In its decision, the French supreme tax court (Conseil d’Etat) had to decide whether, in the presence of intermediary companies, the treaty with the state of residence of the beneficial owner should be applied instead of the treaty with the state of the recipient of the payment.
In this case, the French company Planet paid royalties to Les Mills Belgium SPRL, a Belgian company, and to Les Mills Euromed Limited, a Maltese company, in consideration for the sub-distribution of collective fitness programmes developed by the company Les Mills International LTD, established in New Zealand. Originally, the sums were paid directly to the New Zealand company, which was the parent of the recipient companies.
These sums were subject to the withholding tax of Article 182 B of the French tax code by the tax authorities, reduced by the tax authorities to the rate of 10% provided for by the double tax treaty between France and New Zealand, in the belief that Les Mills International LTD was the true beneficial owner of these sums.
Planet contested this reasoning and considered that, on the contrary, the Franco-Belgian and Franco-Maltese double tax treaties should apply. This permitted the exemption of the royalties paid to the Belgian entity from the French withholding tax on the basis of the DTT between France and Belgium.
The French supreme court, relying on the OECD commentaries on Article 12 of the OECD model double tax treaty, considers the provisions of Article 12(2) of the Franco-New Zealand tax treaty (which provides that “however, such royalties may also be taxed in the state in which they arise and according to the laws of that state, but if the person receiving the royalties is the beneficial owner, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties”) are applicable to French source royalties whose beneficial owner resides in New Zealand, even if they have been paid to an intermediary established in a third country, provided that it is evidenced that the NZ entity is the beneficial owner of these amounts. The mere fact taken into consideration by the Marseille administrative court of appeal that “the New Zealand company Les Mills International LTD should, pursuant to an agency agreement signed on 2 December 1998 between that company and the company Planet, be regarded as the actual beneficiary of the sums in dispute paid by the French company to the Belgian and Maltese companies” is not sufficient.
The French supreme court therefore refers the case back to the administrative court of appeal for retrial.
At this stage, the main impact of the decision is that the notion of beneficial owner effectively dictates the DTT to be applied subject to the wording of this treaty, provided it is objectively evidenced, on the basis of the facts and circumstances of each case. In other words, the French tax authorities cannot just ignore the apparent situation and challenge the apparent recipient to sustain that only the French WHT would apply; in such a case, they must also have evidence as to who is the beneficial owner and apply the DTT based on this new factual situation.
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