The decision of the French Administrative Supreme Court (Conseil d’État) demonstrates the subtleties of interpreting double tax treaties (DTTs) when it comes to the legal concept of residence for entitlement to treaty benefits.
The cases No. 446664 and No. 443018clarify the situation with regard to the companies Société Cegid and Société Observatoire d’économie appliquée, which were subject to a hybrid fiscal regime leading to non-taxation.
Legal background in French tax law
Tax treaties generally refer to domestic law when it comes to characterising a taxpayer’s residence status. Under Article 4 of the OECD Model Tax Convention, being treated as a taxpayer in a contracting state is not sufficient for qualifying as a resident in such a state.
Instead, it is necessary that the tax liability results from a personal link (such as domicile, residence, place of management, or another criterion of a similar nature) between the taxpayer and the relevant contracting state.
Over the past ten years, the Conseil d’État has built complex case law on that issue, in the light of the main object of the DTTs, which is the avoidance of double taxation situations. Under this case law, in addition to the above-mentioned personal link criterion, the taxpayer must not be “structurally exempt”.
This means that, apart from some DTTs concluded by France with jurisdictions that do not levy any income tax, a resident under domestic tax law but entirely tax-exempt "by virtue of its status or activity” cannot claim the benefit of tax treaties concluded by the French Republic. This was confirmed by the Conseil d'État in cases No. 371132 and No. 370054 on November 9 2015.
In the event of partial exemptions, the Conseil d'État is more lenient, stating: "The scope of the tax liability to which a taxpayer is subject in that State is, in itself, irrelevant to the characterisation of the resident status.”(Conseil d'État, June 9 2020, No. 434972).
A hybrid offshore regime brought before the Conseil d’État
This issue of residence for DTT benefits arose in the context of a hybrid tax regime that was applicable in Tunisia to specific companies called, under Tunisian law, “totally exporting companies”.
On the one hand, those companies were taxable in Tunisia only with regard to the profits derived from domestic sales, while profits derived from sales realised outside of Tunisia were excluded from the taxable basis. Pursuant to this hybrid offshore regime, if a company incorporated in Tunisia was operating sales only to clients situated abroad, it never had to pay corporate income tax in Tunisia.
Nevertheless, contrary to many other offshore tax regimes, Tunisian law granted the entities that chose this regime the possibility to carry out domestic transactions, the profits of which were subject to Tunisian corporate income taxation (CIT). As a result, this regime, in itself, still implied a potential risk of double taxation.
On the other hand, those “totally exporting companies” were considered, in any case, as non-resident when at least 66% of their share capital was held by foreign or non-resident individuals or legal persons.
This hybrid offshore regime was modified in 2014, with the introduction of a reduced CIT for offshore profits at the rate of 10%, later increased to 15%. Tunisian finance bill for 2021 decreased the standard Tunisian CIT rate from 25% to 15%. Thus, removing any preferential tax regime on offshore profits.
In the cases submitted to the Conseil d’État, at the time, the Tunisian “totally exporting companies” only realised export transactions and did not pay any corporate income tax in Tunisia.
It was notably held that there was no legal provision prohibiting the companies from carrying out local transactions and, consequently, forcing them to only perform transactions on the export market, which is CIT-exempt. Such situations, even if the companies were not carrying out any local taxable profits, still involve a double taxation-risk.
Furthermore, an essential point was raised by the Advocate General of the Court (“Rapporteur public”): the companies tax exemption arose from a taxable basis deduction and not from a taxpayer status or a territoriality rule. As such, from a statutory standpoint, these Tunisian entities were falling within the scope of Tunisian CIT.
As a result, following the opinion of its Advocate General, the Conseil d’État concluded that the companies were residents within the provisions of the France-Tunisia tax treaty and could claim double taxation relief.
The Conseil d’État may have come to a different conclusion if the French tax authorities had argued that one of the companies could be considered as a non-resident under Tunisian law regarding its non-Tunisian shareholding (the 66% criterion mentioned above).
What can we learn from this decision?
A partial and temporary tax exemption regime, leading to a cyclical absence of income taxation, does not hinder, in itself, the characterisation of the resident status. Particularly if a potential double taxation remains.
Finally, it is crucial to keep in mind that, in the case of double non-taxation situations due to treaty provisions, such situations could fall within the scope of Article 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances) and Article 7 (Prevention of Treaty Abuse) of the OECD’sMultilateral Convention (MLI). In the case at hand, it has been noted that Tunisia has not yet ratified the MLI.
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