The first subparagraph of paragraph I of Article 235 ter ZCA of the French tax code (Code général des impôts), in the form that was derived from Law N° 2015-1786 of December 29, 2015 (the challenged regulation), was declared unconstitutional by the French Constitutional Supreme Court on October 6, 2017. This ruling—often referred to as the tax on dividends—takes effect in all instances that haven’t been definitively decided as of the date it was published (i.e., 8 October 2017). The contested legislation establishes a new tax called “additional contribution to company tax in relation to amounts distributed” that must be paid by organisations subject to company tax. The organisation that distributes revenues owes this contribution. 3% of the money distributed make up the amount owed.

The French Administrative Supreme Court (Conseil d’Etat) sent the matter to the Conseil Constitutionnel based on a QPC (Question Prioritaire de Constitutionalité).

This indicates that Law N° 2015-1786, dated December 29, 2015, was in effect at the time the Conseil Constitutional was convened, but that a portion of it had been contested before the Conseil d’Etat, which had forwarded a concern expressed by the plaintiff, the société de participations financière, to the Conseil Constitutionnel. Whether or not the contested regulation was unconstitutional was the question.

French Constitution

This constitutionality a posteriori conformance includes all of the civil and human rights guaranteed by the French Constitution in addition to being founded on the French Constitution strictly speaking. This is the reason that a lot of laws, regardless of the type of law (such as tax, corporate, business, labour, civil, or administrative), could potentially be challenged.

A further payment to business tax relating to dispersed amounts was the issue brought before the Conseil Constitutionnel. The section of the regulation that was being challenged that was pertinent was the first subparagraph 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.

As a result, an additional tax is imposed on the following items: (i) profits or products that are not set aside or included in the share capital; (ii) any sums or values made available to partners, shareholders, or unit holders that are not withheld from profits; and (iii) unless the contrary is proven, amounts made available to partners (directly or indirectly) in relation to advances, loans, or deposits. (i) remuneration and occult benefits; (ii) non-deductible fraction of remuneration (within the meaning of Article 39 (1°)(1) of the French Code Général des impôts); (iii) expenses and charges which reduction; (iv) sums or values attributable to holders of beneficiary unit or in respect of founder in relation to buybacks of the said units; (v) remunerations and occult benefits; (vi).

Challenged Legislation

The issue at hand was whether or not this additional corporate tax payment violated the constitution. The plaintiff, a business, claimed that there was an unjustified disparity in the transfer of dividends from subsidiaries based on the locations of the respective subsidiaries. If the subsidiary is located in the EU, it is exempt from paying the additional contribution, according to the challenged legislation. The supplementary contribution applies if the subsidiary is based in France or a third nation.

Additionally, the plaintiff claimed that the contested law creates an unjustified disparity in treatment between corporations that distribute dividends received from EU-based subsidiaries and those that distribute dividends deducted from operating earnings.

The plaintiff consequently claimed that the contested rule violates the principle of equality before public burdens (principe d’égalité devant les charges publiques).

Block De Constitutionality

The Conseil Constitutional responded by referencing the “block de constitutionality,” or civil rights that apply in addition to the Constitution. The Declaration des droits de l’homme and du citoyen of 1789, including Articles 6 and 13, served as the basis for the Conseil Constitutional’s ruling.

The law “must be the same for all, if it protects or if it punishes,” according to Article 6. Equal treatment does not, however, preclude the possibility of the law applying different standards in other circumstances. Additionally, there is a public interest exception to the rule against equal treatment. According to case law upheld by the Conseil d’Etat (such as CE Denoyez dated 10 May 1974 (Section) n° 8803288148, Rec. Lebon), this stance is correct.

According to Article 13, a common contribution is necessary for the administrative costs as well as the upkeep of the public force. Each citizen must receive a portion of this contribution according to their ability. The Conseil Constitutional cited a fundamental provision of the Constitution (Article 34) when it said that it is up to the legislation to decide how to evaluate contributory capacities while adhering to constitutional principles and taking into account the characteristics of each tax. In particular, the law must base its evaluation on logical and objective standards based on objectives established by the law itself in order to guarantee respect for equal treatment. However, this evaluation shall not result in a recognised violation of equal treatment before public obligations.

Conseil d’Etat

The Conseil Constitutional also cited case law from the Conseil d’Etat, which stated that profits redistributed by a parent (mother) company 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 cannot be subject to Article 235 ter ZCA. Other profits distributed by such a mother company, however, may be subject to the provisions of Article 235 ter ZCA.

However, these businesses are in a similar position with relation to the contribution’s goal, which is to tax all dispersed funds regardless of whence they originated, including those covered by the EU mother-daughter system.

The French parliament sought to make up for the loss of sustainable income caused by the suppression of withholding tax on UCITs by adopting an additional contribution to corporate tax related to disbursed amounts. Thus, it was obvious that the French parliament had a particular objective in mind. According to the Conseil Constitutional, who decided the case, such a goal does not, in and of itself, have a public interest nature that would justify treating mother companies differently from those who redistributing dividends from subsidiaries established in France or in a third country. As a result, the challenged regulation is unconstitutional because it violates the equality principle before the law and the public burdens.