The State Council makes a preliminary decision

The State Council makes a preliminary decision

In a ruling dated May 20[1]the Council of State rules for the first time on the principle of application of the tax treaty that binds France to the State of the beneficial owner when the latter is clearly defined.

Judgment context

The French company Planet initially entered into a fitness program distribution contract with a New Zealand company. Then I changed the contractual department and signed a sub-distribution contract for the same programs with a Belgian company and then with a Maltese company. Payments made by the French company (which were eventually classed as royalties) benefited from exemption from withholding tax, whereas they would have been subject to a withholding tax of 10% under the Franco-New Zealand tax treaty.

The tax authorities questioned the beneficial owner status of the Belgian and Maltese companies and reorganized Planet by automatically applying the French-New Zealand tax treaty, holding the New Zealand company as the real recipient of payments made by Planet.

The Court of Appeal in Marseille essentially ruled on the eligibility of payments (royalties or services) without answering arguments about the relevance of applying the New Zealand tax treaty.

Put the question to the State Council

This is exactly the question before the Council of State: In the event that the beneficial owner appears to be resident in a country other than that of the apparent beneficiary, the agreement must be made between France and the country of residence of the owner’s beneficiary?

Until now, the Council of State had to rule in cases where the status of the beneficial owner was challenged by the tax authorities and led to the exclusion of the benefit from the tax treaty with the state of the apparent beneficiary. This was also most of the time the position of the tax authorities in the event of an audit, particularly with regard to dividends, and adjustments then led to the pure and simple application of withholding tax under local law.

In the case of Planet, the tax authorities not only annulled the tax treaties with Belgium and Malta, but on the contrary automatically applied the tax treaty between France and New Zealand, holding that the New Zealand company was the beneficial owner of the payments made by Planet.

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Thus, the question of principle settled by the Council of State is whether the tax treaty with the State of the Beneficial Owner can be enforced in the presence of a payment being made to an entity which is only the ostensible beneficiary.

The answer did not seem clear given the wording of Article 12 of the French New Zealand tax treaty which mentions royalties Pay For the resident and the person who Receive proceeds. No doubt a literal interpretation of this article would have led to the conclusion that Article 12 could not apply, since there was no evidence that the New Zealand company had collected royalties.

Broad interpretation of tax treaties

The Council of State adopts a broad interpretation of Article 12 of the French New Zealand Tax Treaty by ruling that both the subject matter of Article 12 and the comments of Article 12 of the OECD Model Treaty lead to an interpretation of the provisions of the new French agreement. The New Zealand tax treaty applies to royalties from French sources whose beneficial owner is a resident of New Zealand, even if they are paid to a broker incorporated in a third country.

On the subject matter of the agreement, the OECD Commentaries on Article 12 make it clear that the term “beneficial owner” must be understood in context and in light of the object and purpose of the agreement, in particular for the avoidance of double taxation and the prevention of tax evasion and evasion. Even if the decision does not specify this, the Council of State gives priority to the elimination of double taxation and therefore does not mention the fight against tax evasion, while until now the idea of ​​the beneficial owner was considered a stand-alone element of the arsenal of fighting arbitrariness in the tax treaty.

While Article 12 of the Franco-New Zealand Tax Treaty was not drafted in the same terms as the OECD Model Agreement, the Council of State relies on the Commentaries of the Model Agreement, including those subsequent to the Agreement, to rule that there is nothing to prevent the application of the Tax Agreement With the state of the specified beneficial owner. It should be noted that these comments do indeed confirm that the concept of the beneficial owner is intended not only to exclude pure intermediaries from benefiting from the tax treaty but also to allow the “beneficial owners” to benefit from it.[2].

And in the special case, the beneficial owner was determined by the tax authorities themselves. However, the Council of State censures the ruling of the Court of Appeal in Marseille, after the court accepted the application of the tax treaty between France and New Zealand without investigating whether the New Zealand company was actually the beneficial owner.

The Council of State maintains that if the beneficial owner is clearly identified, the tax treaty with the state of the latter must be applied

Accordingly, the Council of State ratifies, in principle, the application of the tax treaty which binds France to the State of the beneficial owner once the latter is clearly identified. This principle applies both on the part of the tax administration and on the part of the taxpayer. This approach is valid a fortiori for all tax treaties drafted according to the OECD model, and also for dividends and interest since the notion of a beneficial owner is also suitable for the application of provisions on such income.

However, the General Rapporteur is careful to specify, in her conclusions, that there is no obligation to systematically identify the beneficial owner when it appears that the recipient of the sums is not the beneficial owner. This lack of compliance was previously mentioned by the European Court of Justice in the “Danish” judgments of February 2019 (CJEU, February 26, 2019, C-115/16, C-118/16, C-119/16 and C-299/16) on the interpretation of the concept of beneficial owner within the meaning of the European Directive on Interest and Royalties (which largely referred to OECD comments that are relevant to the interpretation of the Directive).

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In practice, tax authorities rarely have an interest in determining the beneficial owner because the application of a tax treaty would reduce the amount of adjustment determined on the basis of local law. However, where there are elements to identify the beneficial owner, for example because it will require information from the countries of residence of the companies concerned, it will now have to agree to apply the tax treaty with the beneficial owner’s country rather than simply applying French domestic law.

Therefore, it is often for the taxpayer to request the application of the tax treaty with the State of the beneficial owner, either within the framework of a tax audit or before the judges, provided that he proves the elements that allow him to be determined.

The decision of the State Council has an important practical effect: it calls into question the position of the tax administration, which was content to deny the status of beneficial owner and the application of withholding tax under local law. On the merits, it will still be necessary to prove the identity of the beneficial owner in order to claim application of the tax treaty, which can be complicated in practice. This is what the Court of Appeal in Marseille, to which the case has been referred, will do with the task of examining the contractual and financial links between the Belgian, Maltese and New Zealand companies.

The article was published in Option Finance on 08/05/2022

[1] CE, May 20, 2022, No. 444451, Société Planet.

[2] Paragraph 4.6 of the Commentary on Article 12 of the 2017 Form.


Agnès de l’Estoile Campi, Associate Attorney in Tax Law

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