Case Overview
On 24 April 2019, the French Conseil d’État issued an avant-dire-droit decision in Société Générale (n° 399952) concerning France’s treaty foreign tax credit cap (the règle du butoir) for withholding tax (WHT) on foreign dividends received in the context of securities lending and structured equity/fund transactions. The court reaffirmed that the cap is computed using French corporate tax rules, which can require reducing gross dividends by directly linked charges, and then referred an EU-law question to the CJEU under Article 63 TFEU (ex Article 56 EC).
Key Facts (as found by the Conseil d’État)
- Société Générale headed a French tax-integrated group including Société Générale Asset Management (SGAM) Banque.
- For the fiscal years closed in 2004 and 2005, SGAM Banque carried out:
- Securities lending transactions with collateral, documented under an OSLA-type agreement (Overseas Securities Lender’s Agreement), and
- “Fund structuring” / basket transactions where clients bought a managed equity-performance profile for a fixed fee.
- SGAM Banque received dividends on shares of issuers resident in Italy, the United Kingdom and the Netherlands, subject to WHT in those states.
- The bank claimed treaty foreign tax credits in France; following an audit, the tax administration denied part of the credits by applying the butoir.
- Procedural history: TA Montreuil (3 Feb 2011) granted relief; CAA Versailles (17 Mar 2016) reversed; Société Générale appealed to the Conseil d’État.
The Dispute
The relevant treaties used a credit method, but limited the credit to “the French tax corresponding to those dividends” (a treaty cap). Under CGI article 220(1), the credit is allowed, but subject to a limitation matching that treaty cap.
The practical question was how to compute “French tax corresponding to those dividends” when the bank’s contracts effectively required it to pass on dividend economics to counterparties (e.g., amounts equal to dividends in securities lending, or dividend/performance pass-through in structured baskets).
French case law treats the treaty cap as a computation that applies French corporate tax rules to the gross dividend amount (before WHT), while allowing deduction of certain charges. If those “dividend pass-through” amounts are treated as charges directly linked to the dividend income, the “net” base for the cap can be reduced substantially (even to nil), potentially leaving residual, unrecovered foreign WHT.
Société Générale argued that this residual WHT could disadvantage foreign dividends and raised an EU-law issue under the free movement of capital.
Holding (Conseil d’État, 2019)
1) Domestic-law/treaty interpretation: how to compute the cap
Where the treaty does not specify otherwise, the Conseil d’État held that the cap (“French tax corresponding to those dividends”) must be computed by applying all French corporate tax rules to the dividends for their gross amount, meaning (in particular) deducting—unless specific provisions exclude them—justified charges that:
- are incurred only because of the acquisition, holding or disposal of the dividend-producing shares,
- are directly linked to the receipt of the dividends, and
- have no counterpart in an increase of assets. (CE 2019, pt. 5)
2) EU-law question: preliminary reference and stay
Finding no clear CJEU guidance on the extent to which an EU member state that uses a credit method must eliminate residual double taxation beyond the tax it would itself levy, the Conseil d’État stayed proceedings and asked the CJEU whether Article 63 TFEU requires France to go beyond that capped-credit approach. (CE 2019, pts. 11–12)
Subsequent outcome (for context)
The CJEU later held that Article 63 TFEU does not preclude a capped-credit regime that does not fully compensate foreign WHT (C-403/19, EU:C:2021:136). After that ruling, the Conseil d’État rejected Société Générale’s appeal on 5 July 2021 (n° 399952).
Takeaways for Practitioners
- Model “WHT leakage” upfront in securities lending and structured equity products: the treaty credit can be capped on a net basis after “directly linked” charges, even though WHT is levied abroad on a gross basis.
- Document the link between contractual payments and dividend receipt: characterization as “directly linked charges” affects the cap and thus after-tax economics.
- For intragroup versions of these transactions, consider whether pricing and contractual tax clauses reflect the party that economically bears residual WHT in a manner consistent with market practice (arm’s length risk/tax allocation).
Related Content
For practical guidance on evidencing and pricing financial arrangements, see Documentation for Financial Transactions. For foundational concepts used when evaluating whether terms and risk allocation align with market behavior, see Arm's Length Principle.
Frequently Asked Questions
Q1. What is the French “règle du butoir” here?
It is the limitation that caps treaty foreign tax credits to the amount of French corporate tax attributable to the relevant foreign-source income (here, dividends).
Q2. How did the Conseil d’État define charges that reduce the dividend base for the cap?
Absent contrary treaty wording, the cap is computed by applying French corporate tax rules to gross dividends, deducting (unless specifically excluded) charges that are justified, incurred only because of acquiring/holding/selling the relevant shares, directly linked to dividend receipt, and not offset by an asset increase.
Q3. Why does this matter for securities lending and structured equity products?
Because “dividend-equivalent” payments to counterparties may be treated as directly linked charges, shrinking the base used for the cap and potentially leaving unrelieved foreign WHT.
Q4. What EU-law issue was referred in 2019?
Whether Article 63 TFEU requires France, having chosen the credit method, to compensate foreign WHT beyond the French tax attributable to the dividends (i.e., beyond the capped credit).
Q5. What happened after the reference?
The CJEU held that Article 63 TFEU does not prevent such a capped-credit regime (C-403/19). The Conseil d’État then rejected Société Générale’s appeal in 2021 (n° 399952).