Administrative guidelines and court decisions
French tax authorities comments on the tax regime applicable on the sale of French real estate and assimilated elements by non-French residents
The French tax authorities have published a number of administrative guidelines concerning the application of section 244 bis A of the French Tax Code.
This section provides that when a non-resident (an individual or a legal entity) sells real estate, real estate rights or shares of an unlisted company the assets of which consist mainly in real estate, the capital gain is subject to a withholding tax of one-third, subject to the application of a tax treaty. This withholding tax does not apply to the sales of such assets when the seller carries out an industrial, commercial or agricultural activity in France to which the said assets are dedicated.
In administrative guidelines No 8 M-2-00 dated May 18 2000, the French tax authorities indicate that section 244 bis A of the French Tax Code applies not only to sales in the strict meaning of the term, but also to various other operations such as exchanges, contributions to a company, liquidation, etc.
Administrative guidelines No 14 B-2-00 and No 8 M-3-00 dated August 4 2000, deal with the application of section 244 bis A of the French Tax Code in the context of the tax treaty concluded between France and Luxembourg dated April 1 1958.
The French tax authorities comment on an Administrative Supreme Court decision dated March 18 1994, in which it was held that income derived by a Luxembourg company from real estate is not taxable in France, unless the real estate is part of a permanent establishment in France. The court further held that the mere ownership of real estate in France by a Luxembourg company does not constitute per se a permanent establishment.
The French tax authorities specify that the court position also applies to capital gains derived from the sale of real estate. As a consequence, companies resident in Luxembourg are subject neither to the withholding tax provided by section 244 bis A of the French Tax Code nor to the related obligation to appoint a tax representative.
According to the French tax authorities, this is the case as long as the Luxembourg company can justify that it is a resident of Luxembourg by providing an affidavit from the Luxembourg tax authorities.
France - recent court decision
In a decision dated June 13 2000, Société Interhome AG, the Administrative Court of Appeals of Paris specified the permanent establishment concept as set out in the France-Switzerland tax treaty signed on September 9 1966. It is particularly noteworthy that the French tax administration has taken this case to the French Supreme Court.
In the case at hand, the Swiss company acted as agent to the owners of a number of apartments to (i) present the apartments in a catalogue distributed throughout Europe, and (ii) organize the seasonal rental of these apartments. The Swiss company held two subsidiaries incorporated in France, the first one acting as a travel agent (ie booking the rentals and receiving payments) and the second one acting as a real estate agent (ie managing the seasonal rentals).
The French tax administration argued that the commissions paid to the Swiss company from the income generated by the rental activity were subject to corporate income tax in France because the French real estate subsidiary and the rental property constituted permanent establishments in France of the Swiss company, thus attracting the full 'French income' of the Swiss company to France.
In the Société Interhome AG case, the French tax authorities challenged the position of the French subsidiary on the basis of the dependent agent criterion.
As a general rule provided by the OECD Model Convention (article 5, section 7) the fact that a company which is a resident of a contracting state controls or is controlled by a company which is a resident of the other contracting state should not per se deem either company a permanent establishment of the other. This follows from the principle that, for the purpose of taxation, such a subsidiary constitutes an independent legal entity. Thus, it is necessary to determine whether the activity performed in France fulfills the criteria required by the definition of the permanent establishment given by the applicable tax treaty.
The court held that, provided that the French company was not exercising its authority to conclude business transactions in the name and on behalf of the Swiss company, it may not be viewed as a permanent establishment in France of the Swiss parent company (ie the French company may not be viewed as a dependent agent of the Swiss entity).
For the rental property, the court held that the Swiss company was not allowed the use of the apartments or any right other than that of an intermediary. As such, the apartments may not be viewed as a fixed place of business through which the Swiss company wholly or partly carried out its activities. Consequently, the Swiss parent company did not dispose of a permanent establishment in France.
French case law has already stated that the fact that a German company had an office in France whose sole activity was to provide accommodation to German customers, may not per se constitute a permanent establishment in France of the German company (see Administrative Court of Rennes, n°92-5491 and 92-5492 dated March 5 1998).
