Is a federated state exempt from withholding tax?
The State of New Mexico filed a claim seeking a refund of the withholding tax levied on dividends of French origin. It argued that it should be considered a sovereign foreign state within the meaning of Article 131 sexies of the General Tax Code and be exempt from withholding tax.
The Administrative Court of Appeals will first note that the New Mexico Constitution provides criteria that may define a state, as it states that:
that state has a defined territory
sovereignty belongs to the people of that state
The governor ensures that laws are properly enforced.
The Court also notes that "the Tenth Amendment to the Constitution of the United States of America establishes the principle of general jurisdiction for the states and limited jurisdiction for the federal government."
However, she points out that:
"It follows from the 1869 decision of the United States Supreme Court in the case of *Texas v. White*—the principles of which have not been challenged—that the American Union is perpetual and indissoluble, and that the U.S. Constitution does not authorize the member states to secede unilaterally. It follows that the federal government of the United States, to which the member states have thus ceded the "power to determine jurisdiction," alone possesses all the attributes of sovereignty."
"The state of New Mexico is not recognized as a state by France."
The Court therefore finds that it does not constitute a sovereign state within the meaning of Article 131 sexies of the General Tax Code.
The State of New Mexico argued that such discrimination was contrary to the free movement of capital. The Court nevertheless rejected these arguments, holding, on the one hand, that foreign investors, with certain exceptions, are indeed subject to withholding tax and that there is no unjustified difference in treatment compared to French local authorities, which are subject to corporate income tax on their profit-making activities and cannot, in principle, hold equity interests in a commercial company.
The Court therefore dismisses the petition filed by the State of New Mexico.
CAA Paris, 5th Chamber, May 21, 2025, No. 23PA01314
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