By Patrick Donsimoni, Partner, La Boetie, Geneva
Article 182 B of the French tax code provides that the remuneration paid for services of any kind provided or used in France will be subject to a withholding tax when paid by a debtor who exercises an activity in France to a foreign party subject to corporate income tax that does not have a permanent establishment in France.
The withholding tax basis is the gross amount of the sums or proceeds paid.
The domestic withholding tax of article 182 B is levied at a 15% rate, that may be increased to 75% when the remunerations are paid to persons domiciled or established in a tax haven (as defined by French tax law), unless the debtor provides proof that these sums correspond to real transactions, which mainly have an object and an effect other than to allow their location in such a tax haven.
The parties should, therefore, properly determine what this gross amount is in their contractual agreements. For example, when the contractual remuneration to be paid is EUR 100, the withholding tax rate is 15% and the agreement is silent on this issue; the withholding tax to be levied by the debtor will be EUR 15, reducing the (net of withholding tax) amount to be received by the service provider to EUR 85. For the foreign service provider to be able to actually receive EUR 100, the declared remuneration should be grossed up to EUR 117.65, using the following formula: 100 / (1 – 0.15 = 0.85).
The same gross-up issue will be addressed with regard to withholding taxes that may apply to other categories of income paid by French debtors to foreign beneficiaries, such as interest, dividends, royalties, and even with respect to the VAT due on sales of goods and services.
These provisions apply, however, unless provided otherwise by tax treaties signed by France that may reduce the domestic withholding tax rate or, even, exempt the French source remuneration at stake from any withholding tax.
For such tax treaties to apply, the parties must first be considered as tax residents of the states involved.
In ruling number 443018 of February 2, 2022, the French administrative Supreme Court (Conseil d’Etat) ruled whether a Tunisian service provider subject to a Tunisian hybrid fiscal regime leading to actual non-taxation in Tunisia was to be considered a tax resident of Tunisia under the meaning of the tax treaty between Tunisia and France. If so, it should be entitled to benefit from the favorable provisions set forth by this treaty.
Under article 3.1 of the tax treaty concluded between France and Tunisia of May 28, 1973, “the term resident of a Contracting State (Tunisia) means any person who, under the laws of that State (Tunisia), is liable to tax in that State (Tunisia) by reason of his domicile, residence, place of management or any other criterion of a similar nature.”
Under article 11.1 of the same convention:
the profits of an enterprise (resident of Tunisia for tax treaty purposes) of a Contracting State (Tunisia) shall be taxable only in that State (Tunisia), unless the enterprise carries on its business in the other Contracting State (France) through a permanent establishment situated therein. If the enterprise carries on its business in such a way, the profits of the enterprise may be taxed in the other State (France) but only to the extent that they are attributable to that permanent establishment.
Because of article 11.1, the Tunisian service provider challenged the application of the withholding tax of article 182 B above, which the French tax authorities intended on levying.
Based on a previous ruling of the French administrative Supreme Court (decision number 389994 of May 20, 2016), a foreign service provider that is not subject to corporate tax under the law of its country of establishment by reason of its status or activity cannot be regarded as a resident of this country under the meaning of the convention that country signed with France. Therefore, it cannot take advantage of the favorable provisions of the tax treaty involved.
This ruling dealt with a company established in Lebanon (whose tax treaty with France is similar to the tax treaty between France and Tunisia in these aspects) rendering services to a French customer.
The Tunisian service provider was subject to a Tunisian hybrid fiscal regime under which it was tax-exempt (for a ten year period, but it could have been for a shorter time) on non-Tunisian source income deriving from exports and liable to corporate tax under local common rules on income deriving from the local market.
Because the Tunisian service provider did not draw any income from the local market, it was de facto corporate tax-exempt in Tunisia.
The French tax authorities then concluded that, based on ruling number 389994 above, the Tunisian service provider could not be considered as a resident under the meaning of article 3.1 of the tax treaty between France and Tunisia, and thus could not benefit from the provisions of article 11.1 of the same convention. It should henceforth be liable to article 182 B French withholding tax.
The question that arises here is whether the Tunisian service provider should be considered as a tax resident of Tunisia under the meaning of the tax treaty between Tunisia and France only if its earnings derive from Tunisia source income actually drawing local tax (or, as the case may be, if its earnings derive at least partially from Tunisia source income drawing local tax).
After noting that the Tunisian service provider was a company properly incorporated under Tunisian law, that it was tax-exempt only on the basis of the profits deriving from exports but not on profits to be earned on the local market, and since the status of “exporting company” does not prohibit internal operations, the French supreme tax court ruled that the Tunisian service provider was—by principle—subject (even partially) to Tunisian corporate tax.
The Tunisian service provider will thus be regarded as being subject to corporate tax in Tunisia “by reason of his domicile, residence or similar personal relationship” and characterized as a Tunisian tax resident under the meaning of article 3.1 of the tax treaty between France and Tunisia that is entitled to benefit from the provisions of article 11.1 of the same convention.
The fact that the Tunisian service provider actually did not derive any income on the local market or actually paid any tax in Tunisia appears irrelevant, as long as it had the possibility to earn some and pay some.
That being said, one should nevertheless keep in mind that this decision concerns the hypothesis of both a temporary and partial exemption and that the French administrative Supreme Court did not mention the temporary nature of the exemption in its ruling. It would then be comforting if this solution could be confirmed by the French tax courts in the event of partial exemption, as in the case of temporary exemption. Let’s keep on the lookout for this development.
I trust that this above solution should be somehow different, however, if the taxable basis is limited to income deriving its source in a state only because the state regards the enterprise involved as a non-resident.
Indeed, when a state characterizes (in its own tax legislation,) an enterprise having its headquarters in its territory as a non-resident and treats it as such—as is the case in so-called offshore regimes—it seems difficult to consider that such an enterprise should—on the sole ground that the offshore regime is granted to companies having their registered office in this state and has been designed to encourage such an establishment—to be regarded as being “subject to tax on account of its registered office” within the meaning of article 4.1 of the OECD model convention.
So, if a state chooses to look at an enterprise, for the application of its domestic tax legislation, as a non-resident whose taxation finds its cause only in the rule of the source, this enterprise should not be regarded as a resident for the application of tax treaties.
Non-French service providers should, therefore, try and claim for the application of this case law to get withholding tax-reduced rates, or even total exemption, in all cases where the provisions of the tax treaty signed between their country of residence and France is similar to that of the tax treaty signed between Tunisia and France—which is fairly similar itself to the OECD model convention in this respect.
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