Residence test for tax purposes and remittance basis principle

The French High Tax Court (Concil of State) ruled on the impact of the regime of the ‘remittance basis’ on the quality of resident within the meaning of the Franco-British convention.

CE 27 juillet 2012 n° 337656 et 337810, 9e et 10e s.-s., min. c/ R.

Tax treaties, when they refer to the tax convention model of the OECD, mean by ‘resident‘ of a State «(…)» any person who, under the laws of that State, who is liable to tax in that State, because of his home, his residence of its seat of management or any other criterion of a similar nature (…). “However, this expression does not include persons who are subject to tax in that State only for the income from sources in that State or capital which is located” (article 4, 1 of the model tax convention of the OECD). In this case, a person, natural or legal, is only a “resident” of a State, eligible for the benefit of tax if, conventions, it is not exempt of tax in this State but still if it is taxable on a plate that is not limited to only revenue that take their source.

It is the scope of this rule which has been the subject of commentary decision, about a physical person who, residing in the United Kingdom had not paid tax on the income in that State in respect of its foreign source income, in the case of dividends paid by companies French (CE 27 juillet 2012 n°s 337656 et 337810, Regazzacci). The Council of State has admitted that such taxpayer can be a “resident” within the meaning of the Franco-British tax convention of May 22, 1968, then in force, however as the clause of the taxation of how nuanced depending on the applicable treaty provisions.

The facts related to the case were simple. Mr Regazzacci, residing in the United Kingdom had received, in 1996, 1997 and 1998 dividends paid by three French companies. At the time of the distribution, it had been applied Franco-British tax treaty, so that the French withholding tax rate had been reduced by 25% (internal rates of the time) to 15% (reduced rate conventional) and that have tax, then attached to dividends distributed by French companies, had been refunded under deduction of the withholding of 15%.

But, as a result of a tax audit, the administration has challenged these benefits on the basis that the taxpayer had not imposed on the United Kingdom on dividends from French companies. Indeed, he had the ‘remittance basis‘ mechanism whereby natural persons of foreign nationality residing in the United Kingdom aren’t necessarily taxable only on their UK source income and are taxed on their foreign earnings if they are repatriated or used in the United Kingdom. The administration had considered that it was not a “resident” within the meaning of the Franco-British convention in its version applicable at the time of the facts, which included, on this point, the requirements of article 4 1 of the OECD (No. 1) model. Indeed, the applicant did not have been imposed on the United Kingdom on source outside that State revenues.
The Council of State did not follow the administration; It has adopted a liberal interpretation, judging that the person concerned had the quality of ‘resident’ of the United Kingdom even though it had not actually imposed on the United Kingdom on any foreign income in respect of the years involved. Stop laying in principle that a natural person subject to tax to the United Kingdom because of his domicile, residence, place of management or any other criterion of a similar nature, is not likely to lose the quality of tax resident of the United Kingdom on the sole ground that, not having the nationality British, all or part of its foreign source income can, in application of the system of the ‘remittance basis’, not be imposed on the United Kingdom to the title of the year in which they are seen but only in respect of the year during which they are repatriated or used in the United Kingdom.
The Council of State is, indeed, that the regime of the ‘remittance basis’ is not intended to permanently exempt from UK income tax revenues from non-UK source, but simply provides no understanding that income in the bases of this tax until their repatriation or their use to the United Kingdom; Subsequently, therefore that it was established and undisputed that the applicant was well, for the years in question, subject to UK at his residence tax at United Kingdom under domestic law, the fact that the French source dividends have not imposed at the United Kingdom in respect of the year of their perception did not look at it as being subject to tax in this country for its only UK source income. It is therefore considered that the French withholding tax rate could be reduced to 15% by the Franco-British convention.

The Regazzacci decision is very interesting and, in short, fairly innovative, on the interpretation of tax treaties. One cannot, indeed, be surprised by what the State Council gives two different meanings to the same expression, that of taxability, for the application of the same tax convention but about two different conventional stipulations:
When the expression is used to determine whether a person is a “resident” of the United Kingdom, the condition is interpreted as referring to a theoretical, hypothetical tax and which may well never happen. This is a simple virtual imposition, the only condition being that it is provided by British law.
but when it comes to decide if have tax or not should be transferred, the same condition is interpreted to mean an effective tax liability to the United Kingdom in respect of dividends received.