How tax residence is interpreted in French tax treaties
This article is for general information only. Tax law is a highly specialised area and you should only act or refrain from acting after receiving full professional advice on the facts of your particular case. This article is for general information and does not constitute investment advice.
A recent French Supreme Court (Conseil d’Etat 20 mai 2016, no 389994) case considered when a tax payer comes within a French tax treaty. It is an important decision and one to be carefully considered when tax planning. Tax treaties provide protection from double taxation but a point often overlooked is whether you come within the scope of the treaty at the outset. The answer is not always obvious. If you do not the treaty simply does not apply to you and tax treaty protection is lost.
A French resident company paid a Lebanese company for services provided to it in France. The French company was fully taxable whilst the Lebanese company paid a token amount of tax in Lebanon being effectively offshore. The French company was required to withhold a percentage (33.3%) of the payment under Article 182 B of the French Tax Code. The Lebanese company challenged this on the basis that Articles 10 and 26 of the France – Lebanon Tax Treaty exempted the French company from making this deduction.
In order to come within the France – Lebanon treaty you have to be a resident of either Lebanon or France. The French company was definitely French resident but was the Lebanese company Lebanese resident? Article 2 of the treaty says that residents are " toute personne qui, en vertu de la législation dudit Etat, est assujettie à l'impôt dans cet Etat, en raison de son domicile, de sa résidence, de son siège de direction ou de tout autre critère analogue. " In short you must be subject to tax in the Lebanon by reason of your domicile, residence, registered office or any other criteria.
The French Supreme Court said that the treaty must be read with its normal meaning. It is for the avoidance of double taxation and so if one party is not liable to taxation in a country that party cannot be a “resident” of the country as defined in the treaty. This was the case here as the Lebanese company paid almost no tax in Lebanon and so did not come within the treaty.
Companies located in in countries which have a tax treaty with France but which benefit from specific local exemptions from tax are at risk following this decision. There is no reason to restrict it to companies. Individuals who are exempt from tax may well not be resident for treaty purposes. This could apply to a UK non-domiciled person who lives on capital and only has offshore income and so pays no tax in the UK even though resident here.
Planners dealing with French tax treaties will be best advised to ensure that there is some local tax being paid to show that the individual is resident.