International tax treaties make it possible to resolve conflicts when an individual is taxable in several countries. These treaties take precedence over national legislation and make it possible, among other things, to determine the place of taxation of income and to avoid or mitigate double taxation. Below are some basic principles highlighted by your tax lawyer, which generally apply to the tax treaties signed by France.

What is an international treaty?

Tax treaties are formal bilateral agreements between two countries. France has concluded international tax treaties with nearly 125 countries. Tax treaties help prevent double taxation and tax avoidance and evasion. They promote cooperation between France and other international tax authorities in applying their respective tax laws.

These treaties generally follow the OECD model. However, their content is particularly subtle to interpret and consequently to apply. There is a BEPS (base erosion and profit shifting) action plan which targets the specific loopholes exploited by tax planning strategies. This plan has made it possible to address the mismatches that exist between the various international tax measures. It also includes rules aimed at preventing the abuse of tax treaties.

The tax treaties signed between France and other countries make it possible to determine the country of taxation in which the taxpayer must pay the tax. In keeping with the principle of a single tax residence, international treaties determine in which country the tax domicile is located when the individual is resident in both countries.

Tax treaties also establish cooperation between States. This enables them to combat international tax avoidance and tax fraud effectively.
They make it possible to set up exchanges of information between countries, which are very useful for the various tax authorities.

What are international tax treaties for?

As a general rule, the tax treaties concluded by France serve to reduce or eliminate the double taxation that arises from the overlap of tax jurisdictions in different countries: the State where the income arises and the State of the taxpayer’s residence. This may be because the taxpayer resides in one of the countries but derives income from another. A treaty determines, for each type of income, to which State the taxing right is allocated. Note that if you are tax resident in France, double taxation can sometimes be mitigated by a tax exemption, which must be provided for by the treaty, whose rather technical reading your tax lawyer can carry out.

Most international tax treaties provide for a decisive criterion under which an individual residing in another country will be taxed by only one of the two countries. When a taxpayer considers that, despite the treaty, they are disadvantaged from a tax point of view, they may prepare a file to submit to the competent tax authorities in order to discuss their case.

Tax treaties ensure that the rules of each country are applied while preventing tax avoidance and fraud on various forms of income flows between the treaty partners. They provide for an allocation of profits between the parties that is, in principle, fair, by combating tax avoidance practices.

How do tax treaties work?

Tax treaties grant the source country a taxing right over certain types of income, profits or gains, sometimes at limited rates. The individual must pay tax in the country where they are tax resident under the treaty. Where no provision is made by a tax treaty, the resident may be taxed in France on the entirety of their income regardless of its source. This applies even if the foreign income has already been taxed in the foreign country. In that case, no tax credit is in principle granted: the income is taxed in France on its amount net of foreign tax.

Resident status determines the country in which income tax must be paid as well as the amount of tax the resident must pay. It is important to note that each country has the right to tax the income of its own residents under its own domestic legislation, so the tax treaty does not need to restate this rule. If the country of residence has the sole taxing right over certain types of income, profits or gains, this generally results in taxation in that country only.

These treaties make it possible to establish the withholding rates applicable to the various types of income received, whether salaries, pensions or real estate income. The country of origin may also impose a limited tax rate on certain types of income, such as profits or income from real estate, for example.

As regards companies, there are a great many bilateral treaties throughout the world to avoid double taxation, which are generally very dry reading and for which the assistance of a tax lawyer seems advisable. However, France faces numerous tax avoidance problems arising from these international treaties. Since 2019, new measures have therefore come into force to compel large companies that generate significant revenue in France to pay tax in the country. The renegotiation of the European rules in this area will make it possible to further regulate the best-known tax avoidance practices. These new measures now make it possible to tax companies on income transferred to low-tax countries.

The OECD/G20 project was recently set up to strengthen tax treaties and combat tax avoidance. The project makes it possible to reduce the loopholes that exist in international treaties and that result in tax being avoided or shifted, in whole or in part, to another country where tax is low or even zero. More than 100 jurisdictions have agreed on a Multilateral Convention which came into being through the BEPS project. This new convention will make it possible to update the current network of tax treaties and reduce problems relating to tax avoidance.

Our tax law firm can assist you.