France-Canada tax treaty: impacts for companies

The tax treaty aimed at avoiding double taxation and preventing tax evasion with respect to taxes on income and wealth between the French government and the government of Canada was signed on May 2, 1975, and was subsequently amended in 1987, 1995, and 2010 (the "Treaty").

The Treaty provides specific provisions regarding corporations and enterprises established in Canada but which continue to have links with France.

The taxes covered by the tax Treaty are:

• income tax, including in the case of real estate sales;

• corporate tax on companies registered in France or Canada;

• tax on transfer duties on gratuitous transfers (only with respect to France).

We will review the various sources of income and their taxation point by point.

The concept of permanent establishment

The tax Treaty localizes companies through the concept of a "permanent establishment", namely a fixed place of business through which an enterprise carries on all or part of its business: place of management, branch, office, factory, workshop...

The concept of tax residence

Companies that have their effective place of management in France and whose partners, shareholders, or other members are personally subject to tax on their share of profits under domestic French legislation are deemed to be tax residents in France.

Income from immovable property

Income derived from immovable property of an enterprise as well as income used for the practice of an independent profession are taxed respectively in the country where the property is located.

When a French company has shares, interests, or assets in another company that gives it access to the enjoyment of immovable property located in Canada, the income derived from the direct use, letting, or use of the right of enjoyment is impossible in Canada.

Business profits

The profits of an enterprise that is a tax resident in France are taxable only in France, unless the enterprise carries on business in Canada through a permanent establishment situated therein. If applicable, the profits of the enterprise would be taxable in Canada.

When a French enterprise carries on business in Canada through a permanent establishment, the profits made by the permanent establishment are taxable in France and in Canada.

Shipping and air transport

Profits derived by a French enterprise from the operation of ships or aircraft in international traffic shall be taxable only in France.

If the enterprise derives its profits from the operation of ships or aircraft used to transport passengers or goods within the same contracting State (France or Canada), the profits will be taxed in that State.

Associated enterprises

When a Canadian enterprise and a French enterprise are linked financially or in their commercial relations (when a French enterprise participates directly or indirectly in the management, control, or capital of a Canadian enterprise, or when the same persons participate directly or indirectly in the management, control, or capital of both enterprises), the profits made by one of the two enterprises may be included in the profits made by the other enterprise.

Consequently, profits made by a French enterprise, included in those made by a Canadian enterprise, will be taxable in Canada.

Dividends

French enterprises that have invested in shares or financial securities of Canadian companies and receive dividends derived from these investments will be taxable in Canada, but they will also be subject to withholding tax in France in an amount ranging between 5% and 15% of the gross amount of the dividends.

When a French enterprise derives profits or income from an activity in Canada, Canada cannot levy any tax on the dividends received by the company and cannot levy any tax on undistributed profits.

There is, however, an exception: if the dividends are paid to a Canadian resident or if the dividends are connected with a permanent establishment or a fixed base situated in Canada.

Interest

Canadian companies receiving interest from French debt claims are taxed on this income in Canada.

However, as with dividends, this interest will also be taxable in France (tax which will be limited to 10% of the gross amount of the interest), except in certain hypotheses restrictively set forth by the Treaty.

Royalties

All remuneration arising from an intellectual and/or industrial property right (e.g., copyright, patent, trademark, manufacturing process, computer coding, etc.) will be paid in the country of residence of the recipient. Nevertheless, here again, if you are a tax resident in Canada and you receive remuneration from royalties arising in France, you would also be taxable in France, up to a limit of 10% of the gross amount of the income.

There are, however, exceptions to this double taxation, which are restrictively set forth by the Treaty, including when the royalties arise from copyrights, the use of or the right to use computer software, patents, or cultural motion picture films.

Capital gains

Companies that hold real estate in France, or shares, interests, or rights in a company whose assets consist principally of real estate situated in France, will have the gains derived from the sale of such property or shares taxable in France.

To find out more about what the tax Treaty provides for individuals, you can refer to the article “Focus on the tax treaty between France and Canada: its impacts for individuals”