Dividend distributions to partnerships – applicability of double taxation treaties with France

​In principle, dividends paid by a French company to a tax-transparent German partnership are subject to a 25 per cent withholding tax (“WHT”) in France^[1].  Indeed, the Franco-German double tax treaty (“DTT”) is not applicable, given that a tax-transparent partnership cannot be qualified as a resident for DTT purposes.

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Confronted with the risk of double taxation resulting from this situation, the tax judge and then the French tax authorities (“FTA”) considered that it was nonetheless possible to apply the DTT between France and the State of residence of the beneficial owner of passive income (who is in practice the partner of the tax-transparent partnership), and therefore benefit from the reduced treaty WHT rate but only for passive income (i.e., dividends and royalties).

   

However, the FTA tempered this possibility in its administrative guidelines by denying the right to apply the DTT between France and the State of residence of the beneficial owner of passive income when the foreign partnership was itself held by another tax-transparent partnership (corresponding to a case of double interposition of tax-transparent partnerships).^[2] 

  

In a judgment dated 6 June 2024, the Administrative Court of Montreuil rejected the aforementioned position of the FTA, ruling that the Franco-German DTT is applicable to an individual German resident, who is the beneficial owner of a dividend paid by a French company and transiting through two German tax-transparent companies incorporated under the form of Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft (GmbH & Co KG). As a result, the WHT rate on dividends was not 30 per cent (which was the WHT rate under French domestic law applicable at the date of the dividend distribution), but 15 per cent (which is the reduced WHT rate under the Franco-German DTT).^[3] 

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While it is important to bear in mind that the FTA have not yet amended their administrative guidelines, which remain applicable in principle, it is interesting to note that the FTA have not decided to appeal the abovementioned Court judgement rendered in favor of the taxpayer.

  

Finally, by adopting a literal reading of the tax law and the DTT, without mentioning the restrictive guidelines of the FTA, the Administrative Court of Montreuil ruled in a way that could be interpreted as extending beyond the Franco-German context.

  

Therefore, it seems that the door can be opened to potential refund claims regarding passive income (i.e., dividends and royalties) taxed at a 25 per cent WHT rate, whereas the reduced DTT rate could have been applied in the case of double interposed tax-transparent partnerships.