Focus on the Council of State's decision of March 20, 2023, which reiterates the legal value of bilateral tax treaties over French domestic law and should reassure French non-residents, both current and future 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 authorities, regardless of where you earned that income. Thus, if you benefit from income originating from abroad, you are therefore obliged to declare this income to the French tax authorities.
In such an event, you could potentially face double taxation. The mechanism of double taxation implies that the French tax resident is taxed twice. The 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 distinct countries that have not concluded a tax treaty between them.
In this case, a 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 amended by an agreement 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 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 under the France-UAE Tax Treaty.
In a long-awaited decision rendered on March 20, 2023 (No. 452718), the Council of State ruled for the first time on the legal status of the France-UAE Tax Treaty, a reasoning that can be extended to all tax treaties between France and other countries. Furthermore, the Council of State recalled and restricted the legal scope of Article 19.2 of the France-UAE Tax Treaty, which had generated much discussion among legal practitioners as well as in legal theory.
In this decision, the Council of State held that a French tax resident who receives income from the UAE can benefit from the right to a French tax credit that is equal to the amount of the corresponding French tax. The Council of State held that the granting of this tax credit is not subject to the condition that the income concerned must have been taxed in the UAE.
In the present case, an employee of a Swiss company was seconded to the UAE. Considering that he was nevertheless a French tax resident, he declared in his French tax return that he received salaries exempt from income tax for the years 2013, 2014, and 2015. Following a desk 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 appeal was unsuccessful before both the Administrative Court of Strasbourg and the Administrative Court of Appeal (CAA) of Nancy. Consequently, he filed an appeal on points of law before the Council of State.
The Council of State had to determine whether this French citizen, carrying out his activity in the UAE, should be considered a resident of the UAE under Article 4 of the France-UAE Tax Treaty, and thus whether he fell under the provisions of paragraph 1 or 2 of Article 19 of the said Treaty. In other words, the Council of State first had to determine the taxpayer's tax residence and then the tax regime associated with the foreign income (Dubai) under his employment contract as a seconded employee of a Swiss company.
The Council of State criticized the CAA of Nancy for basing its decision solely on the provisions of Article 19.2 of the France-UAE Tax Treaty (thereby relying on domestic law to determine the taxpayer's tax residence) without examining whether the latter could be qualified as a resident of the UAE under the provisions of Article 4 of the France-UAE Tax Treaty.
The Council of State concluded that there was an error of law and decided that the case should be settled on its merits.
The latter pointed out that when a dispute concerning a bilateral treaty is brought before a judge, the judge must first examine whether the disputed taxation complies with French tax law. Only if this condition is met does the judge proceed to analyze whether this treaty prevents the application of French tax legislation.
In this decision, the Council of State first determined that the taxpayer was resident for tax purposes in France under Article 4 of the France-UAE Tax Treaty and not under domestic law (I). Secondly, the Council of State interpreted the provisions of Article 19 § 2 of the France-UAE Tax Treaty (II).
I – Application of the provisions of Article 4 of the France-Emirates 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 rules. 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 international treaties, duly ratified, above national rules.
Consequently, through this innovative ruling, the Conseil d’État gives precedence to the provisions of the France-UAE Tax Treaty over French tax rules. 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 into consideration Article 4 of the France-UAE Tax Treaty, even though the taxpayer was undeniably a tax resident in France since he 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 consider that the taxpayer was domiciled in France, while ignoring Article 4 of the said treaty.
This reasoning highlights the preeminence of the provisions of the France-UAE Tax Treaty, as the Conseil d’État considered it essential to investigate whether the taxpayer could be classified as a resident of the UAE within the meaning of the France-UAE Tax Treaty.
On the other hand, before resolving the merits of the case at hand by considering 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 considered that the taxpayer had established his primary home in France and should be subject to tax in France on all of his 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 he owned. Consequently, even though the latter stayed mainly in the UAE during this period and his income was from UAE sources, he was 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.
In addition to 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 in light of this treaty.
In application of 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 appropriate to apply the methodology of Article 4 § 2 of the said Treaty to determine tax residence in the presence of such a situation, namely a dual tax residence.
The said article specifies that the person concerned by a dual tax residence must be considered a resident of the State where they have a permanent home available to them. 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 considered that the taxpayer's closest personal and economic ties were in France, where his wife and children resided.
In any event, the taxpayer was considered a French tax resident in light of the France-UAE Tax Treaty, and not under the provisions of French domestic law. The application of the said treaty highlights the primacy of the France-UAE Tax Treaty.
II – The Conseil d'État's interpretation of the provisions of Article 19(2) of the France-United Arab Emirates Tax Treaty
A- Legal clarification on the interpretation of Article 19 § 2 of the France-UAE Tax Treaty
By this decision, the Council of State has for the first time openly put forward an interpretation of Article 19 § 2 of the France-UAE Tax Treaty. Indeed, this article defaults the determination of tax residence to a definition in domestic law. Thus, the erroneous interpretation of this article by lower court judges as well as the French tax administration 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 a salary in the Emirates had to be taxable in France. Consequently, the interpretation of this article was in contradiction with the spirit of the France-UAE Tax Treaty, whose objective is to avoid double taxation.
In the present case, the lower court judges of the Nancy Administrative Court of Appeal considered that the stipulations of Article 19 § 2 of said Treaty were applicable. However, the Council of State reproaches the lower court judges for having based their decision solely on the provisions of this article without having investigated whether the taxpayer could be qualified as a resident of the Emirates within the meaning of Article 4 of the France-UAE Tax Treaty.
Indeed, the determination of the residency 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-UAE Tax Treaty, in favor of French residents, or Article 19 § 2 of said Treaty, in favor of residents of the Emirates.
In this instance, settling the matter on its merits, the Council of State considered that the taxpayer was a French tax resident, in accordance with the argument developed earlier, and fell under the provisions of Article 19 § 1 of the France-UAE Tax Treaty. This article grants French tax residents a tax credit concerning salaries received for their professional activity carried out within the Emirates.
In any case, a French tax resident can receive Emirati income without paying tax on that income in France. The Council of State has thus provided a true interpretation of the provisions of Article 19 § 2 of the France-UAE Tax Treaty. Thus, being a French tax resident does not automatically imply taxation on income received in the Emirates.
The Council of State has put an end to legal uncertainty and recurring litigation regarding the application of Article 19 § 2 of the France-UAE Tax Treaty by the tax administration and lower court judges. The fact that the taxpayer took the case all the way to the Council of State made it possible to bring a clear response to this legal vacuum and to assert the supremacy of the France-UAE Tax Treaty over French tax norms. 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 the Emirates due to the application of Article 19 § 2 of the France-UAE Tax Treaty.
Thus, from now on, it will be necessary to determine the taxpayer's tax residence in light of the provisions of Article 4 of the France-UAE 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 said Treaty.
B- Exemption from taxation on salary income coming from the UAE through the tax credit mechanism
Pursuant to paragraph 1 of Article 19 of the France-UAE Tax Treaty, the taxpayer was entitled to a tax credit offset against French tax, in the base of which this income is included. Concretely, the Council of State exempted salary income coming from the Emirates from taxation through the mechanism of a tax credit equal to the theoretical French tax on Emirati income.
Furthermore, the Council of State asserts that the granting of the tax credit does not depend on the actual taxation of income coming from the Emirates within 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 for a situation of double non-taxation of salaries of Emirati source, assuming their income comes exclusively from the Emirates.
Concretely, as an illustration, a taxpayer who is a French tax resident carrying out a professional activity in Dubai or Abu Dhabi must declare the entirety of their income to the French tax administration, whether their income originates from France or the UAE. Following this declaration, the administration will apply an effective tax rate taking into account all of their income, but will only apply this rate to their income originating 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, the latter enjoys a total remuneration of 150,000 euros. To calculate the tax rate, the tax administration will base itself 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, hence on 50,000 euros.
To conclude, the decision of the Council of State enshrines the supremacy, in accordance with the hierarchy of norms, of the France-UAE Tax Treaty over domestic law and Article 4 of the General Tax Code (CGI), by recalling the principle of Article 55 of the Constitution. Therefore, the 121 tax treaties currently in force in France have a higher legal standing than French tax norms.
This decision has provided real legal clarification on a concept that had been misinterpreted for years and to which the Council of State has provided a clear response for the first time, as it had never before been referred such a question regarding the Emirates.
This France-UAE Tax Treaty thus regains its authenticity and allows for the establishment of a genuine system of non-double taxation of income, favorable to expatriate taxpayers who are non-French residents or who receive income from the Emirates. Furthermore, this decision can be replicated for all bilateral French tax treaties in existence today.
Finally, the judges of the Council of State also recalled the true scope and meaning of Article 19 of the France-UAE Tax Treaty, which was considered a sword of Damocles over the taxpayer's head and had been debated and feared by the legal and expatriate world for years, creating genuine legal uncertainty.
Thus, the French tax resident will be exempt from taxation on their salary income coming from the UAE thanks to the tax credit mechanism.
