CJEU issues judgement on the interaction between EU law and foreign direct tax credit systems

Deloitte Malta Tax Alert

27 October 2021

The judgement of the Court of Justice of the European Union (‘CJEU’) of the 25 February 2021 decided the preliminary reference filed by the French Conseil d’Etat in the case of Société Générale SA v. Ministre de l’Action and des Comptes publics (C-403/19) and dealt with the compatibility of French tax rules with Article 63 of the Treaty on the Functioning of the European Union (‘TFEU’) on the free movement of capital.

In its decision, the CJEU confirmed that the calculation of tax credits for the receipt of foreign dividends to offset double taxation, subject to French corporate tax rules, was not contrary to the free movement of capital. This judgement reiterated established CJEU case law, as confirmed in Haribo (C‑436/08), which holds that the parallel exercise of taxing rights by different Member States should not be considered to be contrary to the EU principle of free movement of capital, to the extent that the measures utilised are not discriminatory.


SGAM Banque (‘SGAM’), a company incorporated under laws of France and part of a tax-integrated group of which Société Générale SA, another company incorporated under laws of France was the parent entity, received dividends from group companies incorporated under the laws of Italy, the Netherlands, and the UK in connection with the activities connected to lending of securities and fund structuring transactions. The payments of dividends were subject to juridical double taxation in the form of withholding taxes levied by the source states (i.e. Italy, the Netherlands, and the UK), and corporate income tax levied by France as the residence state of SGAM.

In terms of France’s double tax treaties with the three source states, SGAM was entitled to claim a tax credit for the withholding taxes levied, and which could then be offset against French corporate income tax. As a result:

  • SGAM claimed a full tax credit against the French corporate income tax due on the dividends, corresponding to the foreign withholding taxes paid for the tax years ending 2004 and 2005.
  • Following an audit, the French tax authorities challenged the tax credits claimed, arguing that while the double tax treaties provided for a right to claim a credit to offset the withholding taxes levied in the respective source states, the applicable rules limited this credit to an amount corresponding to the French corporate income tax arising from the dividend payments (i.e., an ordinary foreign tax credit).

SGAM challenged this assessment and argued that the method followed by the taxpayer to calculate the tax credit constituted a disadvantage for transactions entered into with non-resident companies when compared to transactions entered into with resident companies on the basis that a tax credit fully eliminating juridical double taxation on dividends was not possible due to the different basis for taxation utilised in the source states and the residence state. In the case in question, while Italy, the Netherlands, and the UK’s respective tax legislation calculated withholding taxes on the gross amount of the dividends paid, French corporate income tax rules calculated taxes on a net basis after including the dividend income with other income subject to French corporate tax and deducting the corresponding costs.

Accordingly, the tax credit granted to SGAM corresponded to the French tax due in relation to the dividends, calculated on a net basis which, however, could not fully offset the withholding taxes levied by the respective source states which had been calculated on a gross basis.


In its considerations, the CJEU reiterated that settled EU case law holds that although Member States have the competence to establish their fiscal allocation by virtue of their negotiated double tax treaties, such measures should be compatible with the principles enshrined by EU law and observe the principle of equal treatment. Upon analysing the facts, the Court found that all French resident companies are subject to corporate tax on dividends on a net basis, irrespective of where they are sourced, and were also subject to at an equally-applicable rate of tax following the deduction of allowable deductions.

The CJEU therefore concluded that:

  • Member States are free to define the tax base applicable to shareholders receiving dividends in line with EU law; and
  • In the absence of discriminatory measures by a Member State, a disadvantage resulting from the double taxation of foreign sourced dividends arises from the parallel exercise of tax jurisdiction by the source state and the residence state of the shareholder company and should not be considered contrary to the free movement of capital in article 63 of the TFEU.


This judgement confirms that EU Member States have substantial discretion in fiscal matters, particularly relating to double tax treaties entered into to eliminate double taxation. Nonetheless, this is degree of discretion limited and must remain within the confines of EU law. In particular, the judgement also reiterated the CJEU’s position that Member States are free to establish their own tax base applicable to dividends and that the purpose of double tax treaties is not to ensure that taxes levied in one Member State are not higher than that in other Member States.

The CJEU judgement may be accessed here.

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