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 13 March 2025 that the French controlled foreign company (CFC) rules are compatible with the tax treaty between France and Mauritius (Conseil d’Etat, n° 488080) and, by extension, the decision supports the notion that the rules are compatible with most tax treaties concluded by France.
Background
The CFC rules (article 209 of the French Tax Code) apply to greater than 50% owned or controlled foreign subsidiaries or permanent establishments (PEs) of a French company when the effective tax rate of the CFC’s jurisdiction is less than 40% of the French rate (i.e., the actual tax paid compared to the French tax that would be due on the income calculated under French GAAP).
In such a case, the French company is (i) taxed on its pro rata share of the income deemed to be received from the CFC if the CFC is a PE or a branch; or (ii) deemed to have received distributed income from the CFC if the latter is a subsidiary. EU companies are outside the scope of the CFC rules unless the structure was put in place to avoid tax.
These provisions have been amended on multiple occasions, notably in response to the 2002 Schneider Electric decision, which determined that the wording of the law in force at the time prevented its application in cases involving a tax treaty aligned with the OECD model treaty (Conseil d’Etat, 28 June 2002, n° 232276).
The 2005 Finance law amended article 209 B and clarified that the profits realized by a CFC are deemed to be “income from movable capital” of the French company in proportion to the rights it holds in the entity.
Facts of the case
A French company, which had a wholly owned subsidiary established in Mauritius benefiting from a preferential tax regime there, challenged the application of the French CFC rules for fiscal years 2012 to 2014 based on the provisions of the treaty between France and Mauritius.
Decision of the Administrative Supreme Court
The Administrative Supreme Court confirmed the application of the French CFC rules after examining the relevant treaty provisions.
It ruled that the income received by the French company did not constitute dividends within the meaning of article 10 of the treaty as this article (in line with the OECD model treaty) provides a narrow definition of the term dividends, which only covers income distributed pursuant to a decision made by the general assembly of shareholders.
The Administrative Supreme Court also excluded the business income qualification within the meaning of article 7 of the treaty as income taxable under article 209 B is now explicitly deemed “income from movable capital” under domestic law.
As no other treaty article could be applied to the disputed income, the court ruled that it was covered by article 22 of the treaty on “other income,” which grants exclusive taxation rights to the recipient’s state—France in this case. Accordingly, the court concluded that the CFC rules were compatible with the provisions of the France-Mauritius tax treaty and the income received by the French company was taxable in France.
It should be noted that most “other income” articles found in other tax treaties concluded by France are worded similarly. Additionally, some tax treaties explicitly allow France to apply its CFC rules.
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