France: Proof that the non-resident company is subject to corporate income tax by reason of its status or activity

Double tax treaty: proof that the non-resident company is subject to corporate income tax by reason of its status or activity (Paris Administrative Court of Appeal, November 9,  2023, n° 21PA01474)

This case was about a French company Lolie paying to The Continuity Group Numeric Photos BV, based in the Netherlands, €186k in 2014 for reproduction rights of the Dutch company's photographs.

During a tax audit, the French tax authorities considered that these sums should be subject to the withholding tax provided for in article 182 B of the French Tax Code and applied the 33.33% rate (the rate applicable at the time), in accordance with the domestic law.

This article applies to a large number of services provided by foreign entities to clients carrying on business in France. But it is frequently superseded by a tax treaty which does not allow France to tax services provided by non-resident corporate entities unless the latter have a permanent establishment in France providing the services, substantially reduces (sometimes to 0) the WHT rate applicable to royalties.

That is why Lolie challenged the application of this withholding tax and claimed the benefit of article 12 of the Franco-Dutch agreement of March 16, 1973, according to which “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State / 2. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (...) / 3. The provision of paragraph 1 shall not apply if the recipient of the royalties, being a resident of one of the States, carries on business in the other State in which the royalties arise, through a permanent establishment, or performs in that other State professional services from a fixed base, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14 shall apply (...)”.

After having confirmed that the services provided by the Dutch company were indeed in the scope of article 182 B referred above, the Administrative Court of Appeal held that Lolie could not evidence that the Dutch service provider was a resident in the Netherlands, i.e. that it was a person subject to tax in the Netherlands by reason of its status or activity in accordance with the definition of the residence provided by the double tax treaty.

In particular, the Court considered that the mere production of certificates from the Dutch tax authorities indicating that The Continuity Group Numeric Photos BV was a Dutch tax resident within the meaning of article 4 of the double tax treaty was not sufficient. This is the second time that the Court takes this position after a first case held on April 21, 2023, with the same Dutch service provider but a different debtor.

The advocate general (rapporteur public) heard in this case did not provide much details about the reason why the certificates provided were not a sufficient evidence. She just reminded that further to the principle laid down by the French supreme tax court (Conseil d'Etat), the benefit of a double tax treaty must be limited to persons in a situation of double taxation, which implies that the foreign company must be subject to tax in its country of residence in respect of the income received (CE, November 9, 2015, Landersärztekammer Hessen Versorgunsgwerk n° 370054).

This is nothing new on the principle but so far, to our knowledge, the French tax authorities and the judge relied on these certificates of residence in most cases, unless there was a doubt that the foreign recipient of the income was effectively subject to (and sometimes liable to) tax.

A this stage, the French supreme tax court did not take the same position but it is cautious to require in advance on official certificate of residence (Form 5000) and, if the service provider is in the same group, any document confirming that the income has been effectively included in the taxable income of the company to avoid that the benefit of the treaty is rejected.