France has entered into bilateral double taxation treaties with approximately ninety countries. Although the tax treaties the France has entered into with developing countries, especially the French speaking African countries, contain specific provisions designed to encourage French investments in those countries, most of the treaties which France has concluded or amended since 1977 are substantially similar to the 1977 OECD Model Double Taxation Convention.
Pursuant to the French Constitution, the provisions of international agreements prevail over domestic tax law. This constitution provision applies not only to the fiscal provisions of tax treaties but also to definitions of terms such as “tax residence,” or “permanent establishment” as well as the definitions of categories of taxable income contained in such treaties.
Double taxation treaties usually prescribe specific rules for the taxation of various categories of taxable income such as:
– earned income,
– income and capital gains from real property, and
– income in the form of dividends, interest and royalties.
Double taxation treaties also contain certain provisions relating to methods of avoiding double taxation, the mutual assistance of the two contracting parties in connection with the exchange of information and the recovery of taxes, the settlement of problems arising in the area of conflicting taxation, and the guarantee of the equal treatment of nationals of one country vis-à-vis nationals of the other country.
> Earned Income.
Pursuant to double taxation treaties, earned income, i.e., income from business operations and professional or salaried activities, is usually taxable in the country in which the taxpayer has its tax domicile or registered office unless the taxpayer has a permanent establishment to which a portion of its taxable income may be attributed. In the latter case, such attributable earned income is taxable by the country in which such permanent establishment is located.
> Income and Capital Gains from Real Property.
The taxation of income and capital gains arising out of real property is, as a general rule, taxable by the country in which the real property is situated.
> Passive Income.
Passive income, such as dividends (including dividends constructively distributed by permanent establishments), interest and royalties, is usually subject to limited taxation in the form of withholding taxes in the country of source, as well as full taxation in the country of residence. The double taxation treaties concluded by France usually prevent this double taxation of passive income by permitting a taxpayer to claim a tax credit equal to the withholding tax actually imposed on the passive income of the taxpayer by the country of source. Such tax credit may be used to reduce the income tax liability of the taxpayer in its country of domicile relating to such income. As a result, if a given type of passive income is subject to income tax in France at a rate lower than the rate of the withholding tax imposed in the country of source, the tax credit which the taxpayer may claim in France is limited to the amount of tax payable in France; the unused tax credit is lost.
As an incentive for foreign investment, an exception has been made to the foregoing general rules in most of the double taxation treaties which France has entered into with developing countries. Such exception provides that if the treaty calls for a withholding tax to be imposed on a French taxpayer which is below the rate of withholding tax normally applied by the developing country to foreigners, the French corporate taxpayer is entitled to a tax credit in France equal to the normal withholding tax rate which would have been applied in absence of the reduced tax rate provided for by treaty.
A tax credit itself constitutes taxable income; thus, a taxpayer must include the whole amount of a tax credit in its taxable income.