How tax residence is interpreted in French tax treaties

No tax, no residency, no treaty: does the France—Lebanon double taxation treaty apply to Lebanese offshore companies?

Adib Y Tohme, managing partner of the law firm CLLC

 

Disclaimer

This article is for general information only and does not constitute legal advice. Tax law is a highly specialized area and you should only act or refrain from acting after receiving full professional advice based on the facts of your particular case.

 

A recent French Supreme Court decision (Conseil d’État 20 mai 2016, no 389994, Société Staff and Line) held that a Lebanese offshore, which is exempted from corporate income tax, but subject to a lump sum tax, is not regarded as a resident of Lebanon according to the France—Lebanon tax treaty and therefore must be denied the treaty benefits.

 

This controversial decision is very important and must be carefully considered by tax policy makers when determining the scope of taxation of foreign source income generated by Lebanese residents as well as by practitioners when tax planning.

 

The facts

The company Staff and Line (which changed its name to Easyvista), a French resident company, paid fees to Roxana, a Lebanese offshore, for services rendered. The French company was required to withhold a percentage of (33.3%) of the amount paid as withholding tax under Article 182 B of the French Tax Code. The company challenged this withholding on the basis that Articles 10 and 26 of the France—Lebanon Tax Treaty of 24 july1962 exempted the French company from making this deduction.

The issue

The issue is whether the France—Lebanon Tax Treaty is applicable to a Lebanese company that is exempted from corporate income tax but subject to a lump sum tax. In other words, the question is whether a company in a low tax jurisdiction can be considered as a resident under the terms of the tax treaty?

 

In order to be within the scope of the France—Lebanon tax treaty one has to be a resident of either Lebanon or France. The French company was definitely a French resident but was the Lebanese company a Lebanese resident? Article 2 of the tax treaty provides that residents are “toute personne qui, en vertu de la législation dudit Etat, est assujettie à l’impôt dans cet État, en raison de son domicile, de sa résidence, de son siège de direction ou de tout autre critère analogue. ” In short one will be considered as a resident in Lebanon and therefore subject to taxation in Lebanon by virtue of his domicile, residence, registered office or any other criteria. Accordingly, a Lebanese offshore, which is registered in Lebanon, with no fixed establishment in France, will normally be taxed in Lebanon and no withholding tax is applicable.

 

 

However, the French Supreme Court departed from a literal interpretation of the treaty and applied the original meaning of the text. It is for the avoidance of double taxation that the treaty has been enacted. Thus, if a party to a treaty is not subject to taxation in the country where it is located that party cannot be regarded as a “resident” of the country as defined in the treaty. This is the case here as the Lebanese company pays almost no tax in Lebanon and therefore will not be considered within the scope of the treaty.

 

The implications

 

This decision is important as it brings clarifications concerning the determination of the scope of application of tax treaties: a company which is subject to a very low lump sum tax (a Lebanese offshore) will not be considered as a resident under the France—Lebanon Tax Treaty. Likewise, companies located in countries which have a tax treaty with France but which benefit from specific local exemptions from tax are at risk to be exposed to this decision. Individuals as well, who are exempt from tax, may not be considered as residents for treaty purposes. This could apply for example to a UK non-domiciled person who only has income front non-UK source and therefore pays no tax in the UK even though he is a resident there.

We must note, however, that the reasoning of the Supreme Court suggests that the outcome would have been different if the country of residence (in this case Lebanon) has applied a lump sum tax of a reasonable amount in order to be considered as a tax under the international tax treaty.

Groups working with international tax treaties and dealing with low tax jurisdiction (Lebanon offshore or holding, UAE for example) will be best advised to make an audit of their tax situations and to put in place alternative strategies, to ensure that there is some reasonable local tax being paid so that the entity or the individual is considered as a tax resident under the treaty.

 

August 2017

Adib Y Tohme