26 February 2018

Compensation tax and mixed-activity parent companies: hopes are up

A State Council ruling on February 14th 2018 (State Council 8e-3rd chamber, February 14 2018, N°410302, Nord Provence Finances) restated the rule that dividends received by a company, including a parent company with a role in managing subsidies (especially services subject to VAT for these companies), must be included in the compensation tax liability report as stated in Article 231.1 in the General Tax Code, leading to an increase in total tax amount.

 

The State Council confirmed that the compensation tax liability report and the lump-sum tax coefficient (formerly “pro-rata”) on VAT are two different entities, squashing hopes raised by the ruling earlier in the year in the same case by the Douai Administrative Appeals Court (Douai AAC, February 28 2017, N°15DA00594, Nord Provence Finances).

 

The Administrative Appeals Court’s decision was based on the position adopted by European judges on VAT (EUJC, July 16 2015, Larentia + Minerva, C-108-14), that states that a company with a role in managing its subsidies is considered as having an economic activity that enables it to fully deduct VAT from overhead costs, whether or not it receives dividends from its subsidies.

 

The Douai AAC applied this ruling to compensation tax, stating that dividends received by a parent company involved in the management of its subsidies should not be taken into account in the numerator of the compensation tax liability report. Some corporations hope to lower their compensation tax or request a tax relief for previous years.

 

From now on, mixed-activity parent companies that receive dividends from subsidies will still need to integrate them in the numerator of their liability report when calculating compensation tax.