How has France decided to fight against these fixtures since July 1, 2019?
In order to defeat the arrangements based on the arbitration of payment of dividends, financial flows corresponding indirectly to the retrocession of a French source dividend to a non-resident shareholder are subject to the withholding tax since July 1st. 2019. The recipient of the payments may, however, obtain a refund of the withholding tax if he can demonstrate that the transaction was not exclusively for tax purposes.
I. Journalists from Le Monde and other international media revealed, in October 2018, in the context of a survey entitled “CumEx Files”, the existence of optimization practices to avoid withholding tax dividends paid to non-residents. In France, it was essentially to rule out the application of the withholding tax provided for in Article 119 bis of the General Tax Code.
As a reminder, the rate of this withholding tax is set at 30% on dividends paid to companies , 12.8% for individuals, or 75% if the beneficiary individual or company is in a non-cooperative Country. (subject to reduced rates or no withholding tax provided by certain international tax treaties).
II. Several hypotheses of optimization and fraud have thus been highlighted.
The so-called “Cum-Cum” schemes take two different forms.
- The first, so-called “internal component”:
consists in a temporary transfer of shares made, around the date of payment of dividends, by a non-resident to a tax resident of the country of distribution. This distribution then falling under national law, no withholding tax is applicable.
Once the dividend has been collected by the tax resident, the tax resident transfers back to the non-resident (the initial beneficial owner of the share) the shares and the amount of the dividend received, in whole or in part, under the form of an indirect financial flow – whether in the form of remuneration for the temporary transfer of shares, a transaction obliging the resident to surrender these shares directly or indirectly, or an agreement imposing on the resident payment of an amount corresponding to the economic advantage of holding the shares.
- The second hypothesis, known as the “external component”:
consists in the lending of shares (or the assimilated transaction) to a resident of a linked State, by an agreement providing for no withholding tax, to the State of payment. For France, this is the case of the agreements concluded with Saudi Arabia, Bahrain, Egypt, the United Arab Emirates, Finland, Kuwait, Lebanon, Oman and Qatar.
The “Cum-Ex” schemes, for their part, are clearly fraudulent: they are based on the exchange of a very large number of shares between several people around the period of dividend payments, exchanges followed by numerous requests for payment.
Repayment of withholding taxes submitted by several of these persons on the basis of the same dividends.
The tax administrations concerned being unable to clearly identify the true owners of the shares, will refund the withholding taxes that have not been paid.
III. In order to put an end to the tax evasion procedures related to “Cum-Cum” fixtures, Article 36 of the Finance Act for 2019 introduces into the CGI a new case of application of the withholding tax. on “dividends” paid to non-residents.
Henceforth, a distributed income subject to the withholding tax of article 119 bis, 2 of the CGI is deemed to be any payment, up to the amount corresponding to the distribution of proceeds of units or shares, made under any form and by any means whatsoever, by a person who is established or has his fiscal domicile in France for the benefit, directly or indirectly, of a person who is not established or has his fiscal domicile in France, when the following conditions are met:
- the payment is made in the context of a temporary sale or any transaction giving the right or obligation to return or resell these units or shares or rights relating to these shares,
- this transaction is carried out for a period of less than 45 days, including the date on which the right to a distribution of proceeds from shares or similar income mentioned in articles 108 to 117 bis of the French Tax Code is acquired.
These provisions are not applicable when the beneficiary of the payment proves that it corresponds to an operation which has mainly an object and an effect other than to avoid the application of a withholding tax or to obtain the granting a tax benefit.
The beneficiary can then obtain a refund of the withholding tax definitely deducted from the tax authorities.
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