This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
The French Administrative Supreme Court ruled on 2 February 2022 that a company benefiting from a temporary and partial corporate income tax exemption should be considered liable to tax and therefore a tax treaty resident (Conseil d’Etat, 2 February 2022, n° 443018).
As a reminder, only residents of one of the contracting states can claim the benefits of a tax treaty. Most tax treaties signed by France provide, in accordance with the OECD model treaty, that the term “resident of a Contracting State” means “any person who, under the laws of that State, is liable to any taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.”
The French tax authorities sometimes challenge the withholding tax exemptions/reductions provided by tax treaties by claiming that the foreign entity is not a resident of the contracting state under the treaty.
In prior cases, the French Administrative Supreme Court has ruled that an entity that is exempt from tax or subject to lump-sum tax because of its status or its activity should not be considered “liable to tax” and therefore should not be treated as a tax resident for treaty purposes (e.g., the court has ruled in one case that a German pension fund that is exempt from German corporate income tax cannot be considered a resident of Germany under the France-Germany tax treaty; in another case, it has ruled that a Lebanese company that is not subject to the standard corporate income tax in Lebanon but only to a small lump-sum tax applicable to offshore companies is not a Lebanese resident under the France-Lebanon tax treaty).
In the case at hand, a French company had paid fees for services provided by a Tunisian company. Under article 11 of the France-Tunisia tax treaty, such payments made to a Tunisian resident (without a permanent establishment in France) are taxable only in Tunisia. Relying on those provisions, the French company did not withhold any tax on the fees it paid.
The French tax authorities issued a corrective assessment as they considered that the Tunisian company was not a Tunisian resident for purposes of the France-Tunisia treaty. The Tunisian company benefited, according to Tunisian law, from the “total export company” regime under which it was not taxable, for the first 10 tax years, on profits derived from the export of goods and services. As the Tunisian company did not realize any domestic profits, it was, in fact, exempt from corporate tax in the relevant tax years.
The French Supreme Administrative Court observed that the “total export company” exemption only applied to profits derived from exports. Therefore, the court ruled that the Tunisian company was liable to corporate tax in Tunisia by reason of its activities, even if it did not pay tax in Tunisia in the relevant years. Accordingly, the court held that the Tunisian company was a tax treaty resident eligible for the benefits of the France-Tunisia tax treaty, such as a withholding tax exemption for service fees.