Continuing in the line of the Aberdeen case law, the ECJ confirmed on 10 May 2012 in their Santander decision that withholding tax levied in France on dividends paid to non-French investment funds was discriminatory1. This was the main piece of good tax news in France in 2012 !
This means of course that there is an opportunity for asset managers to reclaim tax overpaid in France and across Europe. Statutes of limitation may vary between Member States, however several years of withholding tax overpaid can still be claimed in about 13 countries across Europe for both European and non-European funds.
In France withholding levied since 1 January 2009 can potentially be reclaimed. It is of course important that all reclaims are filed with the French tax authorities before this window of opportunity closes.
Further to the Santander case, the legislation was amended so that dividends paid to non-French investment funds after 17 August 2012 should be exempt.
France is now compliant. Or at least its legislation is. A practical problem remains : How do you actually apply the exemption and how do you reclaim ?
The exemption at source process have not been updated and therefore administrators and custodians are at a loss in terms of putting in place a process that would allow them to pay their investors the full French dividend. Regarding the reclaims, there was no information on what type of evidence and documents would be required by the tax authorities in order to process the claims. That is until now. A few days ago, the French tax authorities have communicated information on the reclaim process. These elements should soon be issued into official administrative guidelines (not published as we go to print).
In the meantime, set out below is a quick overview of what the tax authorities would be looking for in order to support the reclaims. The paperwork and administrative burden of the reclaim may prove very heavy. There is no doubt that the form of the reclaims as much as the substance will be key. The tax authorities may be keen to reject any claims that do not meet the very prescriptive formal requirements.
In this unofficial communication, The French Tax Authorities (FTA) have provided guidance on the information and the documentation required in order to support withholding tax reclaims :
- Relatively vague comments on elements supporting the comparability of foreign investment funds with French similar UCITS funds, and
- Very detailed information on documentation (both on content and format of the documents) evidencing payment of the withholding taxes for which a refund is being reclaimed.
Elements supporting the comparability
The situation of both EU UCITS and non UCITS as well as non EU investment funds is addressed with examples of acceptable documentation to support the comparability.
EU UCITS should be considered comparable as long as a proof of authorisation can be provided (certificate from the regulatory authority or stamped prospectus).
Non authorised EU UCITS (Undertaking for Collective Investment in Transferable Security)should also be treated as comparable if it can be proved that they are structured in a similar way to a UCITS IV compliant fund. This can be evidenced through a number of factors (e.g. use of a custodian, manager, investor information and communication, risk spreading, no debt financing, redemption of units, etc).
Non EU funds also have to demonstrate that they are similar to a French investment fund. The same criteria as listed above can be used.
The lack of clear elements allowing the objective comparability (as stated in the French Tax authorities’ document) is disappointing. The comparability is fundamentally the key factor in order to assess whether a fund is entitled to a reclaim or not and in turn whether the reclaim may be viable.
The amended Law that provides for the exemption of dividends paid to foreign investment funds, is just as vague with relatively loose criteria to follow. It will therefore be down to the asset managers and advisors to gather as much comparable elements and present them in a way that demonstrate the comparability. This is certainly a flexible solution and that can potentially allow a wider range of funds to apply, however that leaves some uncertainty on what will be accepted by the tax authorities.
Evidence of payment
Once the comparability is established, the funds need to produce proof of payment of the dividends and of the withholding tax and this is where the practical aspects of the reclaims may become tricky.
Supporting documentation may be needed from 3 main parties :
- The paying agent
- The (global) custodian
- The fund reclaiming the withholding tax
The type of documents needed may vary depending on the chain of intermediaries for each investment. However, in their document the tax authorities consider the following situation.
A summary table or tax vouchers issued and stamped by the French paying agent must be provided.
This summary table should provide details on the dividend and withholding tax including in particular name of paying agent, name of the beneficiary, name of the distributing company, gross and net amount of dividends, rate of withholding tax total amount of withholding tax paid and reference to form 2777 (potentially to be provided on a monthly basis).
In addition a document from the local paying agent confirming the net payment made to the global custodian as well as the filing of form 2777 should also be provided.
Global custodian/Local custodian
In the event the documents issued by the paying agent do not refer to the beneficiary, but to the global custodian, the global custodian will have to produce documents to allow the tax authorities to reconcile the data provided by the paying agent to support the reclaims. In addition, advice payment to the beneficiary should also be produced.
Funds reclaiming the withholding tax
A summary table of the amounts reclaimed with relevant information on the dividends and potential treaty reclaims already filed should be produced as well as the information allowing the refund (e.g. bank details etc).
The tax authorities have mentioned in their letter that a claim not including all the necessary elements might be rejected.
According to this communication, the documents to be provided to the tax authorities will have to follow a very specific standardized format (some models provided by the tax authorities).
It is clear from the approach taken by the tax authorities that they will put emphasis on the form of the reclaims and that they will use this in order to be able to reject claims that do not meet the standards that they have set. They, however, need to ensure that the conditions they set are not too stringent as it could be contrary to the tax payer’s right under EU law and case law.
We also hope that in the official guidelines, there will be guidance on the application of the exemption at source, otherwise the lack of efficient procedure in order to apply the law should also be in breach of the EU principles