When you are considered a French tax resident, you are required to report all of your income to the French tax authorities, regardless of where you earned it. Therefore, if you receive income from abroad, you are required to declare this income to the French tax authorities.
In such a case, you could potentially face double taxation. The double taxation mechanism means that the French tax resident is taxed twice. Income could therefore be taxed in two countries at the same time. This situation arises when the individual or a company is located in two separate countries that have not concluded a tax treaty with each other.
In this case, an agreement between the government of the French Republic and the government of the United Arab Emirates (" WATER "), with a view to avoiding double taxation, was signed on July 19, 1989 and amended by an amendment dated December 6, 1993 (the " France-Emirates Tax Convention ").
Therefore, thanks to this France-Emirates Tax Convention, the French resident, taxpayer, is protected against double taxation due to the simultaneous application of the tax laws of France and WATER. We invite you to consult on this point our article which returns in detail point by point to the treatment of the different sources of income within the France-Emirates Tax Convention.
In a long-awaited decision dated March 20, 2023 (No. 452718), the Council of State ruled for the first time on the legal value of the France-Emirates Tax Convention, a reasoning that can be extended to all tax conventions between France and other countries. On the other hand, the Council of State came to recall and limit the legal scope of Article 19.2 of the France-Emirates Tax Convention which caused a lot of ink to flow among legal practitioners, but also in doctrine.
In this decision, the Council of State considered that the French tax resident who receives income from WATER, may benefit from the right to a French tax credit which is equal to the amount of the corresponding French tax. The Council of State considered that the granting of this tax credit is not subject to the condition that the income concerned has been taxed in WATER.
In this case, an employee of a Swiss company was seconded to WATERThe latter, considering that he was nevertheless a French tax resident, indicated in his French income tax return that he received salaries exempt from income tax for the years 2013, 2014 and 2015. Following a documentary audit, the French tax authorities challenged this exemption, considering that the taxpayer should have paid taxes in France on the income received in WATERThe taxpayer was unsuccessful before the Strasbourg Administrative Court or the Nancy Administrative Court of Appeal (CAA). As a result, he appealed to the Council of State.
The Council of State had to investigate whether this French citizen, carrying out his activity within the WATER, should be considered a resident of the WATER under the terms of Article 4 of the France-Emirates Tax Convention, and therefore if it fell under the provisions of paragraph 1 or 2 of Article 19 of said Convention. In other words, the Council of State had to ask itself firstly what the taxpayer's tax residence was and secondly what the tax regime then associated with foreign income (Dubai) was under his employment contract as a seconded employee of a Swiss company.
The Council of State criticizes the Nancy CAA for having based itself solely on the provisions of article 19.2 of the France-Emirates Tax Convention (and therefore the taking into account of domestic law to determine the tax residence of the taxpayer) without seeking to determine whether the latter could be a resident of WATER with regard to the provisions of Article 4 of the France-Emirates Tax Convention.
The Council of State concluded that there had been an error of law and considered that the case should be settled on the merits.
The latter emphasizes that when a dispute, linked to a bilateral convention, is brought before the judge, it is up to him to first examine the conformity of the contested tax with French tax legislation. If this condition is met, only then does the judge proceed with the analysis in order to determine whether or not this convention opposes the application of French tax legislation.
In this decision, the Council of State initially determined that the taxpayer was domiciled for tax purposes in France under the terms of theArticle 4 of the France-Emirates Tax Convention and not under domestic law (I). In a second step, the Council of State interpreted the provisions of theArticle 19 § 2 of the France-Emirates Tax Convention (II).
I – Application of the provisions of Article 4 of the France-Emirates Tax Convention
A- On the supremacy of the France-Emirates Tax Convention over domestic law
In this decision, the Council of State has for the first time established the supremacy of a bilateral tax treaty over domestic standards. The Council of State recalls the principle of the hierarchy of standards under Article 55 of the 1958 Constitution. This article places the law arising from duly ratified international conventions above domestic standards.
Consequently, by this innovative decision, the Council of State gives precedence to the provisions of the France-Emirates Tax Convention on French tax standards. Indeed, the Council of State determined the taxpayer's tax residence not by reference to the provisions of the General Tax Code (CGI) but in light of the provisions of Article 4 of the France-Emirates Tax Convention.
Thus, the Council of State highlighted the importance of taking into consideration Article 4 of the France-Emirates Tax Convention, even if the taxpayer was incontestably a tax resident in France since he himself had submitted a French tax declaration as a French tax resident.
However, the Council of State nevertheless sanctioned the trial judges who had relied on Article 19.2 of the France-Emirates Tax Convention to consider that the taxpayer was domiciled in France, ignoring Article 4 of the said convention.
This reasoning makes it possible to highlight the preeminence of the provisions of the France-Emirates Tax Convention, since the Council of State considered that it was essential to determine whether the taxpayer could be qualified as a resident of the Emirates within the meaning of the France-Emirates Tax Convention.
On the other hand, before resolving the disputed case on the merits by taking into consideration the provisions of Article 4 of the France-Emirates Tax Convention, the Council of State recalls the provisions of Articles 4A and 4B of the CGI which determine the conditions for a person to be considered a tax resident in France.
In light of these provisions, the Council of State considered that the taxpayer had established his main home in France and that he should be subject to tax in France for all of his income. According to the evidence gathered, it is established that during the period in question, from 2013 to 2015, the taxpayer's wife and children resided in France and occupied the house he owned. Consequently, even if the latter mainly stayed in WATER during this period and that this income was from an Emirati source, he was taxable in France.
B- On the application of the provisions of Article 4 of the France-Emirates Tax Convention
The importance of this decision lies in the application of Article 4 of the France-Emirates Tax Convention to determine the taxpayer's tax residence.
Beyond the reminder of the provisions of the CGI, the Council of State also analyzed whether the taxpayer could be considered a resident of WATER in the sense ofArticle 4 of the France-Emirates Tax Convention. Indeed, it was appropriate to decide on the taxpayer's situation with regard to this convention.
In application of the provisions of theArticle 4 § 2 of the France-Emirates Tax Convention, the taxpayer could be considered as resident in both countries. Therefore, it was appropriate to apply the methodology of Article 4 § 2 of the said Convention, to determine the tax residence in the presence of such a situation, i.e. a double tax residence.
The said article specifies that the person concerned by a dual tax residence must be considered a resident of the State where he or she has a permanent home. In this specific case, the taxpayer's wife and children lived in France, so his or her vital interests were located in France. Indeed, the Council of State considered that the taxpayer's closest personal and economic ties were in France, where his or her wife and children resided.
In any event, the taxpayer was considered a French tax resident in light of the France-Emirates Tax Convention, and not with regard to the provisions of French law. The application of the said convention highlights the primacy of the France-Emirates Tax Convention.
II – The interpretation of the provisions of Article 19 § 2 of the France-Emirates Tax Convention by the Council of State
A- On the legal clarification of the interpretation of article 19 § 2 of the France-Emirates Tax Convention
With this decision, the Council of State has for the first time brought to light an interpretation of theArticle 19 § 2 of the France-Emirates Tax Convention. Indeed, this article attributes by default the determination of tax residence to a definition in domestic law. Thus, the erroneous interpretation of the trial judges as well as the French tax administration concerning this article has been identical for years.
This interpretation was lacking for taxpayers because through this interpretation, the latter considered that the income of a French tax resident from a salary in the Emirates should be taxable in France. Therefore, the interpretation of this article was in contradiction with the spirit of the France-Emirates Tax Convention, the aim of which is to avoid double taxation.
In this case, the trial judges of the Nancy CAA considered that the stipulations of theArticle 19 § 2 of the said Convention was applicable. However, the Council of State criticizes the trial judges for having based themselves solely on the provisions of this article without having investigated whether the taxpayer could be qualified as a resident of the Emirates in the sense ofArticle 4 of the France-Emirates Tax Convention.
Indeed, the determination of the resident criterion in accordance with the provisions of Article 4 made it possible to determine whether the taxpayer fell under the provisions of theArticle 19 § 1 of the France-Emirates Tax Convention, in favor of French residents or of theArticle 19 § 2 of the said Convention, in favor of residents of Emirates.
In this case, settling the case on the merits, the Council of State considered that the taxpayer was a French tax resident, in accordance with the argument developed previously, and fell under the provisions of theArticle 19 § 1 of the France-Emirates Tax ConventionThis article grants the tax resident of France a tax credit, concerning the salaries received in respect of his activity carried out within the Emirates.
In any case, a French tax resident can receive Emirati income without paying tax on this income in France. The Council of State has therefore made a true interpretation of the provisions of the article 19 § 2 of the France-Emirates Tax Convention. Thus, being a French tax resident does not automatically imply taxation on income received in Emirates.
The Council of State has put an end to legal uncertainty and recurring litigation regarding the application of theArticle 19 § 2 of the France-Emirates Tax Convention, by the tax administration and the trial judges. The fact that the taxpayer took the case to the Council of State made it possible to provide a clear response to this legal vacuum and to assert the supremacy of the France-Emirates Tax Convention on French tax standards. This decision restores the original meaning of this agreement between France and the Emirates, French tax residents will no longer be taxed in France on income from Emirates, due to the application of theArticle 19 § 2 of the France-Emirates Tax Convention.
Thus, it will now be up to determine the taxpayer's tax residence with regard to the provisions of Article 4 of the France-Emirates Tax Convention. Then, at the end of this analysis, it will be necessary to determine whether the taxpayer falls under the paragraph 1 or 2 of Article 19 of the said Convention.
B- On the exemption from taxation of employee income from the UAE through the tax credit mechanism
In application of the paragraph 1 of Article 19 of the France-Emirates Tax Convention, the taxpayer benefited from the right to a tax credit deductible from the French tax in the base of which this income is included. Concretely, the Council of State exempted from taxation the salary income from the Emirates through the mechanism of a tax credit of the amount of the theoretical French tax on Emirati income.
Furthermore, the Council of State states that the allocation of the tax credit does not depend on the actual taxation of income from the Emirates in the Emirates. In fact, French tax credits applicable to Emirati income are applicable, even if these salaries are not taxable in the Emirates.
Thus, by granting a tax credit to a French tax resident receiving salaries in the Emirates, the Council of State allows a situation of double non-taxation of salaries from Emirati sources, in the event that their income comes exclusively from the Emirates.
In concrete terms, for example, a taxpayer who is a French tax resident and who carries out a professional activity in Dubai or Abu Dhabi must provide proof of all of their income to the French tax authorities, whether it comes from France or the UAE. Following this declaration, the authorities will apply an effective tax rate, taking into account all of their income, but will only apply this rate to their income from France.
If the taxpayer, a French tax resident, receives a salary of €100,000 per year from his or her work in the Emirates and €50,000 per year from his or her work in France, the latter therefore benefits from a total remuneration of €150,000. The tax authorities will base their calculation of the tax rate on the total amount of income, i.e. €150,000 (the French income plus the Emirati income). However, the effective tax rate will only apply to French income, i.e. €50,000.
In conclusion, the decision of the Council of State allows the supremacy to be established, in accordance with the hierarchy of standards, of the France-Emirates Tax Convention in the face of domestic law and Article 4 of the CGI by recalling the principle of Article 55 of the Constitution. Thus, the 121 tax treaties currently in force in France therefore have a value superior to French tax standards.
This decision provided real legal clarification on a concept that had been misinterpreted for years and for which the Council of State provided a clear answer for the first time, the latter having never been asked to address such a question in relation to the Emirates.
This France-Emirates Tax Convention therefore regains its authenticity and allows for the establishment of a real regime of non-double taxation of income favorable to expatriate taxpayers, non-French residents or those receiving income from the Emirates. Furthermore, this decision can be duplicated in all existing French bilateral tax treaties to date.
Finally, the judges of the Council of State also recalled the true scope and meaning of Article 19 of the France-Emirates Tax Convention, which they considered to be a sword of Damocles hanging over the taxpayer's head and which had been the subject of debate and frightening the legal world and expatriates for years by creating real legal uncertainty.
Thus, the French tax resident will be exempt from taxation on his salary income from the UAE thanks to the tax credit mechanism.
