US pension funds bring €15m+ dividend row before French State Council

France
On the 07/21/20 at 6:36AM

by

Adrien Paredes-Vanheule

Asset News can reveal that 15 US pension schemes have introduced a recourse before the French State Council regarding the refund of the French dividend withholding tax for the 2006-2009 period.
French State Council
(Flickr)

A pool of 15 US pension schemes, some of which being trusts from well-known S&P 500 companies, have taken a step further in their battle against the French tax administration that started in 2014. Asset News can reveal that these pension funds have recently introduced a cassation recourse before the French State Council, France’s highest court ruling on cases involving the local public administration. That followed a succession of unfavourable rulings for the concerned schemes by the administrative court of appeal of Versailles between December 2019 and June 2020.

These cases covered demands of the 15 US institutional investors upon the restitution of the French dividend withholding tax for the period running from 2006 to 2009. On the basis of the rulings viewed by Asset News, the pension funds claimed back at least €15m, not including interests and other sums to be paid by the French state. In addition, they solicited the advice of the French State Council as well as the filing of a request for a preliminary ruling of the Court of Justice of the European Union on the matter. They wanted both institutions to assess if the French dividend withholding tax for the 2006-2009 period had breached in any way the article 56 of the treaty establishing the European community [article referring to the free movement of capital within the EU, ed.]. Both demands were turned down by the administrative court of appeal of Versailles.

Rejections from French administrative courts

Concretely, these US pension funds first claimed their due before the administrative court of Montreuil. Between 2014 and 2016, the tribunal partially satisfied the claims but only for the refund of the French dividend withholding tax for the year 2009. Hence, according to figures gathered by Asset News, the court ruled the reimbursement of at least €5.8m that must be added to the minimum €15m claimed for the years 2006, 2007 and 2008. Then, in its recent decisions, the administrative court of appeal of Versailles broke the Montreuil administrative court’s rulings on the ground that they had considered ‘inadmissible’ the complaints of the pension schemes for the years 2006, 2007 and 2008. At the same time, the administrative court of appeal of Versailles rejected these same claims in its own rulings.

The French tax administration is unfamiliar with the organisation of US pension schemes.

Allard De Waal, tax partner, Paul Hastings

“The underlying motive for the litigation is that non-European pension plans are not regarded per se as not-for-profit organisations by the French tax administration. But the treaty on the European Union and its provisions on the free circulation of capitals allow non-European pension funds to ask for a similar tax treatment to the one applied to European pension plans,” explains Allard De Waal, the lawyer of the US pension funds and partner, tax department, at the Paris office of law firm Paul Hastings. “Yet, the French tax administration is unfamiliar with the organisation of US pension schemes that relies on external providers for asset management, reporting, back-office, and uses all means to not refund them. It only sees the third-party management feature of the US pension funds and denies them as being not-for-profit organisations. To date, 15 US pension schemes have litigation issues with the French tax administration,” he points out to Asset News.

The lawyer recalls that in France, French listed companies’ dividends remained untaxed until 2009 if received by not-for-profit organisations. It was the case for a number of local institutions with a mission of general interest such as Agirc Arrco and Prefon. “At the same time, in the United States, pension funds are exempt under conditions set by the Employee Retirement Income Security Act that dates back to 1974. Before exonerating the pension schemes, the US tax administration checks the compliance of the concerned schemes. The France-US tax treaty used to provide US pension funds with a tax refund that fully neutralised a 15% withholding tax on dividends paid by French companies. However, this tax credit was repealed to the benefit of a flat dividend tax. Therefore, the 15% tax has become a definitive tax for US pension funds investing in French listed companies.”

The issue of the not-for-profit feature

Usually managers of not-for-profit organisations do not earn any remuneration or a symbolic one. Therefore, the core question of the litigation between US pension funds and the French tax administration is whether US pension funds’ managers are remunerated in a way that casts doubt on the not-for-profit nature of the institutions. “The sponsor of the pension funds appoints internal lawyers as named fiduciaries to whom external providers report to. These named fiduciaries do not earn any extra money as they are already employees but the sponsor grants time off to fulfil their duties as named fiduciaries,” says De Waal.

He adds: “A few months ago, the administrative appeal court of Versailles ruled against a withholding tax refund claim introduced by several US pension plans. It asked how much the sponsors paid the named fiduciaries for the time they spend taking care of their duties as named fiduciaries. The court followed the French tax administration’s viewpoint. Adding to this, French administrative courts consider the budgetary aspect in their rulings. We have thus introduced a recourse before the French State Council, which has to accept the case before examining it and ruling about it. We have good reasons to believe the case will not be rejected given the question is very new and serious.”

France’s reputation towards these large US institutional investors is at stake.

Allard De Waal, tax partner, Paul Hastings

The tax partner at Paul Hastings’ Paris bureau says that if the French pension scheme regime is to be introduced in coming years, an adequate legal and fiscal regulatory framework will be necessary. He highlights that currently, French pension schemes such as Prefon and Agirc Arrco are exceptions to the French general law. “If we already had had a status for French pension schemes in the law then disputes between non-European pension funds and the French tax administration would be easier to solve. We would be able to establish comparisons between pension scheme regimes, make equivalences. Since we do not have any status, we just rely on general principles,” he argues.

Meanwhile, De Waal believes that the French tax administration should refund taxes withheld on dividends at source to the US pension schemes rather than battling with them in courts. “France’s reputation towards these large US institutional investors is at stake,” he says.

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