A closer look at the Conseil d’État ruling of March 20, 2023, which recalls 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 this income. Thus, if you receive income from abroad, you are obliged to declare this income to the French tax authorities.
In such a scenario, you could potentially face double taxation. The mechanism of double taxation implies that the French tax resident is 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 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 "), with a view to avoiding double taxation, was signed on July 19, 1989, and amended 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 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 reviews in detail, point by point, the treatment of different sources of income within 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 value of the France-UAE 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 recalled and limited the legal scope of Article 19.2 of the France-UAE Tax Treaty, which has generated much debate among legal practitioners as well as in doctrine.
In this decision, the Council of State considered that a French tax resident who receives income from the UAE can benefit from the right to a French tax credit equal to 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 the UAE.
In the present case, an employee of a Swiss company was seconded to the UAE. This individual, considering himself to be a French tax resident nonetheless, indicated in his French income 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, considering that the taxpayer should have paid taxes in France on the income earned in the UAE. The taxpayer did not succeed before the Administrative Court of Strasbourg or the Administrative Court of Appeal (CAA) of Nancy. Consequently, he filed an appeal in cassation 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 therefore 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 ask what the taxpayer's tax residence was and, secondly, what the tax regime associated with the foreign income (Dubai) was by virtue of his employment contract as an employee seconded from a Swiss company.
The Council of State criticized the Nancy CAA for relying solely on the provisions of Article 19.2 of the France-UAE Tax Treaty (and thus taking domestic law into account to determine the taxpayer's tax residence) without investigating whether the taxpayer could qualify 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 considered that the case should be settled on its merits.
The latter points out that when a dispute linked to a bilateral treaty is brought before the judge, it is up to him to first examine the conformity of the contested taxation with French tax legislation. If this condition is met, only then does the judge proceed with the analysis to determine whether or not this treaty opposes the application of French tax legislation.
In this decision, the Council of State first determined that the taxpayer was tax domiciled 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 – The application of the provisions of Article 4 of the France-Emirates Tax Treaty
A- On the supremacy of the France-Emirates Tax Treaty over domestic law
For the first time in this decision, the Conseil d’État establishes the supremacy of a bilateral tax treaty over domestic law. The Conseil d’État recalls the principle of the hierarchy of norms under Article 55 of the 1958 Constitution. This article places law arising from international treaties, duly ratified, above national law.
Consequently, through this innovative ruling, the Conseil d’État gives precedence to the provisions of the France-Emirates Tax Treaty over French tax law. 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-Emirates Tax Treaty.
Thus, the Conseil d’État highlighted the importance of taking Article 4 of the France-Emirates Tax Treaty into consideration, even though the taxpayer was undeniably a tax resident in France since he had voluntarily submitted a French tax return as a French tax resident.
However, the Conseil d’État nevertheless penalized the lower court judges who had relied on Article 19.2 of the France-Emirates Tax Treaty to deem 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-Emirates Tax Treaty, as the Conseil d’État considered it indispensable to investigate whether the taxpayer could be qualified as a resident of the Emirates within the meaning of the France-Emirates Tax Treaty.
On the other hand, before resolving the merits of the case by taking into consideration the provisions of Article 4 of the France-Emirates 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 if the latter resided mainly in the UAE during this period and his income was from Emirati sources, 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.
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-Emirates 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-Emirates 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 situation, namely dual tax residence.
The article specifies that a person affected by 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 located in France. Indeed, the Conseil d’État considered that the taxpayer's closest personal and economic relations 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-Emirates Tax Treaty, and not under the provisions of French law. The application of the said treaty highlights the primacy of the France-Emirates Tax Treaty.
II – The Interpretation of the Provisions of Article 19 § 2 of the France-UAE 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 publicly asserted an interpretation of Article 19 § 2 of the France-Emirates Double Tax Treaty. Indeed, this article defaults the determination of tax residence to a definition under domestic law. As a result, the erroneous interpretation by both the lower courts and the French tax administration regarding this article had been identical for years.
This interpretation was disadvantageous to taxpayers, as through it they believed that the income of a French tax resident derived from an Emirates-sourced salary had to be taxable in France. Consequently, the interpretation of this article contradicted the spirit of the France-Emirates Tax Treaty, which aims to avoid double taxation.
In the present case, the judges of the Nancy Administrative Court of Appeal considered that the stipulations of Article 19 § 2 of the said Treaty were applicable. However, the Conseil d’État criticized the trial judges for relying 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 Treaty.
Indeed, determining the residence criterion in accordance with the provisions of Article 4 made it possible to establish 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 case, ruling on the merits, the Conseil d’État considered that the taxpayer was a French tax resident, in accordance with the previously developed arguments, and fell under 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 activity performed within the Emirates.
In any event, a French tax resident can receive Emirati income without paying tax on that income in France. The Conseil d’État has thus provided 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 trial judges. The fact that the taxpayer took the case to the Conseil d’État provided a clear answer to this legal vacuum and asserted the supremacy of the France-Emirates Tax Treaty over French tax rules. 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, from now on, it will be necessary to determine the taxpayer's tax residence with regard to the provisions of Article 4 of the France-Emirates Tax Treaty. Then, following this analysis, it must be determined 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
Pursuant to paragraph 1 of Article 19 of the France-Emirates Tax Treaty, the taxpayer was entitled to a tax credit offsettable against French tax in the base of which this income is included. Specifically, 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 states that the granting of the tax credit does not depend on the effective taxation of the income from the Emirates in the UAE. In fact, French tax credits applicable to Emirati income are applicable, even if these salaries are not subject to tax 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 cases where the individual's income is exclusively derived from the Emirates.
Concretely, by way of illustration, a taxpayer who is a French tax resident performing a professional activity in Dubai or Abu Dhabi must report all of their income to the French tax administration, whether the income comes from France or the UAE. Following this declaration, the administration will calculate an effective tax rate taking into account all of their income, but will only apply this rate to the income derived from France.
If the taxpayer, a French tax resident, earns a salary of 100,000 euros per year from their activity in the Emirates and 50,000 euros per year from their activity in France, they receive a total remuneration of 150,000 euros. To determine the tax rate calculation, the tax administration will base it on the total income of 150,000 euros (the French income added to the Emirati income). However, the effective tax rate will only be applied to the French income, i.e., on 50,000 euros.
In conclusion, the decision of the Conseil d’État establishes the supremacy, in accordance with the hierarchy of norms, of the France-Emirates Tax Treaty over domestic law and Article 4 of the French General Tax Code (CGI) by recalling the principle of Article 55 of the Constitution. Thus, the 121 double tax treaties currently in force in France have a higher value than French tax norms.
This decision has provided real legal clarification on a concept that had been misinterpreted for years, and to which the Conseil d’État has provided a clear response for the first time, as the latter had never before been referred with such a question regarding the Emirates.
This France-Emirates Tax Treaty therefore regains its authenticity and allows for the establishment of a real double non-taxation regime favorable to expatriate taxpayers, who are non-French residents or receive income from the UAE. Furthermore, this decision can be replicated for all bilateral French tax treaties existing to date.
Finally, the judges of the Conseil d’Etat also recalled the true scope and meaning of Article 19 of the France-Emirates Tax Treaty, which had been considered a sword of Damocles hanging over the taxpayer's head, inciting debate and frightening the legal world and expatriates 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.
