Bilateral tax conventions: specifications relating to the conditions of their enforceability

December 28th 2015

The bilateral tax conventions signed by France had the purpose, in particular, of avoiding double taxations which could result from the legislation of these States. They may also provide for specific taxation rules. For example, numerous conventions provide for the limitation of the amount of the deductions at source on the intra-group dividends.

These conventions, often drafted according to the model drawn up by the OECD, set forth that the term of “resident of a contracting State” must be understood as any person who, by virtue of the legislation of said State, is subject to tax in this State, as a result of his domicile, residence, his director’s head office or any other analogous criteria.

In two rulings of November 9, 2015, concerning the Franco-German and Franco-Spanish tax conventions, the Conseil d’Etat judged that a person exempt from tax in a contracting State as a result of his status may not be considered as being subject to this tax, nor, as a result, as a resident of this State for the application of the convention. Therefore, this person is not entitled to assert the provisions of the bilateral convention.

This situation, which may appear to be surprising, is far from hypothetical.

In the first matter, a pension organisation with its head office in Germany, had received dividends, in the year 2000, from French companies subject to withholding tax at 25 % in application of the French legislation. This pension oragnisation therefore requested the partial return of this withholding tax by asserting the rate of 15 % provided by the Franco-German convention. Nevertheless, noting that the pension organisation was exempt from corporate tax in Germany, the Conseil d’Etat judged that it could not be considered as a resident of Germany within the meaning of the convention, and consequently, that it could not assert the stipulations of this convention.

The solution was extended, in the second matter, to Spanish pension funds subject to corporate tax in Spain at a rate equal to zero. The Conseil d’Etat ruled that this circumstance would eliminate the capacity of taxpayer within the meaning of the convention. Therefore, the Spanish pension funds are not entitled to assert the provisions of the Franco-Spanish tax convention limiting the rate of withholding tax at 15% on the intra-group dividends.

Claire Lachaux