The rules for taxing non-resident partners of partnerships are set

1 – The issue of taxation of the results achieved in France by French partnerships whose partners are non-resident has, for fifteen years, generated some controversy between the advocates of corporate transparency that people wanted, basically, the non-resident partners are taxed in France if the company did not exist and those who felt the need to draw all the consequences that society exists independently of its members and it was therefore can not be ignored.

2 – If the principle of taxation law in France was ruled by the courts of the State Council, the impact of tax treaties had yet to be specified because the case was not quite at the end of the argument .

This is done today. By a decision of the plenary particularly clear and provided with the authority to close debate litigation, the State Council has indeed confirmed, so solemn, that the non-resident partners of French partnerships are taxable in France because of their participation in society and the tax treaties which take the model of the OECD, that is, those that do not contain specific provisions that would impede them, do not object.

* CE 11 juillet 2011 n° 317024 plén., Quality Invest.

The circumstances of the case Quality Invest

3  -The Norwegian company owned 99% Quality Invest stake in the real estate company (SCI)-construction sale Villa Prat, whose headquarters was located in Nice. The SCI purposes was land acquisition, construction on this land for apartment buildings and then sell them in blocks or in batches, the SCI was employed exclusively in France. During the year 1991 was one in dispute, his activity consisted in the rehabilitation of a building for resale in batches. SCI did not opt ​​for the liability to corporation tax.

The Norwegian partner of SCI, the company Quality Invest in France had not declared the proportion of benefits accruing by reason of its stake in SCI. The administration has therefore sent a notice to sign a declaration of result, and as this demand had remained unanswered, Quality Invest has been subject to corporation tax, plus interest and late 40% penalty under section 1728 of the CGI, the share in the profits accruing from the SCI and the procedure for taxation of office.

4  – Quality Invest challenged the tax and won the case on appeal (CAA Paris April 10, 2008 No. 06-3686, Quality Invest), the court had in fact considered that the Norwegian company was not taxable in France in respect of profits that it was withdrawing its participation in the SCI, to the extent that such income was subject to any provision of the Franco-Norwegian 19 December 1980 and therefore they entered the field of broom clause relating to income not specified, leading to reserve the right to impose Norway.

The State Council has, in a remarkably consistent and coherent decision, set aside the appeal decision for error of law.

5 – The State Council reaffirms first that companies such as real estate company of the species, are governed by Article 8 of the CGI have a personality distinct from that of their members and are active their own. Since this activity is carried out in France, the profits of these companies are generally taxed in France in the hands of their members, including those residing outside of France, in proportion to their holdings in the company. The solution in principle is not new and it had also been taken over by the appeal decision in the case of Quality Invest.

6 – The State Council had previously asked about the principle of a French GIE receiving royalties from French sources and one of whose members was a Canadian corporation (EC April 4, 1997, No. 144,211, Sté Kingroup Inc. .: RJF 5 / 97 424, with concl. Loloum F. p. 293). On this occasion, the Council of State had said, for the first time in an international context, the principle of personality GIE tax, and more generally of partnerships. It held that the true and only subject to tax is the GIE, as it determines the liability of its members in France and non-resident members must, as well as resident members, be required in France to pay tax according to their share of operating results.

7 – It would be incorrect in our view, to conclude that the taxation of partnerships whose partners are not always apparent to residents a purely internal problem and that tax treaties are inherently ineffective. On the contrary, the Council of State takes care of the applicable state, but their implementation must take into account the specific nature of partnerships;

– The tax treaty between France, as a State of residence of the partnership, and the country of source of income is necessarily applicable since the company is a “resident” in France for the application of tax treaties (subject of course it meets all conditions required by other “residents”),  this convention may be applied, for example, where a partnership is engaged in French outside France in through a permanent establishment or when it carries out real estate income or capital gains on property outside of France, it should also, in our opinion, allow non-resident partners of a partnership of French who derives income from to benefit from foreign tax credits for conventional taxation in France (where the partnership receives, for example, dividends, interest or royalties from a country “agreement”);

– The tax treaty between France and the State of the partners may also be applicable, if it provides a different rule from those posed by OECD model convention, would be the case if it prohibited the imposition or if it prevented the collection of taxes on behalf of the non-resident partner. But this agreement may, if it is classic and if it contains no specific treaty provision, an obstacle to the taxation provided for in domestic law since, in this case, it can not prevent France from imposing income one of its residents, even on behalf of its partners.

8 – However, as in the current state of French conventional network, it does not appear to specifically prohibit a tax treaty with France to tax the income of a partnership on behalf of its non-resident partners, the solution in principle and adopted by the Council of State led to confirm the solutions adopted and usually does not upset the current law.