Tax domicile is not tax residence | Withholding tax on French-source wages, salaries and pension: what are the practical implications?
Published on 5th Apr 2024
In a decision handed down on 5 February this year, CE, 5 févr. 2024, n° 469771, Société Axa Group Opérations the French Administrative Supreme Court strictly applied the provisions of Article 182 A of the French Tax Code (FTC), thereby overturning the French tax doctrine in force.
As a reminder, article 182 A of the FTC provides for the application of a withholding tax on French-source salaries, wages, pensions and life annuities paid to persons who are not domiciled in France for tax purposes. Although this tax domicile is not expressly defined by reference to French domestic law or tax treaties, French tax doctrine indicates that tax residence within the meaning of the applicable tax treaty should be taken into account). Where applicable, the withholding tax is calculated according to an annual scale with three brackets (at rates of 0%, 12% and 20% in mainland France and 0%, 8% and 14.4% in the overseas departments), only part of which is in full discharge of the income tax due in France. Such withholding tax applies unless otherwise provided in the applicable tax treaty.
With this decision, the French Administrative Supreme Court draws the importance of the distinction that must be made between tax domicile within the meaning of French domestic law and tax residence within the meaning of the bilateral tax treaty. In essence, it points out that an employee won't have the withholding tax under Article 182 A of the FTC applied to his French-source salaries if he/she is domiciled for tax purposes in France within the meaning of Article 4 B of the FTC, even if he/she is not a French tax resident within the meaning of the applicable tax treaty.
Accordingly, a French company to which an employee who is a foreign resident within the meaning of a tax treaty has been seconded by a foreign company will not have to apply the withholding tax on the portion of the remuneration corresponding to the activity carried out on French territory, but rather the "prélèvement à la source" (which is another mechanism), provided that the employee is domiciled for tax purposes in France within the meaning of French domestic law and that the applicable tax treaty requires taxation in France, as the withholding tax is not a tax but a taxing method.
As a reminder, a person is resident in France for tax purposes (within the meaning of French domestic law) in one of the following cases:
- He/she has his/her home or main place of residence on French territory,
- He/she carries on a professional activity in France, whether salaried or not, unless he/she can prove that this activity is carried on in France on an ancillary basis,
- He/she has his/her centre of economic interests in France,
- He/she is a civil servant carrying out his/her duties or mission in a country where he/she is not subject to personal tax on all his/her income.
Given the above, a parallel could be drawn with the preferential tax regime for impatriation, which gives employees relocated from a foreign country in order to work in a company based in France entitlement to partial exemptions from French income tax. Indeed, Article 155 A of the FTC expressly states that the impatriation regime applies, among other conditions, to persons who are domiciled in France within the meaning of a and b of article 4 B, paragraph 1 of the FTC. As for the French tax doctrine commenting on such specific scheme, it adds a further condition not contained in the law by specifying that if the impatriate is not a French resident within the meaning of the applicable tax treaty, even though he or she complies with the conditions of domicile provided for in article 4 B, 1-a and b of the FTC, the preferential tax regime of impatriation won't be applicable.
This position of the French tax authorities appears highly questionable, especially as Article 155 B of the FTC only refers to French domestic law to define tax domicile, unlike Article 182 A, which refers to "domicile fiscal" without any further clarification.
As French tax doctrine is not law and has no regulatory value, the French tax authorities should not be able to base reassessments on their own doctrine, which any taxpayer could decide not to follow in this case. To do so would be to run the risk of an adjustment and subsequent litigation, which should nevertheless be favourable to the taxpayer.
The French preferential tax regime for impatriation should therefore theoretically apply to any taxpayer domiciled in France because he/she has his/her home or main place of residence there or because he/she carries out a professional activity there on a principal basis, even if he/she is not a French tax resident within the meaning of the tax treaty.
It is also legitimate to wonder about the possibility of extending such reasoning to other levies, such as the withholding tax on dividends (119 bis of the FTC) or certain capital gains (244 bis A and 244 bis B of the FTC), which might not apply when the beneficiary has his or her tax residence (within the meaning of French domestic law) in France.
Lastly, it should be noted that the French Administrative Supreme Court has not adopted the Court of Appeal's reasoning in terms of which the entire remuneration paid to a corporate officer should be subject to withholding tax in France and not the sole portion of this remuneration corresponding to the activity carried out on French territory (It has simply not taken a position on this issue). There is, however, nothing new in this respect, as past case law already requires particular attention to be paid to remuneration in respect of corporate office, which is not necessarily prorated.
