Administrative Supreme Court rules on treatment of sale of US partnership interests

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 gains derived from the sale of US partnership interests and realized by a French tax resident should be treated as capital gains under article 13(6) of the France-US income tax treaty. As such, they should only be taxed in the seller’s country of residence, i.e., France (Conseil d’Etat, 2 February 2022, n° 443154).

As a reminder, the French and US tax authorities may have diverging interpretations regarding the treatment of the sale of US partnership interests:

The US tax authorities consider a US partnership to be fully tax transparent (i.e., it is not itself liable to tax but its income and gains flow through to its partners, who are taxed on the same). They therefore conclude that a sale of partnership interests should be treated as the sale of a fraction of the partnership’s assets, which falls within the scope of article 13(3)a of the France-US tax treaty—i.e., gains from the alienation of movable property forming part of the business property of a permanent establishment (PE) or fixed base are taxable in the country where the PE/fixed base is located (i.e., the US in this case).

According to the French tax authorities (FTA), the sale of US partnership interests by a French tax resident generates a capital gain taxable only in France under article 13(6) of the treaty.

In the case at hand, a French tax resident individual sold his 25% US partnership interest in 2002. He claimed a foreign tax credit in France as he believed the gains to be taxable in the US. However, the FTA challenged the credit.

The French Supreme Administrative Court ruled that gains resulting from the sale of interests in a US partnership realized by a French tax resident are capital gains exclusively taxable in France pursuant to article 13(6) of the tax treaty. As a result, the French resident is not entitled to a foreign tax credit in France.

The court judged that the gains resulting from the sale of US partnership interests could not be considered as having been made through the entity notwithstanding the fact that the partnership is tax transparent in the US. Thus, it rejected the application of articles 7(4) (business profits) and 13(3)a of the treaty.

The FTA is aware of this difference in treaty interpretation between the two countries. The FTA undertakes to study on a case-by-case basis situations that may lead to double taxation within the framework of the mutual agreement procedure provided for in article 26 of the France-US tax treaty.


Nathalie Aymé

Nathalie Aymé, Partner, specializes in domestic and international tax law. She regularly advises French and international companies especially in the manufacturing and the telecom & technology sectors. She assists her […]

Grégoire Madec

Grégoire Madec, Partner, has over 20 years of experience in corporate tax. He mainly assists multinational groups in the definition of their tax strategy as well as in the management […]

Alice de Massiac

Alice de Massiac, Partner, has developed extensive expertise in supporting major French and foreign multinational companies, both in consulting and tax controversy, anticipating the impact of the proposed recommendations in […]

Thomas Perrin

Thomas Perrin, Partner, specializes in international tax. He has been involved in many transactions for international French and foreign groups. In 2004, he created the R&D department as well as […]

Sophie Tardieu

Sophie Tardieu is a partner in the international tax department of Deloitte Société d’Avocats. With over 25 years’ experience in corporate taxation, Sophie advises French and foreign multinational companies in […]