Focus on the Council of State's decision of March 20, 2023, which recalls the legal value of bilateral tax treaties over French domestic law and should reassure French non-residents who are currently or planning to become expatriates
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When you are considered a French tax resident, you are then required to report all of your income to the French tax administration, regardless of where you earned that income. Thus, if you receive income from abroad, you are obliged to declare this income to the French tax administration.
In such a scenario, you might potentially face double taxation. The mechanism of double taxation implies that a French tax resident is taxed twice. Income could therefore be taxed in two countries at the same time. This situation occurs when an individual or a company is located in two distinct countries that have not concluded a tax treaty with each other.
In this case, a double tax treaty between the Government of the French Republic and the Government of the United Arab Emirates ("UAE"), to avoid double taxation, was signed on July 19, 1989 and modified by an amendment dated December 6, 1993 (the "France-UAE Tax Treaty").
Therefore, thanks to this France-UAE Tax Treaty, the French resident taxpayer is protected against double taxation resulting from the simultaneous application of the tax laws of France and the UAE. On this point, we encourage you to consult our article which details, point by point, the treatment of various income sources under the France-UAE Tax Treaty.
In a long-awaited decision rendered on March 20, 2023 (No. 452718), the Conseil d’État ruled for the first time on the legal weight of the France-UAE Tax Treaty, a reasoning that can be applied to all tax treaties between France and other countries. Furthermore, the Conseil d’État recalled and limited the legal scope of Article 19.2 of the France-UAE Tax Treaty, which had generated significant debate among legal practitioners and scholars.
In this decision, the Conseil d’État ruled that a French tax resident receiving income from the UAE can benefit from the right to a French tax credit equal to the corresponding French tax. The Conseil d’État held that granting this tax credit is not subject to the condition that the income in question has been taxed in the UAE.
In the present case, an employee of a Swiss company was seconded to the UAE. Convinced that he remained a French tax resident despite the secondment, he declared in his French tax return salaries exempt from income tax for the years 2013, 2014, and 2015. Following an audit, the French tax administration challenged this exemption, arguing that the taxpayer should have paid taxes in France on the income received in the UAE. The taxpayer's appeals were rejected by both the Administrative Court of Strasbourg and the Administrative Court of Appeal (CAA) of Nancy. Consequently, he filed an appeal in cassation before the Conseil d’État.
The Conseil d’État had to determine whether this French citizen, conducting his professional activity in the UAE, should be considered a resident of the UAE under Article 4 of the France-UAE Tax Treaty, and therefore whether his situation was governed by paragraph 1 or 2 of Article 19 of the said Treaty. In other words, the Conseil d’État had to first determine the taxpayer's tax residence and, secondly, the tax regime associated with the foreign income (Dubai) under his employment contract as a seconded employee of a Swiss company.
The Conseil d’État criticized the CAA of Nancy for relying solely on the provisions of Article 19.2 of the France-UAE Tax Treaty (thus taking domestic law into account to determine the taxpayer's tax residence) without examining whether the taxpayer could qualify as a resident of the UAE under the provisions of Article 4 of the France-UAE Tax Treaty.
The Conseil d’État concluded that a legal error had been made and decided to rule on the merits of the case.
The latter emphasized that when a dispute linked to a bilateral treaty is brought before a court, the judge must first examine whether the challenged tax is in compliance with French tax legislation. If this condition is met, only then does the judge proceed to analyze whether this treaty prevents the application of French tax legislation.
In this decision, the Conseil d’État first determined that the taxpayer was resident in France for tax purposes under Article 4 of the France-UAE Tax Treaty and not by virtue of domestic law (I). Secondly, the Conseil d’État interpreted the provisions of Article 19 § 2 of the France-UAE Tax Treaty (II).
I – The application of the provisions of Article 4 of the France-Emirates Double Tax Treaty
A- On the supremacy of the France-UAE Tax Treaty over domestic law
In this decision, the Conseil d’État establishes for the first time the supremacy of a bilateral tax treaty over domestic provisions. The Conseil d’État recalls the principle of the hierarchy of norms under Article 55 of the 1958 Constitution. This article places law derived from properly ratified international treaties above national provisions.
Consequently, through this pioneering ruling, the Conseil d’État gives precedence to the provisions of the France-UAE Tax Treaty over French tax provisions. Indeed, the Conseil d’État determined the taxpayer's tax residence not by reference to the provisions of the French General Tax Code (CGI), but in light of the provisions of Article 4 of the France-UAE Tax Treaty.
Thus, the Conseil d’État highlighted the importance of taking Article 4 of the France-UAE Tax Treaty into consideration, even though the taxpayer was undeniably a tax resident in France since they had voluntarily filed a French tax return as a French tax resident.
However, the Conseil d’État nevertheless sanctioned the lower court judges who had relied on Article 19.2 of the France-UAE Tax Treaty to rule that the taxpayer was domiciled in France, while ignoring Article 4 of said treaty.
This reasoning highlights the preeminence of the provisions of the France-UAE Tax Treaty, as the Conseil d’État held that it was essential to determine whether the taxpayer could be qualified as a resident of the UAE within the meaning of the France-UAE Tax Treaty.
On the other hand, before resolving the underlying dispute on its merits by taking into consideration the provisions of Article 4 of the France-UAE Tax Treaty, the Conseil d’État recalls the provisions of Articles 4A and 4B of the CGI, which determine the conditions under which a person can be considered a tax resident in France.
With regard to these provisions, the Conseil d’État held that the taxpayer had established their primary home in France and should be subject to tax in France on their global income. Based on 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 owned by the taxpayer. Consequently, even if the taxpayer spent most of their time in the UAE during this period and their income was from Emirati sources, they were taxable in France.
B- On the application of the provisions of Article 4 of the France-UAE Tax Treaty
The importance of this decision lies in the application of Article 4 of the France-UAE Tax Treaty to determine the taxpayer's tax residence.
Beyond recalling the provisions of the CGI, the Conseil d’État also analyzed whether the taxpayer could be considered a resident of the UAE within the meaning of Article 4 of the France-UAE Tax Treaty. Indeed, it was necessary to rule on the taxpayer's situation with regard to this treaty.
Under the provisions of Article 4 § 2 of the France-UAE Tax Treaty, the taxpayer could be considered a resident in both countries. Therefore, it was necessary to apply the methodology of Article 4 § 2 of the said Treaty to determine tax residence in the presence of such a tie, i.e., dual tax residence.
This article specifies that a person with dual tax residence must be considered a resident of the State where they have a permanent home. In this specific case, the taxpayer's wife and children lived in France, which means his vital interests were in France. Indeed, the Conseil d’État held that the taxpayer's closest personal and economic ties were in France, where his spouse and children resided.
In any event, the taxpayer was deemed to be a French tax resident in light of the France-UAE Tax Treaty, and not under the provisions of French domestic law. The application of said treaty highlights the supremacy of the France-UAE Tax Treaty.
II – The Interpretation of the Provisions of Article 19 § 2 of the France-Emirates Tax Treaty by the Conseil d'État
A- On the legal clarification of the interpretation of Article 19 § 2 of the France-Emirates Tax Treaty
By this decision, the Conseil d’État has for the first time openly put forward an interpretation of Article 19 § 2 of the France-Emirates Tax Treaty. Indeed, this article assigns by default the determination of tax residence to a definition under domestic law. Thus, the erroneous interpretation by the judges of the lower courts as well as the French tax administration regarding this article had been identical for years.
This interpretation was detrimental to taxpayers since, through this interpretation, they considered that a French tax resident's income coming from an Emirates salary had to be taxable in France. Consequently, the interpretation of this article was in contradiction with the spirit of the France-Emirates Tax Treaty, the objective of which is to avoid double taxation.
In this case, the lower court judges of the CAA of Nancy considered that the stipulations of Article 19 § 2 of the said Treaty were applicable. However, the Conseil d’État reproached the lower court judges for having based their decision solely on the provisions of this article without investigating whether the taxpayer could be qualified as a resident of the Emirates within the meaning of Article 4 of the France-Emirates Tax Treaty.
Indeed, determining the residence criterion in accordance with the provisions of Article 4 made it possible to determine whether the taxpayer fell under the provisions of Article 19 § 1 of the France-Emirates Tax Treaty, in favor of French residents, or Article 19 § 2 of the said Treaty, in favor of residents of the Emirates.
In this instance, settling the case on the merits, the Conseil d’État considered that the taxpayer was a French tax resident, in accordance with the argument previously developed, and fell under the provisions of Article 19 § 1 of the France-Emirates Tax Treaty. This article grants the French tax resident a tax credit regarding the salaries received for their 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 Conseil d’État has therefore made a true interpretation of the provisions of Article 19 § 2 of the France-Emirates Tax Treaty. Thus, being a French tax resident does not automatically imply taxation on income received in the Emirates.
The Conseil d’État has put an end to legal uncertainty and recurring litigation regarding the application of Article 19 § 2 of the France-Emirates Tax Treaty by the tax administration and lower court judges. The fact that the taxpayer took the case to the Conseil d’État made it possible to provide a clear answer to this legal vacuum and to assert the supremacy of the France-Emirates Tax Treaty over French tax standards. This decision restores the primary meaning of this agreement between France and the Emirates; French tax residents will no longer be taxed in France on income from the Emirates due to the application of Article 19 § 2 of the France-Emirates Tax Treaty.
Thus, it will henceforth be necessary to determine the taxpayer's tax residence in light of the provisions of Article 4 of the France-Emirates Tax Treaty. Then, following this analysis, it will be appropriate to determine whether the taxpayer falls under paragraph 1 or 2 of Article 19 of the said Treaty.
B- On the exemption from taxation of employment income from the UAE through the tax credit mechanism
In application of paragraph 1 of Article 19 of the France-Emirates Tax Treaty, the taxpayer benefited from the right to a tax credit offsettable against French tax, in the basis of which this income is included. Concretely, the Conseil d’État exempted employment income from the Emirates from taxation through the mechanism of a tax credit equal to the amount of theoretical French tax on the Emirati income.
Furthermore, the Conseil d’État stated that the allocation of the tax credit does not depend on the actual taxation of the income from the Emirates in the Emirates. Indeed, 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 Conseil d’État allows a situation of double non-taxation of UAE-source salaries, in the event that this income comes exclusively from the Emirates.
Concretely, as an illustration, a taxpayer who is a French tax resident and carries out a professional activity in Dubai or Abu Dhabi must declare all of their income to the French tax administration, whether their income comes from France or the UAE. Following this declaration, the administration will apply an effective tax rate taking all of their income into consideration, but will apply this rate only on their income coming from France.
If the taxpayer, a French tax resident, receives a salary of 100,000 euros per year as part of their activity in the Emirates and 50,000 euros per year as part of their activity in France, they therefore benefit from a total remuneration of 150,000 euros. To determine the tax rate calculation, the tax administration will base it on the total amount of income, i.e., 150,000 euros (the French income added to the Emirati income). On the other hand, the effective tax rate will only be applicable to the French income, i.e., on 50,000 euros.
To conclude, the decision of the Conseil d’État consecrates the supremacy, in accordance with the hierarchy of norms, of the France-Emirates Tax Treaty over 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 have a higher value than French tax standards.
This decision has provided real legal clarification on a concept that had been misinterpreted for years, and to which the Conseil d’État has brought a clear answer for the first time, as it had never before been referred to with such a question concerning the Emirates.
This France-Emirates Tax Treaty thus 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 replicated for all bilateral French tax treaties existing to date.
Finally, the judges of the Conseil d’État also recalled the true scope and meaning of Article 19 of the France-Emirates Tax Treaty, which was considered a sword of Damocles hanging over the taxpayer's head, and which had been debated and had frightened the legal and expatriate world for years by establishing real legal uncertainty.
Thus, the French tax resident will be exempt from taxation on their employment income from the UAE thanks to the tax credit mechanism.
