Loss-Making Companies and Distribution of Dividends

The recent intervention of the EU Court of Justice.

With the judgment C-575/17 of 2018, the European Court of Justice intervened in the matter of distribution of dividends to Loss-making companies and application of relative taxation.

Specifically, the affair involved a French company and three minority subsidiaries of Belgium, which distributed dividends of the former, at a loss.

A 15% withholding tax was applied to this distribution.

The companies, obviously non-residents, challenged the decision claiming a clear unequal treatment between resident and non-resident companies.

Taxation of dividends to loss-making companies according to French law.

In France, in fact, if a resident loss-making company distributes dividends, the taxation and related collection will be postponed to the first effective financial year closed positively.

It seems paradoxical, but even the payment of the amounts due may never occur in the event of cessation of activity.

This situation came to the attention of the Luxembourg Court, which ruled in favour of non-resident companies, ascertaining a clear difference in treatment, on the part of the French jurisdiction, between domestic and foreign companies.

The Court affirmed the concept according to which this provision, in the event of distribution of the dividends of:

“Unfavorable treatment by a Member State of dividends distributed to non-residents with respect to the treatment of dividends paid to residents is likely to deter companies established in a Member State other than the first from investing in the same first State Member State and therefore constitutes a restriction on the free movement of capital, prohibited in principle by Article 63 TFEU “.

CJEU C-575/17 2018

In conclusion, the ruling of the EU Court does nothing but reiterate and affirm one of the fundamental and fundamental principles of the European Union, namely the free movement of capital, which must not be subjected to any limitation also linked to possible disparities in tax treatment, as was for the French case.

Non-resident companies, belonging to a different Member State, will now be able to enjoy a relevant precedent if they find themselves in similar situations of disparity.