This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
The French Conseil d’Etat (Administrative Supreme Court) ruled on 19 February 2024 that the allocation of a tax credit for patent royalties paid by a Tunisian payer to a French company that are subject to withholding tax in Tunisia, is not limited to the amount of French tax imposed on those royalties (Conseil d’Etat, 19 February 2024, n° 469407, available in French only).
Background and facts of the case
Under the provisions of article 19 (royalties) of the France-Tunisia treaty, royalties paid by a resident of one contracting state to a recipient in the other contracting state for the use of patents, designs, models, plans, secret processes, and formulae are taxed in the hands of the recipient in the other contracting state. The royalties may also be taxed in the source jurisdiction, but under article 19(2)(b) of the treaty, the tax charged may not exceed 15% of the gross amount of the royalties.
Paragraph (1)(b) of article 29 (provisions for the elimination of double taxation) of the treaty states that France may include the gross amount of royalty income received in the income chargeable to French tax but that a credit is available against the French tax payable for the amount of Tunisian tax paid on the same income. In addition, article 29(1)(d) provides for a flat-rate 20% tax credit for royalties taxed in Tunisia under article 19(2)(b), regardless of the amount of Tunisian tax paid.
In the case at hand, in the period from 2014 to 2016, a French company received royalties (derived from licenses to use patents) which were subject to a 15% withholding tax in Tunisia under the terms of the treaty, and to corporate income tax at a rate of 15% (as at that time) in France.
The French company claimed the benefit of the 20% matching tax credit provided under article 29(1)(d); however, the French tax authorities considered that the tax credit could not exceed the amount of the French tax due on the royalties (i.e., 15% at that time). Therefore, the question for the court to answer was whether the 20% flat-rate clause under article 29(1)(d) applies independently of the imputation clause applicable to royalties generally in article 29(1)(b).
Decision of the Administrative Supreme Court
The Administrative Supreme Court ruled in favor of the taxpayer, stating that according to the specific provisions of the treaty, the royalties derived from licenses to use patents that were paid to a French recipient, and subject to a withholding tax in Tunisia, give rise to a 20% tax credit, regardless of the tax imposed in France on those royalties, and the treaty does not limit the tax credit to the amount of French tax due.
