers revised guidelines as to the requirements non-European Union (EU) collective investment funds must meet, in order to be entitled to withholding tax exemptions on French source dividends, pursuant to Article 119 bis, 2 of the French Tax Code.
Historical tax treatment of non-EU collective investment funds
In keeping with the mandate of the Treaty on the Functioning of the European Union (specifically Articles 63 to 65), EU member states are prohibited from treating comparable Collective Investment Vehicles (CIVs) differently, based solely on where they are resident. In order to reflect this, French tax law has, since 2012, allowed for certain foreign CIVs to receive French source dividends free of withholding tax. This applies if the foreign CIVs are comparable to French CIVs, since French CIVs are not subject to withholding tax under French tax law.
The above principle becomes evident in the case of tax treatment of Undertakings for Collective Investments in Transferable Securities (UCITS). As highly regulated funds, they are comparable regardless of which EU member-state they are resident in and as a consequence, France treats all UCITS funds from across the EU (and the EEA) similarly – as being exempt from withholding tax on French dividend payments. However, as far as non-EU funds are concerned, the French tax authorities have, until recently, provided very little guidance as to the requirements in order to be assimilated to French UCIs and thus benefit from the withholding tax exemption. The French tax authorities have only recently issued their first set of favourable decisions on the reclaim applications filed, on the basis of the free movement of capital (Article 63 of the Treaty on the Functioning of the European Union), by certain US Registered Investment Companies (RICs).
France issues comparability criteria for non-EU CIVs
The latest update offered by the FTA this August, is significant in this regard as it clarifies the criteria for foreign non-EU CIVs to be considered comparable to French CIVs. There are two broad requirements for non-EU funds to be eligible for the withholding tax exemption:
Firstly, the CIV must be established in a state or territory that has entered into an administrative assistance agreement with France, to combat tax fraud and evasion. In line with this, funds resident in what are considered non-cooperative states or territories by the Organisation for Economic Co-operation and Development (OECD) with regards to transparency and exchange of tax information, are not eligible.
Secondly, the non-French CIV must have certain specified characteristics similar to those of relevant French funds. In particular, the CIV must raise capital from a number of investors, in accordance with a defined investment policy, must not be controlled by its unitholders, must be managed internally or through a manager or management company (approved by a supervisory authority), must have an independent custodian that is separate from the fund manager, must have an investment and risk spreading policy and must issue a document to its potential investors before any subscription. In addition, the CIV’s accounts must be certified by an independent auditor and it must be agreed, approved or registered with a supervisory authority.
Furthermore, the fund should not only be able to justify its comparability with the relevant French or EU funds, but the French tax authorities must be able to verify such compliance with the authorities of the state in which the applicant is domiciled, in line with the administrative assistance agreement signed between France and the state or territory in question.
All of these specifications have been taken into account in the newly published form BOI-FORM-000089. Both the new form and the updated guidelines are available on the FTA’s website in French.
Proving comparability can be extremely complex
Although the French administrative guidelines provide a list of requirements, in practice it is often difficult to fully ascertain whether the non-EU investment fund can benefit from the withholding tax exemption, since it is likely unclear how all of the above-mentioned criteria are to be interpreted. This is further complicated by the fact that the legal and regulatory framework for funds in the US or other non-EU states, is different from that in the EU and therefore proving comparability can be extremely complex.
WTax has a dedicated team who understand the complexity and intricacy of the comparability requirements as well as the relevant legal structures to which comparisons are made in France. We assist our clients by performing a detailed analysis of our clients’ funds and assessing whether these funds can be compared to French CIVs, in order to maximize their withholding tax refund potential. Not only is it important to assess whether investment funds are considered comparable in light of the new French tax guidance for prospective claims, but also to examine pending refund requests filed with the French tax authorities in the past. Action may be required on previously filed claims, to ensure that the right to refund is maintained and not lost due to procedural or substantive inadequacies.
Contact your local WTax office, to find out more about the impact of the latest French guidelines on your investment funds.