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Tax on dividends (French law)

On 6 October 2017, French Constitutional Supreme Court (Conseil Constitutionnel) ruled unconstitutional first sub-paragraph of paragraph I of Article 235 ter ZCA of French tax Code (Code général des impôts), in its drafting derived from of Law N° 2015-1786 dated 29 December 2015 (the challenged regulation). This decision, commonly named tax on dividends, applies as from the date of its publication (i.e. 8 October 2017) to all cases not definitely ruled as of this date. The challenged regulation creates a new tax to be paid by entities subject to company tax named « additional contribution to company tax in relation to amounts distributed ». This contribution is due by the entity who distributes revenues (within the meaning of Articles 109 to 117 of the said Code). The amount due is equal to 3% of the distributed amounts.

The Conseil Constitutionnel was seized of the case by the French Administrative Supreme Court (Conseil d’Etat) on the basis of a QPC (Question Prioritaire de Constitutionalité).

This means that Law N° 2015-1786 dated 29 December 2015 was in force when the Conseil Constitutional was seized, but part of it was challenged before the Conseil d’Etat, which transferred a question to the Conseil Constitutionnel raised by the plaintiff, the société de participations financière. The question was to determine whether or not the challenged regulation was unconstitutional.

This constitutionality a posteriori conformity is not only based on the French Constitution stricto sensu but encompasses all human and civil rights guaranteed by French Constitution. This is the reason why many laws may potentially be challenged irrespective of a given area of law (e.g. tax, corporate, business, labor, civil, administrative).

The question raised before the Conseil Constitutionnel was in relation to an additional contribution to company tax related to distributed amounts. The relevant part of the challenged regulation was first sub-paragraph of paragraph I of Article 235 ter ZCA of the French Code général des impôts, which states that “Companies, or French or foreign entities subject to company tax in France, UCITS mentioned in Article L214-1 of the French monetary and financial Code excluded, and those which qualify for the definition of micro, small and medium companies given in annex I of Commission regulation (UE) n°651/2014 dated 17 June 2014 stating certain categories of aids compatible with the internal market by application of Articles 107 and 108 of the Treaty are subject to an additional tax to this tax in respect of amounts distributed within the meaning of Articles 109 to 117 of the present Code.”.

This means that an additional tax is created in respect of (i) profits or products that are not put in reserve or incorporated in the share capital, (ii) any sums or values put at the disposal of the partners, shareholders or holders of units and not withheld on profits, (iii) unless evidenced the contrary, amounts put at the disposal of the partners (directly or indirectly) in respect of advances, loans or deposit (iv) sums or values attributed to holders of beneficiary unit or in respect of founder in relation to buybacks of the said units, (v) remunerations and occult advantages, (vi) non-deductible fraction of remuneration (within the meaning of Article 39 (1°)(1) of the French Code général des impôts), (vii) expenses and charges which reduction for company tax basis is forbidden according to sub-paragraph and c) of the said Article 39.

The question raised was to determine whether or not this additional contribution to company tax was unconstitutional. The plaintiff, which was a company, alleged a non-equal treatment not justified between the redistributions of dividends from subsidiaries depending on the location of the said subsidiaries. According to the challenged regulation, if the subsidiary is located in the EU, it does not bear the additional contribution. If the subsidiary is located in France or in a third country it is subject to the additional contribution.

In addition, the plaintiff alleged that the challenged regulation creates a non-equal treatment not justified between companies distributing dividends received from subsidiaries located in the EU and the subsidiaries distributing dividends taken from their operating profit.

As a result, the plaintiff alleged that the challenged regulation breaches the equality treatment in relation to public burdens (principe d’égalité devant les charges publiques).

In response, the Conseil Constitutionnel, used the « bloc de constitutionalité » i.e. civil rights applicable in addition to the Constitution itself. In particular, the Conseil Constitutionnel based its decision on Articles 6 and 13 of the Déclaration des droits de l’homme et du citoyen dated 1789.

According to Article 6, the law « must be the same for all, if it protects or if it punishes. ». However, the equal treatment does not contravene the possibility for the law to rule differently situations that are different. In addition, a derogation to equal treatment also exists in the event of public interest. This position is in line with case law ruled by the Conseil d’Etat (e.g. CE Denoyez dated 10 May 1974 (Section) n° 8803288148, Rec. Lebon).

According to Article 13, a common contribution is essential for the maintenance of the public force and for expenses of administration. Such contribution must be allocated between all citizens, depending on their capacity. Using a core rule of the Constitution (Article 34), the Conseil Constitutionnel stated that it is for the law to determine, within the respect of constitutional principles and given the features of each tax, rules according to which have to be assessed the contributive capacities. In particular, to ensure respect of equal treatment, the law must ground its assessment upon rational and objective criteria, depending on goals determined by the law itself. However, this assessment must not give rise to a characterized breach of equal treatment before public burdens.

In addition, the Conseil Constitutionnel referred to the Conseil d’Etat case law: Article 235 ter ZCA cannot be applied to profits redistributed by a parent (mother) company taken from a subsidiary established in an EU member state other than France to which the daughter/mother regime of Directive dated 30 November 2011 applies. Article 235 ter ZCA can, however, be applied to other profits distributed by such mother company.

As a result, the challenged regulation creates a non-equal treatment between mother companies depending on whether or not the dividends are distributed by a subsidiary established in a member state other than in France. Yet, these companies are in the same situation with regards to the object of the contribution consisting of taxing any distributed amounts, regardless of their geographical origin, including those subjects to the mother/daughter EU regime.

By instituting this additional contribution to company tax related to distributed amounts, French parliament aimed at compensating the loss of sustainable income generated by the suppression of withholding tax on UCITs. Thus, the aim of French parliament was clearly a yield objective. To rule the case, the Conseil Constitutionnel states that such a goal is not, itself, of a public interest nature justifying the non-equal treatment between mother companies redistributing dividends from subsidiaries established in an EU member state and those redistributing dividends from subsidiaries established in France or in a third country. As a result, the equality principle before the law and the public burdens is breached and the challenged regulation is therefore unconstitutional.

Up to date 6 October 2017

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Experience in Business Succession

A large number of small and medium-sized businesses are going to have to make arrangements for business succession in the near future. There are various possible approaches to organizing succession.

According to a study conducted by KfW Research, approximately one in every six small and medium-sized businesses will be planning for business succession by the year 2018. The study states that around 620,000 businesses will be searching for a suitable successor. For a lot of businesses, a change at the management level represents a considerable challenge. We at the commercial law firm GRP Rainer Rechtsanwälte have the experience required for weighing up the various options and finding a suitable solution to a business’s transition.

Generational change is something many family-run businesses are set to be faced with in the coming years. Often the desired solution is for the business to remain family-owned and the next generation to carry on the business. Having said that, this is not automatically the ideal solution, as the children, for instance, might not have any interest in the company or be suited to continue the business. In these cases, other options such as the sale or partial sale of the company need to be considered. In doing so, it is also important to take taxation and family aspects into account in addition to economic factors.

Selling a business requires intensive preparation, which is why business succession ought not to be kicked into the long grass. The order situation, balance sheets and existing employment contracts play an important role. Another key aspect is, of course, the valuation of the business to ascertain an appropriate selling price. Depending on the corporate form, it might also be a good idea to sell one’s company shares to one of the other shareholders.

It is equally important to consider inheritance claims. The rules of intestate succession kick in in the absence of appropriate arrangements, and this can give rise to problems. For this reason, it Is advisable to prepare what is referred to in German as an “Unternehmertestament” (entrepreneur’s will). With this kind of will, the testator can prevent a community of heirs from pursuing different interests and thus avoid the business’ continuity being put at risk. It is possible to make arrangements in an entrepreneur’s will that already apply during the testator’s lifetime. Another possible option may be to set up a foundation.

Business succession should be planned in advance with due regard to all legal aspects as well as factors pertaining to taxation. Lawyers who are experienced in the field of company law can ensure that the handover of the business runs smoothly.

https://www.grprainer.com/en/legal-advice/company-law/business-succession.html

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Exclusive: Linklaters opens fifth German office to chase banking work

Linklaters will open its fifth office in Hamburg in the first quarter of this year to capitalise on an increase in banking work for German clients.

The firm has made no lateral hires with the launch, instead transferring two existing partners from Frankfurt and Dusseldorf.

Linklaters LLP is a multinational law firm headquartered in London. Founded in 1838, it is a member of the “Magic Circle” of elite British law firms. It currently employs over 2,000 lawyers across 29 offices in 20 countries.

In 2016, Linklaters achieved revenues of £1.31 billion ($1.97 billion) and profits per equity partner of £1.45 million ($2.2 million), making it the world’s fourth highest-grossing law firm, and the most profitable member of the Magic Circle. In the UK, the firm has top-tier rankings across many practice areas, including corporate/M&A, capital markets, litigation, banking and finance, restructuring and insolvency, antitrust and tax. Linklaters counts more FTSE 100 companies among its clients than any other law firm. For direct deals by institutional investors in the first half of 2016, Linklaters tied for first place. In the 2012 Global Elite Brand Index, Linklaters was named the third strongest global law firm brand.