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France told to pay companies 10 bn in blow to deficit target

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Paris (AFP)

France said Wednesday it has been ordered to pay back 10 billion euros ($12 billion) to big companies after overtaxing them on dividend payouts, a cost that threatens to blow French deficit targets off course.

The Constitutional Council, France's highest constitutional authority, ruled that a tax of three percent on dividend payments, introduced in 2012, was illegal, government spokesman Christophe Castaner told reporters after a weekly cabinet meeting.

The tax was first levied by former French president Francois Hollande's government and had already been challenged in the courts, including before the European Court of Justice, before the French Constitutional Council finally declared it unconstitutional.

President Emmanuel Macron's administration will now have to find the money to reimburse companies, a budgetary effort that will throw a spanner in the works of fiscal consolidation.

"Legal amateurism led to the biggest tax gift ever handed to companies in this country," Castaner said, in a clear reference to the Hollande government.

The finance ministry may include the new spending in an updated budget plan, or mini-budget, later in the year, he said.

Macron's government, anticipating problems with the tax, had already decided not to renew it for next year's budget and planned to set aside 5.7 billion euros to reimburse companies, but over five years and only starting in 2018.

Castaner did not elaborate on how exactly the ministry now plans to cover the much-bigger-than-expected sum, which reports say will have to be paid out immediately, but unless massive budget cuts are made it will deepen the public sector deficit.

By comparison, the new cost represents two thirds of the 15 billion euros the government said it would find in new savings next year, and far exceeds the seven billion it has promised in tax cuts.

France has promised that it will keep its deficit to below 3.0 percent of gross domestic product (GDP) this year as required by eurozone rules, the first time France would meet that target in a decade.

But France's 2.9 percent objective -- which it says is key to boosting its credibility in Europe as Macron eyes a shake-up of the European Union -- now looks elusive.

Before the court ruling, France had budgeted for a deficit of around 76.5 billion euros for this year, and around 83 billion for 2018.

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