Case Note of Joined Cases C-407/22 and C-408/22 /Shen Siqi

Case Note of Joined Cases C-407/22 and C-408/22 /Shen Siqi

1. Introduction

The case name of C-407-22 is Ministre de l’Economie, des Finances et de la Relance v. Manitou BF SA and the case name of C-408/22 is Ministre de l’Économie, des Finances et de la Relance v. Bricolage Investissement France SA.

The two companies filed claims for tax reimbursement concerning the regulations governing tax-exempt tax groups and the tax authorities rejected the complaintswhich made the dispute go on judicial access, the two cases were joined for the procedure and the judgement to the Court of Justice of the European Union (CJEU) for a preliminary ruling.

2. Facts of the case

Manitou BF SA (Manitou) is a French tax-residentcompany that received dividends from its non-French subsidiaries which were not in the tax-integrated group in 2011. As per French tax rules, Manitou treated only 95% of the dividends as exempt from corporate income tax. In 2014, Manitou sought reimbursement for the tax paid on the non-exempt portion of the 2011 dividend (5%) arguing that the provisions that were applied were not in line with the freedom of establishment. The situation is similar to Bricolage Investissement France SA (Bricolage).

3. Issues

The main legal issue presented in the two cases iswhether the legislation of France regarding the tax group exemption is incompatible with Article 49 TFEU which refers to the “freedom of establishment”.

The tax group exemption refers to dividends distributed from subsidiaries within a tax-integrated group to their parent company being fully tax-exempt from corporate income tax. In contrast, dividends paid from non-resident subsidiaries not belonging to the same tax-integrated group are only 95% tax-exempt.

4. Rule

Article 49 TFEU requires the abolition of restrictions on the freedom of establishment which prohibit the origin Member State (MS) from hindering the establishment in another MS of one of its nationals. It is also apparent from the Court’s case law (Case C-386/14) that freedom of establishment is hindered if, under an MS’s legislation, a resident company having a subsidiary or a permanent establishment in another MS suffers a disadvantageous difference in treatment for tax purposes compared with a resident company having a permanent establishment or a subsidiary in the first mentioned MS.

5. Application

5.1 A fundamental freedom involved

The fundamental freedom of establishment is involved in the joined cases.

5.2 Discrimination or restriction to cross-border activities

5.2.1 The cross-border situation treated worse off than a purely domestic situation

Dividends received by a resident parent company belonging to a tax-integrated group and distributed by its resident subsidiaries belonging to the same tax group and non-resident which would have been eligible to be part of that group are fully exempt from corporation in that MS while dividends received by a resident parent company that is not part of a tax-integrated group and distributed by resident and non-resident subsidiaries are only partially exempt.

In these two cases, the companies are not part of the tax-integrated group and in fact did not have the possibility of creating such a group with their subsidiaries established in other MS which had capital links cause only companiesresident in France may opt for the tax integrated scheme according to the French domestic rules.

The results are that a resident parent company with a French subsidiary will always be able to take advantage of the tax benefit regarding this neutralization and add-back cost charge by exercising the scope of its own tax-integrated subsidiaries, whereas a resident parent company with subsidiaries in other member states has no way of obtaining this tax benefit unless, as a French resident company, it used to be part of a tax-integrated group in France.

Such a difference in tax treatment makes the French rules less attractive as they can be seen as dissuading the establishment of subsidiaries in EU MSs other than Franceand thus, the cross-border situation treated worse off than a purely domestic situation.

5.2.2 the cross-border situation objectively comparable to the purely domestic situation

As regards the comparability of the situations, the Court held that the dividends received by a parent company which benefits from full tax exemption come from subsidiaries that are part of the tax-integrated group to which the parent company concerned also belongs did not amount to an objective difference in the situation of parent companies. Whether or not it belongs to a tax-integratedgroup, the parent company bears the costs and expenses related to its shareholding in the subsidiary facing similar economic realities regarding costs and taxation. The situation is objectively comparable.

Based on the above reasons, the French tax rules constitute a restriction to the freedom of establishment.

5.3 Justifications

For justifications, an accepted reason in the public interest is needed as there already had existed a restriction and the situation is comparable. However, neither the Court nor the French Government has been able to argue that the public interest is justified. Moreover, even if the argument relating to the need to safeguard the cohesion of the tax system or other public interests may not be acceptable as the neutralization within the integrated group also does not result in any tax disadvantage for the group parent company (Case C-386/14).

5.4 Proportionality

There are no proportionality reasons proposed in the defense.

6. Conclusion

The Court ruled that the neutralization mechanism should have been available also for dividends distributed from foreign subsidiaries and not exclusively reserved for distributions occurring within a tax group and Article 49 TFEU must be interpreted as precluding legislation of anMS relating to a tax integration scheme.