The Administrative Tribunal of Lyon issued a decision on 20 November 2007 in a case involving France???„?s implementation of the anti-abuse provision in the EC Parent-Subsidiary Directive (McKechnie). If the anti-abuse rule applies, the exemption from withholding tax on outbound dividends paid to an EU parent company will be denied. Under France???„?s implementation of the EC Parent-Subsidiary Directive (i.e. article 119 ter of the French Tax Code), dividends paid by a French subsidiary to its EU parent company are exempt from withholding tax if certain requirements are met. For example, the exemption will not apply where the French subsidiary is controlled directly or indirectly by companies outside the EU, unless the French taxpayer can demonstrate that the main purpose for interposing EU companies in the shareholding chain is not to obtain the benefits of the exemption.

According to guidance published by the French tax authorities, the taxpayer???„?s burden of proof is satisfied when the total amount of withholding tax in the entire chain of companies is at least equal to the amount of French withholding tax that would have applied to dividends paid to the non-EU company. In addition, the taxpayer will be deemed to meet the burden of proof when the participation chain existed before the Parent-Subsidiary Directive became effective. The McKechnie case involves a French subsidiary that paid dividends to its U.K. parent company, which was indirectly controlled by two companies based in Jersey. The French tax authorities denied the right
to apply the withholding tax exemption on the dividends on the grounds that neither of the circumstances referred to in the guidelines were present. The company???„?s only argument was that at the time the group was acquired by the Jersey companies, the French company was already held by its U.K. parent and the U.K. company continued to
manage and control its French subsidiary under the same conditions.

The Tribunal concluded that the facts presented by the taxpayer were sufficient to show that the chain of shareholdings did not have as its main objective the avoidance of tax. The decision indicates that the taxpayer is not confined to any particular method to demonstrate the absence of abuse for purposes of the application of the withholding tax
exemption. The Tribunal also was of the opinion that the fact that the French company was already a subsidiary of an EU parent company (i.e. the U.K. company) when the group was acquired by the Jersey shareholders was sufficient to overcome a presumption of abuse.

Without specifically addressing the compatibility of France???„?s anti-abuse provision with EC law, the Tribunal ruled that the wording of the antiabuse provision in article 119 ter had no application to the case. In fact, the taxpayer???„?s contention made no reference to the purpose of the reorganisation nor did the Tribunal require any statement from the
taxpayer as to that purpose to demonstrate that the reorganisation was not tax driven. If confirmed, the decision provides a strong guarantee against reassessments based merely on the existence of a non-EU ultimate parent company.

This decision appears to adopt principles enunciated by the European Court of Justice (ECJ), according to which an anti-abuse provision is compatible with EC law only if its scope of application is restricted to artificial schemes (see, for example, the 2006 decision in the Cadbury Schweppes case). The Lyon Tribunal has thus taken one step towards integrating French tax law with principles outlined by the ECJ, and it comes at a time when the European Commission has been challenging the anti-abuse rules of a number of EU Member States.