UK: A New Double Tax Treaty Between The United Kingdom And France

Last Updated: 8 March 2010
Article by Mark Nichols and Agathe D'Aubigny

Following the treaty rewrite in 2004 which was never ratified, it is something of a relief to report that a new double tax treaty ("DTT") between France and the United Kingdom was signed on 19 June 2008 and finally entered into force last December. In the UK, its provisions first apply to income and gains arising on or after April 2010 (6th April as regards UK income tax and capital gains tax, 1st April as regards UK corporation tax).

The new double tax treaty contains several changes amongst which the following are, in particular, worthy of attention:

  • French social taxes are now within the scope of the new DTT putting to an end situations of double-taxation;
  • Specific provisions for partnerships have been included in an attempt to provide more clarity and avoid situations of double-taxation or double-exemption;
  • The double-taxation rules relating to dividends are more favourable with respect to certain distributions;
  • An anti-abuse provision as regards interest, dividends, royalties and other income has been added;
  • Loopholes relating to real estate capital gains have been closed;
  • A new arbitration procedure is provided in cases where the mutual agreement procedure failed;
  • Favourable provisions with respect to French wealth tax for individuals have been included;
  • Loopholes used by UK non-domiciled for French income taxable only under the UK remittance basis rules have been closed.

As a whole, the new DTT represents an improvement as compared to the previous one. The French and UK tax authorities have obviously looked to bring more clarity through this new DTT, hence, improving tax certainty for the taxpayers, in particular by adhering more closely to the OECD Model.

Apart from the fact that this allowed them to justify the closing of several loopholes, e.g. loopholes based on the application of the remittance basis rules, the clarity objective does not appear to have been wholly achieved, unfortunately! For instance, while new anti-abuse provisions relating to interest, dividends, royalties and other income have been included so as to cover various situations where an abuse could be made, the broad sense of the terms used may lead to confusion. Moreover, while certain areas have been dealt with thoroughly, others have been left in the shadow (see provisions relating to partnerships which are extremely complex).

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French social taxes within the scope of the new DTT

French social taxes (contribution sociale généralisée, contribution pour le remboursement de la dette sociale, contribution sociale sur l'impôt sur les sociétés) are within the scope of the new DTT. This is a major change since those taxes did not exist when the former DTT was put into place and since, as a result, the mechanism of double-taxation avoidance could not apply to them. From now on, the French social taxes are covered by the provisions of the DTT. Therefore, for example, in case of rental income from the UK received by French individuals, the tax credit attached to the UK income tax paid may now be offset against the French social taxes levied on the same rental income.

Specific provisions for partnerships

New long and complex provisions have been included in Article 4 "Residence" of the new double tax treaty. They concern partnerships and aim to reflect the new French position regarding those entities. Indeed, contrary to the UK which has adopted the principle of transparency for partnership supported by the OECD, France had taken the view that, like its sociétés de personnes (the French most usual form of partnership), foreign partnerships were to be regarded as opaque although the income or gains realised by the entity is taxable in the partners' hands. By so considering, France prevented partnerships and their partners from benefiting from the application of double tax treaties. Since 2007, France now agrees to admit the principle of transparency to foreign partnerships for the application of the double tax treaties, however still denying it to the French sociétés de personnes. This difference of tax treatment led to potential conflicts of qualification in the application of the double tax treaty between France and the UK and, as a consequence, to double taxation (or double non-taxation) risks.

The new provisions have been introduced in an attempt to resolve those issues. They are organised on the same model as that of Article 4 of the DTT between the USA and Japan and provide that:

  • French source income received by a UK partner through a UK partnership is eligible for the benefits of the DTT as if such income was directly received by the UK resident partner.
  • UK source income received through a French partnership, wherever the residence of the partners is, benefits from the DTT. However, this is applicable only if the French partnership has its place of effective management in France, is subject to tax in France and if all its partners are, pursuant to French tax law, personally liable to tax in respect of their share of the profits of the partnership.
  • French source income received by a UK partner through a French partnership can be taxed without any restriction in France.
  • UK source income received by a French partner through a partnership established in the UK or in a third-party country is not eligible for the benefits of the DTT if France regards the partnership as non-transparent.
  • French source income received by a UK partner through a partnership established in a third-party country is eligible for the benefits of the DTT as if it was directly received by the UK partner provided that France has concluded with the third-party country an agreement containing a provision for the exchange of information with a view to the prevention of fiscal evasion.


Being in one of the particular situations that are considered in these new provisions, the taxpayer should therefore be able to determine what taxation will be charged to them by both states.

However, the DTT provides with no rule in case the taxpayer is confronted to a situation which has not been specifically addressed. The only general rule to apply, in certain cases only, is that, providing certain conditions are satisfied, a French partnership, group of persons or similar entities are to be regarded as French resident. Left with that, the taxpayer has to deal alone with the differing interpretations of the tax treatment applicable to partnerships in France and in the UK.

Dividends

Distributions of dividends by a company situated in one country to its corporate shareholder which is resident of the other country, previously subject to a withholding tax that could not exceed 5%, are now exempted from the withholding tax provided that the shareholder holds, directly or indirectly, at least 10% of the capital of the distributing company.

Specific provisions are included regarding dividends distributed by real estate investment vehicles such as the French SIIC (société d'investissement immobilier cotée), OPCI (organisme de placement collectif immobilier) or the UK REIT. Beneficial owners holding less than 10% of the capital of such vehicle can benefit from the DTT withholding tax rate of 15% on dividends received. In other cases, dividends distributed by such vehicles are taxed at the rate provided by the domestic law of the country in which the dividends arise.

Anti-abuse provision for interest, dividends, royalties and other income

An extended anti-abuse provision has been introduced as regards dividends, interests, royalties and other income. Pursuant to this provision, an abuse is constituted when it was "the main purpose or one of the main purposes" of any person concerned to take advantage of the provisions of the DTT by means of the creation or assignment of the debt claim, shares, property or other rights in respect of which the income is paid. This definition is broader than the definition of abuse of law under the French tax rules under which the transaction may be regarded as an abuse of law only if the sole purpose of which was to avoid or reduce taxation. In the previous DTT, the anti-abuse provisions only covered cases where the creation or assignment were realised "mainly for the purposes of taking advantage" of the provisions of the DTT.

The compatibility of these extended anti-abuse provisions with ECJ case law is questionable. Indeed, according to ECJ case law, a national measure restricting the freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the member state concerned (e.g. Case C-324/00, Lankhorst-Hohorst [2002] ECR I-11779). However, the ECJ concept of abuse of law is not yet settled and, in this matter, the ECJ case law is likely to further evolve.

Capital gains

The changes introduced by the 2008 DTT provisions lead to the closing of several loopholes relating to capital gains.

For example, pursuant to the previous DTT between France and the UK, in the right circumstances, French residents could realise capital gains on the sale of UK real estate without suffering any tax charge either in the UK or in France. Specifically, while the UK does not tax capital gains resulting from the sale of a UK property by a non-UK resident, the 1968 DTT provided that the gain could be taxed in the UK and that, as a consequence, it would be exempted in France. According to the 2008 DTT, the French exemption does not apply anymore. Any gain realised by a French resident upon the sale of its UK real estate will be taxed in France and in cases where he is subject to UK tax on the gain, he will be entitled to a tax credit against French tax.

Another loophole in the previous DTT allowed UK companies to sell French real estate without being taxed in France on the gain realised providing that the UK company had no permanent establishment in France. This loophole has now been closed through the new DTT.

It is also worth noting that the sale of a substantial holding in a company (Article 13 (4) of the former DTT) no longer constitutes an exception to the general rule under which gains from the alienation of property are taxable only in the state of the alienator. However, such a sale could still be subject to tax under the domestic law of the source state when the alienator was a resident of this source state at any time in the fiscal year during which the substantial holding was sold or during the six previous fiscal years.

New arbitration procedure

The mutual agreement procedure Article (Article 26) now provides for an arbitration of issues that remained unresolved after two years of a mutual agreement procedure. A similar procedure already exists with respect to transfer pricing issues (pursuant to the EC Arbitration Convention). According to the DTT, the arbitration procedure will now be compulsory for other matters.

French wealth tax for individuals

Although wealth tax is not within its scope, the new DTT provides that the French wealth tax liability of UK nationals will only be based on French assets, instead of on the net value of their worldwide assets, for the first five years after becoming a resident of France. This rule is already provided by French tax law. However, if, in the future, the domestic law changes, the DTT provision will still protect UK nationals.

UK non-dom & remittance basis

Previously, UK non-domiciled individuals could benefit from a double exoneration in situations where DTT provisions were giving the UK an exclusive right to tax but the French source income was not remitted to the UK and, consequently, was neither taxed in France nor in the UK.

Under Article 29 (1) of the new DTT, in such situations of double non-taxation, the provisions of the treaty allowing the exclusive right to tax to the UK will apply only to the amount of the income that is taxed in, i.e. remitted to, the UK. Article 29 (1) does not apply to dividends and business profits.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 08/03/2010.

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