French Withholding Tax: The Transposition into French Law of the New Anti-Abuse Provision of the EU Parent-Subsidiary Directive May Impact Certain Acquisition Structures Commonly Used by Non-EU Funds/Corporate Investors to Acquire French Companies

Sullivan & Cromwell LLP - January 21, 2016

The French Amended Finance Act for 2015 implements a new EU anti-abuse clause that aims at excluding “non-genuine” arrangements from the scope of the withholding tax exemption applicable to dividends paid by French subsidiaries to EU parent companies.
In particular, the new anti-abuse clause targets EU holding companies, such as Luxembourg holding companies, commonly used as investment vehicles by non-EU entities to acquire French target companies in order to benefit from the exemption of withholding tax on the upstreaming of dividends from France.

Even though there is some uncertainty about the interpretation of the new law, it is likely that the substance requirements for holding companies to benefit from the French withholding tax exemption will be significantly higher than under previous legislation. In particular, the current “substance thresholds” generally recommended for such holding companies (e.g., minimum staff, offices, location of board meetings, etc.) may no longer be sufficient to qualify for the withholding tax exemption.
This anti-abuse clause would apply to both future and existing structures with respect to distributions made during fiscal years beginning on or after January 1, 2016.