A French bank, acting from its head office, had advanced loans
to various branches located in China, Philippines, India,
Singapore, and Thailand. In certain cases, the interest paid on the
loans was subject to WHT in the source country, and the head office
took the position that it was entitled to a tax credit
(TC) under the relevant treaties between France
and the source jurisdictions. In other instances, no effective
foreign WHT was applied to the interest, and the head office had
taken the position that it was entitled to a TC under the "tax
sparing" mechanism of the relevant applicable treaties. During
a tax audit, the FTA took the view that no TC was available to the
head office in either case.
The lower court has decided in favor of the FTA with a reasoning
which is somewhat confusing and not very convincing (TA Montreuil,
February 9, 2015, n°1303525 and 1308999).
The court's starting point was the traditional method of
application of international tax treaties by French courts: a given
situation is first analyzed under the relevant French domestic tax
rules, and then it is ascertained whether the applicable treaty (if
any) modifies the solution provided under the domestic rules.
In respect of the loan made by the head office to the
Philippines branch, the court took the view that the treaty was not
applicable (because the branch is not a Philippines tax resident),
and therefore no TC was available, given that French domestic rules
do not provide any TC in the absence of an applicable treaty. While
it is true that the branch was not a tax resident, the more
relevant question would have been whether the interest paid by the
branch was of Philippines source.
In the case of the other jurisdictions and the relevant treaties
between them and France (China, Singapore, India, and Thailand) the
court started its analysis with a reminder of the basic applicable
rules: a resident of jurisdiction A which receives interest from a
source in jurisdiction B is liable to tax in A in respect thereof,
unless such interest is attached to a permanent establishment
(PE) A may have in B (in which case the interest
is taxable in B).
In this case, the court seemed to take the view that, while the
bank did have a PE in each of the relevant jurisdictions and the
loans were attached to the relevant PEs, the profits made on the
loans could not be attached to these PEs, i.e. the interest was
taxable only in France. The court concluded that the exclusive
taxation in France meant that no TC was available in respect of any
WHT. Again, it is difficult to follow the reasoning used by the
court: i) either the loan claim was attached to the PE as per the
court's suggestion, in which case it is not clear why the
related interest was taxable in France, or ii) the interest was
taxable in France, as per the court's conclusion, and it is not
clear why the TC was not available.
The situation should be, hopefully, clarified at the Appeal
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