An international tax treaty is an agreement between two States allocating between them the right to tax income and, sometimes, wealth, inheritances or gifts. Its main purpose is to prevent the same person from being taxed twice on the same income. France has concluded more than 120 tax treaties, listed in the table of tax treaties.
This article presents the basic principles of these treaties from the French point of view: what France may tax, exempt or credit. As each treaty has its own features, only an analysis by a lawyer in international taxation can determine whether or not the applicable treaty may reduce or eliminate French tax in a given situation.
In brief
- A tax treaty allocates between two States the right to tax each category of income.
- Where a person is resident in both States, it generally determines the State of residence by means of successive criteria.
- For a resident of France, a treaty may, depending on the case, avoid double taxation through an exemption in France taken into account for the effective rate, or through a tax credit; only an analysis of the situation by a lawyer can determine whether and how it applies.
- Treaties prevail over French law, but do not create tax: France may only tax if its domestic law so provides.
- They also organise the exchange of information and a mutual agreement procedure between tax authorities.
Contents
What is an international tax treaty?
Tax treaties are agreements, usually bilateral, between France and another State. They generally follow the OECD Model Tax Convention, but each has its own features, which makes them difficult to interpret.
A treaty does not create tax: it allocates the right to tax between the two States. France can therefore only tax income if its domestic law so provides and if the treaty does not take that right away. Where domestic law and the treaty differ, the treaty prevails (article 55 of the French Constitution).
What are tax treaties for?
The main purposes of the tax treaties concluded by France are:
- to avoid double taxation, where the country in which income arises and the taxpayer’s country of residence both wish to tax it;
- to determine the tax residence of a person considered resident by both States;
- to organise the exchange of information and, often, assistance in the collection of taxes between tax authorities;
- to prevent tax avoidance, in particular by means of anti-abuse clauses;
- to make it possible to resolve difficulties of application through a mutual agreement procedure between tax authorities.
How does a treaty determine tax residence?
Where a person is considered resident by both France and the other State under their respective laws, the treaty generally provides successive criteria to attach him or her to a single State: permanent home, then centre of vital interests, habitual abode and finally nationality; failing that, the tax authorities consult each other. This question is detailed in the article on dual tax residence.
How does France eliminate double taxation?
For each category of income (salaries, pensions, real estate income, dividends, interest, capital gains, etc.), the treaty states whether the right to tax belongs to the country of source, the country of residence, or both. Where France is the State of residence, it may, in some cases, eliminate double taxation using one of the two methods provided for by the treaty; it is necessary to have each situation analysed by a lawyer to find out whether one of them applies, and which one:
- exemption with the effective rate: the income may be exempt in France, but it is then taken into account to calculate the tax rate applicable to the household’s other income;
- the tax credit: the income is in principle taxed in France, but a tax credit may be set off against French tax. Depending on the treaty and the type of income, this credit is equal to the French tax corresponding to that income (which in practice amounts to an exemption with the effective rate) or to the amount of tax paid abroad, up to the amount of French tax.
For dividends and interest, a treaty may limit the rate of withholding tax that the country of source is entitled to levy, in which case France may grant its residents a tax credit equal to that withholding tax, up to the limit provided for by the treaty; only an analysis of the treaty and of the situation by a lawyer can determine whether, and to what extent, this credit applies. Example: a resident of France receives €800,000 of dividends from a US company, on which €120,000 was withheld in the United States. The dividends are in principle taxable in France; the France–United States treaty provides for a tax credit equal to the tax withheld in the United States, up to 15%, i.e. €120,000 here, which would, where applicable, be set off against French tax up to the amount of that tax.
In the absence of a treaty, a resident of France is in principle taxable in France on all his or her income, including income already taxed abroad, without a tax credit: the foreign tax is then in principle only deducted from the income taxable in France.
The returns to be filed in France
Even where it is exempt in France, foreign-source income must in principle be declared, in particular on form 2047, and then reported in the appropriate boxes of the income tax return: for example box 8TK for income giving entitlement to a tax credit equal to French tax. The procedure is presented on the page on foreign income tax returns.
The mutual agreement procedure
Where a taxpayer considers that the actions of one or both States result in taxation not in accordance with the treaty, he or she may in principle present the case to the competent authority of his or her State of residence, which endeavours to resolve the difficulty with the other State. For disputes between Member States of the European Union, a 2017 directive strengthens this dispute resolution mechanism.
Combating tax avoidance: the BEPS multilateral convention
The OECD/G20 project known as “BEPS”, launched in 2013, led to a multilateral convention signed by more than 100 jurisdictions. In force for France since 1 January 2019, it modifies many existing treaties to introduce, in particular, anti-abuse clauses, so as to prevent artificial schemes from being used to escape tax or shift it to countries with low or zero taxation.
As each treaty has its own features and may have been amended, it is necessary to have the applicable version examined by a lawyer before any decision, to find out whether or not the treaty makes it possible to reduce French tax.
What I see in my cases
The error I come across most often is confusion between the methods provided for by treaties to avoid double taxation, namely the tax credit and the exemption with the effective rate rule, or the application of one instead of the other. Dual tax residence, which is fairly common, is generally resolved through the treaty, provided the situation is properly framed. Foreign pensions and retirement benefits also come up often: it is, as a general rule, the treaty that settles the question of their taxation in France.
FAQ
Can a tax treaty create a tax in France?
In principle, no: a tax treaty allocates the right to tax, but does not create tax. France can only tax income if its domestic law so provides and if the treaty does not take that right away.
Must income exempted by a treaty be declared in France?
In principle yes: a resident of France declares his or her foreign-source income even where a treaty may exempt it, in particular so that the effective rate or the tax credit can be calculated; only an analysis of the situation by a lawyer can determine whether or not the treaty leads to an exemption.
What happens in the absence of a treaty?
A resident of France is then in principle taxable in France on all his or her income, including income already taxed abroad, without a tax credit; the foreign tax is in principle only deducted from taxable income.
