French Apex Court held that tax treaty benefits for lower withholding tax rates on dividends is available only when the recipient is the beneficial owner of such income.

Brief background & key excerpts from the ruling

• The taxpayer is a company tax resident in France which is wholly held by an entity domiciled in Luxembourg (hereinafter referred to as ‘immediate holding entity’);
• The taxpayer had paid an interim dividend of EUR 3.6 million to the immediate holding entity, which thereafter was remitted to another entity (hereinafter referred to as ‘ultimate holding entity’);
• In the instant case, the dividend paid by the French subsidiary to the immediate holding company was remitted the very next day to the ultimate holding company;
• During the audit, the tax authorities challenged the taxpayer’s action of considering the immediate holding entity as the beneficiary owner;
• The Court found that the immediate holding entity had carried out no activity other than holding the securities of the French subsidiary. Therefore, the Court found merit in tax authorities’ contention that the immediate holding entity cannot be regarded a beneficial owner;
• The Court also found that the Article 8 of the Treaty does not include the ‘beneficial owner clause’ that has been later established in the Treaty (under Article 10) to align with OECD Model Tax Convention and Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘MLI’);
• Hence, the Court emphasised that an absence of an express clause in a Tax Treaty for application of a reduced withholding tax rate does not prevent refusal of tax treaty benefit to an entity which is only an apparent/ nominal recipient. The Court therefore repudiated the claim of lower withholding tax rate based on Tax Treaty as well;
• Since the immediate holding company is only an apparent/ nominal recipient of the dividends and said immediate holding company lacked commercial/ economic substance, the Court denied the taxpayer’s claim of lower withholding tax under the Tax Treaty.