ECJ decision could allow pension schemes to reclaim millions from French tax authorities, expert says

In its ruling, the ECJ said that French rules which applied a 15%-25% withholding tax on dividend payments made to foreign investment funds but not French funds breached EU law.

Claims by investors Europe-wide, including UK pension funds, could be worth as much as €20 billion, according to industry publication Professional Pensions, with UK pension funds set to gain between £400-500 million in claims made between 2004 and 2009 on direct investments in France and exposure through investment funds. To date, around 10,000 claims by investors for refunds have been denied by the French tax authorities.

However pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, warned that although the ruling was good news for those pension schemes that have had to pay the withholding tax on underlying French investments, they should not expect an immediate windfall. "It is likely to take some time for the courts to decide exactly how compensation is to be paid," he said.

Tyler said that many occupational pension schemes, particularly the larger schemes, currently invest in Undertakings for Collective Investment in Transferable Securities (UCITS) investment funds. Once registered in one EU country a UCITS fund, which will be regulated by the UCITS Directive, can be freely marketed across the EU. UCITS funds currently manage assets worth over €500 trillion, according to EU figures.

EU law prohibits all restrictions on the movement of capital between its 27 member states, and between its member states and third countries, including different tax rules for nationally-sourced dividends. Although this does not affect the right of member states to distinguish between taxpayers who are not in the same situation with regards to their place of residence or the place where their capital is stored, the ECJ said, these provisions cannot amount to "a means of arbitrary discrimination or a disguised restriction of the free movement of capital and payments".

Under French tax legislation, dividends paid by companies resident in France to UCITS which are not resident in France are taxed at source at the rate of 25%, while the same dividends are exempt from tax when paid to resident UCITS. The ECJ said that this difference in tax treatment could discourage non-resident UCITS from investing in companies established in France, as well as discouraging French investors from acquiring shares in non-resident UCITS.

Under EU law, different tax treatment may be permitted where the circumstances are not objectively comparable or it is justified by an overriding reason in the public interest. However, the ECJ said that where national legislation sets out a distinguishing criterion, such as that of the UCITS' place of residence, account of that criterion must be taken in deciding whether the situations are comparable. This meant that in the present case, only the location of the UCITS rather than the place of residence of the shareholders investing in that UCITS could be taken into account.

The court added that where a member state had chosen not to tax resident UCITS that received dividends on their investments in French companies, it could not then argue it had a public interest in taxing non-resident UCITS in receipt of the same income.