Increasingly, the French tax authorities are making use of the beneficial ownership concept to deny withholding tax exemptions (or the application of a reduced rate of withholding tax) for dividends and royalties, either pursuant to domestic law or a double tax treaty. The position in respect of interest is slightly different due to a broad domestic exemption.

The test for beneficial ownership tends to be regarded as objective, without any need to demonstrate the existence of an abuse of law (i.e., without the need to test the aim of, or rationale behind, the interposition of a flow-through company in the relevant structure). French courts would generally have regard to the following criteria:

• Power, which involves assessing whether the company has the effective right to manage and control the use of the funds it received (to this end, French courts notably assess the existence of a legal or contractual obligation to pass on the payment received to another person - such a legal obligation may result from the purpose of the company as set out in its by-laws).
• Substance, including two objective criteria, one procedural and one material. The procedural criterion looks at whether the corporate body functions normally and complies with its accounting obligations; the material criterion looks at whether the company has the adequate material, human and financial means to manage and control the use of the funds and carry out its activity. But even if these “objective” substance criteria have been met, the French tax authority may still argue that a company is not the beneficial owner of the relevant payment, if its place in the structure is not justified by sound non-tax reasons.
• Economic, looking at whether, when and how much of the relevant payment is passed on. Even where a payment is not immediately passed on, a company may not be regarded as the beneficial owner if it has no autonomy to decide how to use the sums received.

Where it is established that the recipient is not the beneficial owner of the relevant payment, it may be possible to look through to the person who is the beneficial owner so as to claim the benefit of the double tax treaty, depending on its wording, between France and the country where the beneficial owner is resident. In fact, the French Administrative Supreme Court recently accepted such a look-through approach (CE, 20 May 2022, n° 444451, Planet). It would, however, fall on the taxpayer to identify the beneficial owner and justify why treaty benefits should be available as the French tax authorities consider that they do not have any obligation to identify the beneficial owner for these purposes.

Adopting a look-through approach may also raise several practical questions. How would it apply, for instance, where the relevant payment flows are of a different nature - e.g., where royalty income is passed on in the form of a dividend? Which article of the double tax treaty between France and the beneficial owner’s jurisdiction would apply – the royalties article on the basis of the outflow from France or the dividend article on the basis of what is received by the beneficial owner?

And if the benefit of the double tax treaty is subject to a minimum shareholding requirement, how would one assess this requirement where the beneficial owner of the payment has only an indirect interest in the original payor? For example, as regards the dividend article, would one need to distinguish between double tax treaties which expressly require a direct shareholding (such as the one between France and Luxembourg) and double tax treaties which also take indirect shareholdings into account (such as the one between France and the UK)?