France: A Person Exempted From Tax Does Not Qualify As A "Resident" Under A Tax Treaty

Last Updated: 5 January 2017
Article by Christophe Flaicher, Bertrand Hermant and Michael Jaffe

A person is entitled to claim treaty benefits if that person could be considered as a resident under a tax treaty. The criteria to be met to qualify as a tax resident were not clear for some individuals or entities who were subject to tax but did not actually pay tax, as a result of their status or the availability of a tax holiday in their home country. This issue most commonly arises when dealing with foreign pension funds or non-profit organisations with respect to entities or individuals who do not pay any income tax in their home country, as is the case in some Middle Eastern countries.

The French Supreme Court1 stated that a company that does not pay any taxes in its home country, because of its status or activity, cannot be considered as a resident under a tax treaty. The Court considered that the fact that the person falls within the scope of the tax is not sufficient.

However, the question remains open for entities or individuals who are subject to tax on a specific basis, such as a forfeit basis. It is expected that this issue will be resolved soon in a case that is pending before the Administrative Court of Appeal. The case will have to determine whether taxation on a specific basis could be viewed as being "liable to tax" pursuant to a tax treaty and, accordingly, could be sufficient for the entity or individual to qualify for the right to benefit from tax treaty provisions.

It is worth noting that these cases dealt with the tax treaties signed by France with Germany, Spain and Lebanon. The analysis is dependent on the relevant tax treaty provisions.

Our recommendation

These recent decisions may have an impact on certain restructurings, if they rely upon tax treaty provisions. Therefore, we would recommend reviewing such structures, and the tax status of individuals, in order to check whether they may still rely upon tax treaty provisions following these recent decisions.

Acquisition of predominant real estate company's shares – end of the tax-free revaluation of the real estate held through an SCI?

When a company acquires a transparent vehicle (such as an SCI) holding a real estate asset, the acquisition price of the shares usually takes account of the latent capital gain at the level of the transparent vehicle. This means that the purchaser will be subject to tax on this latent capital gain at the time of the sale of the shares or the building.

For instance, assume that an SCI owns an asset with a tax basis equal to 50 and a fair market value of 100. The SCI shares are bought for 100 by an investor. The investor realises a step-up at the level of the SCI: the tax value of the asset will increase from 50 to 100. The investor will then be allowed to amortise the asset on the revalued basis, but he will also be subject to tax on the revaluation gain as the SCI is a transparent entity.

However, it is possible to eliminate the taxation of such latent capital gain by winding-up the transparent entity following the share acquisition. In such a case, the revaluation gain resulting from the step-up will increase the tax value of the shares (i.e. from 100 to 150, in our example). The winding-up would result in a capital loss (i.e. 150-100= (50)) for the shareholder which will be offset against the revaluation gain (i.e. 50).

The tax treatment of such operation has been confirmed by a ruling published by the French tax authorities in 2007 and, since then, many operators have taken advantage of this tax-free revaluation.

However, a recent decision dated 6 July 2016 (Sté Lupa) shone a light on this scheme, stating that this operation is only possible when there is effective double-taxation at the level of the SCI partner, which is not the case for a revaluation made immediately after the acquisition. That being said, this decision might be based on the specific fact-pattern of an intra-group restructuring involving a Luxembourg company.

In any event, operators should still be able to rely upon the ruling, but the French tax authorities may decide to revoke it at any time. In addition, there are some alternative strategies that may be implemented in order to eliminate the risk of the purchaser being taxed on this latent capital gain.

Our recommendation

Operators in the process of acquiring French real estate property or who have already purchased such properties through transparent vehicles such as an SCI should rethink their tax strategy following this recent decision.

Footnotes

1 French Supreme Court, 9 November 2015, n°370054 and n°371152

2 French Constitutional Court, 22 July 2016, n° 2016-554

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.