When you are considered a French tax resident, you are required to report all your income to the French tax authorities, regardless of where you earned it. So, if you receive income from abroad, you are obliged to declare this income to the French tax authorities.
If you do so, you may be subject to double taxation. The double taxation mechanism means that French tax residents are taxed twice. Income could therefore be taxed in two countries at the same time. This situation arises when an individual or a company is located in two different countries that have not signed a tax treaty with each other.
In this case, a treaty between the government of the French Republic and the government of the United Arab Emirates (“UAE“) for the avoidance of double taxation was signed on 19 July 1989 and amended by an addendum dated 6 December 1993 (the “France-Emirates Tax Treaty“).
Under the France-UAE Tax Treaty, French residents are protected against double taxation due to the simultaneous application of the tax laws of France and the UAE.
On this point, we invite you to consult our article which goes into detail point by point on the treatment of the different sources of income within the France-Emirates Tax Treaty.
In a long-awaited decision handed down on 20 March 2023 (no. 452718), the Council of State ruled for the first time on the legal value of the France-Emirates Tax Treaty, a reasoning that can be extended to all tax treaties between France and other countries.
On the other hand, the Council of State has reiterated and limited the legal scope of Article 19.2 of the France-Emirates Tax Treaty, which had been the subject of much debate among legal practitioners and academics alike.
In this decision, the Council of State ruled that a French tax resident who receives income from the UAE is entitled to a French tax credit equal to the amount of the corresponding French tax.
The Council of State ruled that the granting of this tax credit is not subject to the condition that the income concerned has been taxed in the UAE.
In this case, an employee of a Swiss company was seconded to the UAE. Considering that he was nonetheless a French tax resident, the employee stated on his French tax return that he received tax-exempt salaries for 2013, 2014 and 2015. Following a documentary audit, the French tax authorities questioned this exemption, considering that the taxpayer should have paid tax in France on the income received in the UAE. The taxpayer was unsuccessful before the Strasbourg Administrative Court and the Nancy Administrative Court of Appeal (CAA). He therefore appealed to the Council of State.
The Council of State had to determine whether this French citizen, who carried on his business in the UAE, should be considered a resident of the UAE under the terms of Article 4 of the France-Emirates Tax Convention, and therefore whether he was covered by the provisions of paragraph 1 or 2 of Article 19 of the said Convention. In other words, the Council of State had to ask, firstly, what the taxpayer’s tax residence was and, secondly, what the tax regime was at the time for foreign income (Dubai) under his employment contract as a seconded employee of a Swiss company.
The Council of State criticised the Nancy CAA for basing its decision solely on the provisions of Article 19.2 of the France-Emirates Tax Treaty (and therefore taking account of domestic law to determine the taxpayer’s tax residence) without investigating whether the taxpayer could be considered a resident of the UAE in the light of the provisions of Article 4 of the France-Emirates Tax Treaty.
The Council of State concluded that there had been an error of law and considered that the case should be settled on its merits.
The Council emphasised that when a dispute relating to a bilateral treaty is brought before the courts, it is up to the courts first to examine whether the disputed taxation complies with French tax legislation. If this condition is met, only then does the court analyse whether or not the treaty precludes the application of French tax law.
In this decision, the Council of State first determined that the taxpayer was domiciled in France for tax purposes under the terms of Article 4 of the France-Emirates Tax Treaty and not under domestic law (I). Secondly, the Council of State interpreted the provisions of Article 19 § 2 of the France-Emirates Tax Treaty (II).
I – The application of Article 4 of the France-Emirates Tax Convention
A- On the supremacy of the France-Emirates Tax Treaty over domestic law
In this decision, the Council of State for the first time confirms the supremacy of a bilateral tax treaty over domestic law. The Council of State recalls the principle of the hierarchy of norms under the terms of article 55 of the 1958 Constitution. This article places the law resulting from duly ratified international agreements above national standards.
Consequently, in this ground-breaking ruling, the Council of State has given precedence to the provisions of the France-Emirates Tax Treaty over French tax law. 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 the light of the provisions of Article 4 of the France-Emirates Tax Treaty.
However, the Council of State nonetheless ruled against the lower courts, which had relied on Article 19.2 of the France-Emirates Tax Treaty to consider that the taxpayer was domiciled in France, ignoring Article 4 of the Treaty. This reasoning highlights the pre-eminence of the provisions of the France-Emirates Tax Treaty, since the Council of State considered that it was essential to investigate whether the taxpayer could be qualified as a resident of the Emirates within the meaning of the France-Emirates Tax Treaty.
However, before resolving the case on the merits by taking into consideration the provisions of Article 4 of the France-Emirates Tax Treaty, the Council of State recalled the provisions of Articles 4A and 4B of the CGI, which set out the conditions under which a person may 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 on all his income. Based on the evidence gathered, it was established that during the period in question, from 2013 to 2015, the taxpayer’s wife and children lived in France and occupied the house he owned. Consequently, even though the taxpayer was mainly staying in the UAE during this period and his 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 Treaty
The importance of this decision lies in the application of Article 4 of the France-Emirates Tax Treaty to determine the taxpayer’s tax residence.
In addition to recalling the provisions of the CGI, the Council of State also analysed whether the taxpayer could be considered a resident of the UAE within the meaning of Article 4 of the France-Emirates Tax Treaty. In fact, it was necessary to rule on the taxpayer’s situation with regard to this treaty.
Pursuant to the provisions of Article 4 § 2 of the France-Emirates Tax Convention, the taxpayer could be considered resident in both countries. It was therefore necessary to apply the methodology set out in Article 4(2) of the treaty to determine tax residence in such a situation, i.e. dual tax residence.
The said article specifies that the person concerned by dual residence for tax purposes is to be considered a resident of the State in which he has a permanent home available to him. In this particular case, the taxpayer’s wife and children lived in France, so it was in France that his vital interests were located. The Council of State considered that the taxpayer’s closest personal and economic ties were in France, where his wife and children lived.
In any event, the taxpayer was considered to be a French tax resident in the light of the France-Emirates Tax Treaty, and not in the light of the provisions of French law. The application of the said treaty highlights the primacy of the France-Emirates Tax Treaty.
II – The Council of State’s interpretation of Article 19(2) of the France-Emirates Tax Convention
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 Article 19 § 2 of the France-Emirates Tax Treaty. By default, this article attributes the determination of tax residence to a definition in domestic law. The erroneous interpretation of this article by the lower courts and the French tax authorities has been the same for years.
This interpretation failed taxpayers because they considered that a French tax resident’s income from a salary in the Emirates should be taxable in France. As a result, the interpretation of this article contradicted the spirit of the France-Emirates Tax Treaty, the aim of which is to avoid double taxation.
In this case, the judges of the Nancy CAA considered that the provisions of Article 19 § 2 of the said Convention were applicable. However, the Council of State criticised the lower courts for basing their decision solely on the provisions of this article without investigating whether the taxpayer could be classified as a resident of the Emirates within the meaning of Article 4 of the France-Emirates Tax Convention.
In fact, determining the criterion of residency in accordance with the provisions of Article 4 made it possible to determine whether the taxpayer was covered by the provisions of Article 19 § 1 of the France-Emirates Tax Convention, in favour of French residents, or by Article 19 § 2 of the said Convention, in favour of residents of the Emirates.
In this case, ruling on the merits, the Council of State considered that the taxpayer was a French tax resident, in accordance with the arguments developed earlier, and was covered by the provisions of Article 19 § 1 of the France-Emirates Tax Treaty. This article grants French tax residents a tax credit for salaries received in respect of their work carried out in the Emirates.
The Council of State has put an end to legal uncertainty and a recurring dispute over the application of Article 19 § 2 of the France-Emirates Tax Convention by the tax authorities and the lower courts. The fact that the taxpayer took the case all the way to the Council of State provided a clear response to this legal vacuum and asserted the supremacy of the France-Emirates Tax Convention over French tax rules. This decision restores the original meaning of the 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.
It will now be up to the taxpayer to determine his tax residence in accordance with the provisions of Article 4 of the France-Emirates Tax Treaty. Then, at the end of this analysis, it will be necessary to determine whether the taxpayer falls under paragraph 1 or 2 of Article 19 of the said Convention.
B- On the exemption from taxation of salaried income from the UAE through the tax credit mechanism
Pursuant to paragraph 1 of Article 19 of the France-Emirates Tax Treaty, the taxpayer was entitled to a tax credit chargeable against the French tax base in which such income was included. In concrete terms, the Council of State exempted from taxation income from the Emirates through the mechanism of a tax credit in the amount of the theoretical French tax on Emirati income.
In addition, 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, the 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 Emirati-source salaries, assuming that his income is exclusively from the Emirates.
In practical terms, by way of illustration, 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 his income to the French tax authorities, whether his income comes from France or the UAE. Following this declaration, the tax authorities will apply an effective tax rate taking into account all of the taxpayer’s income but will only apply this rate to income from France.
If the taxpayer, a French tax resident, earns a salary of 100,000 euros a year from his business in the Emirates and 50,000 euros a year from his business in France, he would receive total remuneration of 150,000 euros. The tax authorities will base the calculation of the tax rate on the total amount of income, i.e. 150,000 euros (the French income plus the Emirati income). However, the effective tax rate will only apply to the French income, i.e. 50,000 euros.
In conclusion, the Council of State’s decision confirms the supremacy, in accordance with the hierarchy of norms, of the France-Emirates Tax Treaty over domestic law and Article 4 of the General Tax Code, while recalling the principle of Article 55 of the Constitution. As a result, the 121 tax treaties currently in force in France take precedence over French tax legislation.
This decision has shed real legal light on a concept that had been misinterpreted for years, and for which the Council of State has provided a clear answer for the first time, as it had never been seized of such a question in relation to the Emirates.
The France-Emirates Tax Treaty has therefore regained its authenticity, enabling the introduction of a genuine system of non-double taxation of income that is favourable to expatriate taxpayers who are not French residents or who receive income from the Emirates. In addition, this decision can be applied to all existing French bilateral tax treaties.
Lastly, the judges of the Council of State have also reiterated the true scope and meaning of Article 19 of the France-Emirates Tax Treaty, which was considered to be a sword of Damocles hanging over the heads of taxpayers and which had been causing debate and fear in the legal and expatriate worlds for years, creating real legal uncertainty.
As a result, French tax residents will be exempt from tax on their earned income from the UAE thanks to the tax credit mechanism.