A court rules on whether dividends are revenue or capital income, and the resulting tax implications.

Under French law, dividends received by investors are liable to social charges (prélèvements sociaux) of 17.2%. They are also liable to income tax. Such capital income is called revenu du patrimoine.

However, where the owner of a company pays themselves a dividend, this rule only applies provided the amount paid is less than 10% of the capital of the company owned by them. A larger dividend is subject to the full panoply of social security contributions (cotisations sociales) of around 45%, as it is then considered to be revenue income (revenu d’activité).

The aim of this rule is to stop company owners paying themselves large amounts in dividends, rather than a salary, and thereby escaping the payment of social insurance. The rule has been in place since 2013.

Accordingly, an owner who paid themselves a dividend equivalent to 20% of the capital of the company they owned would pay 10% in social charges and 10% in social security contributions.

In a case recently heard in the French Supreme Court, the Cour de Cassation, a dentist ran his business through a company in which he owned only 1% of the capital, the rest being held by a holding company in which the entire share capital was held equally by him and his wife.

The subsidiary company paid out large dividends to the holding company, which the couple declared as capital income, and on which they paid social charges.

The local social security office contested the categorisation of the dividends as capital income, arguing that as the income paid into the holding company had been generated by the dentist in his business activity it should be treated as revenue income.

The dentist argued that as the dividends were distributed by a separate legal entity, the holding company, they could not constitute income from employment.

The court ruled that as the dental surgeon was the only professional partner of the subsidiary company he was the only one able to generate income enabling dividends to be distributed to the holding company. In addition, he and his wife held the entire share capital of that company. The dividends paid to the holding company therefore had to be included in the dental surgeon's income from employment, and subject to social insurance contributions.