Banco Santander SA and other financial services companies including Societe Generale SA won a court bid to overturn a French levy on some mutual funds in a ruling that may lead to rebates for investors.
The European Union’s Court of Justice ruled that France was wrong to charge a 25 percent withholding tax on dividend payments to a type of EU-regulated funds, known as UCITS, outside France. French-based products aren’t required to pay the tax.
The measure “constitutes a restriction on the free movement of capital, which is in principle prohibited under EU law,” the court said in a statement today.
France has already received claims for tax refunds of more than 4 billion euros ($5.2 billion) and could face more, said Kit Dickson, a tax partner at Deloitte & Touche LLP, in a telephone interview. EU countries have reacted to similar claims by changing rules that tax foreign-based funds differently.
“We’ll see tax policy changes coming in from different member states and they’ll either be starting to tax resident funds as well as non-resident funds or they’ll choose to exempt them,” Dickson said. “Spain changed some of its withholding tax rules in 2010, the Netherlands changed them in 2008, France chose to tax resident pension funds from 2009.”
The French Finance Ministry press office didn’t immediately respond to calls and e-mails requesting comment on the decision and the potential tax rebate.
The EU court refused a request from the French government to put a time limit on when claims could be made. It said France hadn’t put forward any evidence that it would risk serious economic repercussions.
The German fund management association, or BVI, which encouraged members to complain, estimated potential French tax rebates for German funds at as much as 1 billion euros. It is monitoring similar cases in the Netherlands, Spain and Italy.
“Any possible refunds go to the funds so the investors get the benefit,” the association said in an e-mailed statement. “The ruling may make French investments more attractive because funds based in Germany or elsewhere will no longer suffer a disadvantage compared to French funds.”
Ten funds operated by Santander, Societe Generale, Allianz Global Investors Kapitalanlagegesellschaft mbH, KBC Groep NV, Generali and Dimensional Fund Advisors LP challenged the French tax, arguing that EU rules forbid different treatment in France and elsewhere in Europe for UCITS, or Undertakings for Collective Investment in Transferable Securities.
Santander and Dimensional didn’t immediately respond to e-mails seeking comment. Societe Generale and KBC declined to comment and Generali declined to immediately comment. Allianz referred requests for comment to the BVI.
The ruling sets principles that may help litigation over French tax discrimination for other products such as life insurance where French-based companies escape taxes that are levied on foreign rivals, said Eglantine Lioret, a tax lawyer based in Paris.
The judgment doesn’t limit discrimination to funds within Europe which may aid refund claims from funds from elswhere, Dickson said.
“If you’re a fund based in the U.S. or Canada or Japan, then potentially you could take advantage of this as well,” Dickson said.
While the ruling from the EU’s highest court is binding, final decisions on the case must be taken by an administrative court in Montreuil, France.
The cases are: C-338/11 FIM Santander Top 25 Euro Fi, Direction des residents a l’etranger et des services generaux, C-339/11 Cartera Mobiliara, C-340/11 Alltri Inka, C-341/11 DBI-Fonds APT no 737, C-342/11 SICAV KBC Select Immo, C-343/11 SGSS Deutschland Kapitalanlagegesellschaft, C-344/11 International Values Series of the DFA Investment Trust, C-345/11 Continental Small Series of the DFA Investment Trust, C-346/11 Sicav GA Fund B, C-347/11 AMB Generali Aktien Euroland.