France

Branch Reporters
Stphane Austry*
Michel Collet *

Summary and conclusions

France is a written law and a civil law country; anti-avoidance provisions thus have
a written source. They are codied in statute (code gnral des impts: French tax
code (FTC)). They derive mainly from tax law1 and tax treaties.
France applies a territorial principle. Corporations are subject to corporate
income tax on income that is attributable to their French based activity only and
not attributable to foreign operations through permanent establishments (PEs) or
subsidiaries. Foreign companies may be subject to French corporate tax on their
French source income. French resident individuals, however, are liable to personal
income tax on their worldwide income.
With as many as 112 double tax treaties (DTTs) in force, France has the most
extended tax treaty network. To prevent treaty shopping, France has implemented a
number of anti-abuse provisions pursuant to an interesting and constant development mainly in response to the sophistication of international transactions.
The rst development dealt with domestic legislation for anti-abuse provisions. The rst statutory anti-abuse provision is the general abuse of law (abus de
droit). The abus de droit may apply to both domestic and international arrangements and its scope has been extended since its codication in 1941, notably by
the Conseil dtat (French Supreme Administrative Court) case law and most
recently in 2008.
This provision allows the French tax authorities (FTA) to challenge any
arrangements which are either ctitious or genuine but designed solely to avoid or
evade the tax liability that would have normally been borne. To date, abus de droit
has proved to be one of the major anti-avoidance tools for the FTA to combat international tax abuse.
Specic anti-avoidance provisions were enacted later, to prevent international
abusive transactions for companies and individuals. They target specic types of
income (interest income, dividends, etc.) or schemes (rent-a-star companies, etc.).
In France tax treaties prevail over domestic law. However, issues should be
addressed rst through the lter of domestic law either in terms of classication of
income or in terms of treatment. Only then should one look at the tax treaty and

*
1

CMS Bureau Francis Lefebvre, Paris

Tax can be assessed and collected only in compliance with an act of the legislature, i.e. Parliament,
as provided under art. 34 of the French Constitution of 4 October 1958.

IFA 2010

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determine whether the treaty allows the domestic treatment. This is referred to as
the so-called subsidiarity principle.
The same principle applies to domestic anti-abuse provisions. The general statutory anti-abuse abus de droit should be characterized rst under domestic law to
strike down an abuse of tax treaty. Also specic anti-abuse provisions may apply as
long as the relevant tax treaty allows it. For instance, in Schneider, French controlled foreign company (CFC) rules could not apply in the absence of a PE of the
CFC in France.
The FTA may also resort to anti-avoidance provisions provided in DTTs.
To the best of the reporters knowledge, the application of such provisions has
rarely been sought by the FTA, although there is an emerging and growing interest
in relying on some of them. For instance, and as in some other countries, the benecial ownership test may well become a powerful tool to the FTA. The tax treaty
benecial ownership test, which may also be viewed as already existing in domestic law, may be stapled to the domestic abus de droit.
Because anti-abuse provisions have a written source, they evolve less easily than
in common law countries. However, this does not prevent the FTA and courts from
focusing more and more on the economic substance of transactions. This trend
translates into a more demanding requirement for taxpayers to justify the business
purpose and the economic substance of transactions. Recent case law went through
a risk analysis and an in-depth scrutiny of the terms of a transaction with their corresponding consequences for the parties. To some extent it may be considered that
the French courts are moving closer to a substance over form approach. This recent
approach which may be viewed as departing from traditional civil law reasoning
seems to be the necessary answer to a more sophisticated business environment.
However, the very recent development of the abus de droit may soften the importance of this requirement if the tax benet claimed by the taxpayer does not prove to
contradict the objective of the measure based on legislative history.
If the case law of the European Court of Justice (ECJ) may be viewed as having
fuelled that recent development of the French courts, on the other hand, the ECJ has
not hesitated to strike down domestic anti-abuse provisions as being too broad and
not sufciently narrow to target actual abusive transactions where the provisions
are regarded as hindering the exercise of one of the four freedoms governing the
European Union (EU) single market.
One of the most critical challenges facing the tax authorities today, and especially France, is to gain access to information regarding international transactions
and taxpayers in order to reduce the gap between taxpayers and the tax authorities
in the knowledge and understanding of ever more sophisticated transactions.
Obviously, access to information also leads to more efcient tax audits. France
considered at some point introducing disclosure requirements (as in the USA and
the UK). France is now currently one of the leading countries seeking transparency and exchange of information with non-cooperative states. The FTA has
already made it clear that it is looking forward to testing the recently signed agreements with former grey list countries. Domestic anti-abuse provisions such as the
CFC rules are likely to be tightened along with the application of a withholding
tax of 50 per cent and the disallowance of payments made to non-cooperative
countries.
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1. Domestic anti-avoidance provisions with an

international scope
1.1. General overview

French tax law provides numerous provisions allowing the FTA to counter tax
avoidance or evasion.
Provisions with a general focus have been used to ght tax avoidance in wholly
domestic situations before being also applied to international or cross-border
arrangements. These include the abus de droit, an abnormal act of management
(acte anormal de gestion) provision and the general right of the authorities to
reclassify contracts or arrangements.
The abuse of law2 has been playing a more important role in international situations for the past few years. Legal provisions of the abuse of law were redrafted in
the 2008 Supplementary Finance Act to codify the most recent developments from
the Conseil dtat case law. The abuse of law is now a favourite tool available to the
FTA in an international context.
In addition to general anti-avoidance provisions, French tax law provides for a
range of specic provisions which are designed for international arrangements.
These provisions have been adopted since 1972 in order to prevent abusive arrangements in a cross-border context, which could only with difculty have been challenged by the FTA under the general anti-avoidance provisions. Almost all of these
provisions have been modied in the past few years in order to comply with nondiscrimination principles in DTTs and/or in EU law.
A critical provision addressing indirect transfer of benets to a foreign afliate
(codied under article 57 of the FTC) is not addressed in this report since it relates
to transfer pricing issues which go beyond the scope of the present report.3
1.2. General anti-avoidance provisions wit h international focus or
effect

French tax law provides for three general anti-abuse provisions which may have an
international effect:
the abuse of law procedure allows the FTA to disregard a legal arrangement
when certain conditions are met;
aside from the abuse of law, the FTA may reclassify a transaction based on
the actual intent of the parties. The difference from the abuse of law may be
very slight but this provision applies even where the intention may not be tax
avoidance;
the abnormal act of management provision allows the FTA to challenge the tax
deductibility of an expense which is not made in the interest of the taxpayer/
company, i.e. which does not correspond to a sound business decision. It is
2
3

Codified in art. L.64 of the Tax Procedural Code (Livre des Procdures Fiscales (LPF)).
For further analysis on this topic, reference is made to previous IFA reports, e.g. 2007, vol. 92a,
Transfer Pricing and Intangibles.

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applicable both to domestic and international arrangements. In international situations, the FTA resorts to the abnormal act of management mainly for transfer
pricing matters: consequently, it is not within the scope of this report.
These provisions apply to both wholly domestic and cross-border transactions. The
following developments focus on the abuse of law procedure, which is in France
the only general statutory anti-avoidance tool which may apply equally to domestic
and international arrangements.
In principle, agreements are deemed to be real and binding, including agreements between related parties. If they provide for reciprocal obligations, these
obligations are deemed to be normal. Accordingly, taxpayers may exercise full discretion in how they organize their economic activities and the FTA is, in principle,
not allowed to interfere with the management decisions of taxpayers.
Pursuant to the abuse of law procedure, the FTA is, however, allowed to disregard the form of a transaction if it does not reect the real nature or reach of the
intended transaction. The scope of the abuse of law has been dened by the
jurisprudence further to an interesting development. The 2008 Amending Finance
Act extended the scope of the abuse of law with the introduction of the general
principle of fraus legis.

1.2.1. History and development of the abuse of law

The abuse of law is a theory rooted in civil law principles: it was initially developed
by civil courts and was codied in the FTC by a law dated 13 January 1941.4 The
courts have provided important input on the scope of the abuse of law.
They adopted rst a restrictive view and the abuse of law was scarcely applied in
an international context aside from a few clear-cut cases.
However, since 2004 and 2005,5 the relevance and efciency of the abuse of law
for international investments and nancial transactions has been conrmed.6
Originally, the abuse of law was applied by courts to fictitious arrangements,
i.e. formally valid arrangements designed for the only purpose of hiding the
actual nature and objective of the transactions, which were to avoid tax.7
In addition to fictitiousness, the Conseil dtat has determined8 that the abuse
of law may also apply to transactions which, without being fictitious, were
designed solely to avoid tax.
This did not mean that the abuse of law procedure prevented taxpayers from structuring actual transactions in a tax efcient manner. Taxpayers may seek to tax plan
if transactions are real with a business purpose, even if this is ancillary.9
4

5
6
7

8
9

314

The first case law recognizing a sui generis right for the FTA to challenge the validity of transactions in the case of tax avoidance or obvious evasion was rendered by the Cour de cassation, on 20
August 1867. Major amendments of the 1941 Law were enacted afterwards by statutes or laws
dated 27 December 1963, 8 July 1987 (Aicardi Law) and 30 December 2008 (Amending Finance
Act for 2008).
CE, 18 February 2004, Min. c/ Socit Pliade and CE, 18 May 2005, SA Sagal.
The CE held that abuse of law provisions are compliant with EC law.
Only a little case law has applied the fictitiousness in international situations: see, for instance, CE,
17 January 1979, nos. 5,118 and 5,654.
CE, 10 June 1981, no. 19,079.
E.g. in CE, 16 June 1976, no. 95,513. This principle is also acknowledged as such by administrative
guidelines: D.Adm. 13 L-1531, no. 18.

AUSTRY, COLLET
Subsequent decisions conrmed the extension to non-ctitious acts being exclusively tax driven: but, until the year 2004, only a little case law dealt with international applications. Most of it was applied to rent-a-star arrangements,10 prior to
the introduction of special anti-abuse provisions11 (article 155A of the FTC, see
section 1.3.2).
The application of the abuse of law procedure was rst raised on outbound
transactions in treaty shopping cases. French source royalties were paid to a Dutch
company with a zero withholding tax treatment thanks to the tax treaty between
France and the Netherlands. The royalties were then passed on almost entirely to a
non-treaty-protected entity formed in the Dutch Antilles.12 A lower tax court determined that the transaction was not abusive13 since the FTA, alleging that the Dutch
company was the nancial transparent agent (mandataire), failed to justify it (the
same reasoning was also applied in a case of a back-to-back loan arrangement).14
The application of the abuse of law in inbound situations was raised when
French companies structured their investments through foreign subsidiaries (sometimes beneting from favourable tax treatments locally) in order to receive taxfree dividends in France. The lower tax courts considered that the abus de droit
was not applicable based on the ctitious argument with foreign companies since
the companies were duly incorporated and managed in accordance with domestic
legislation.
However, in 2004 and 2005, the Conseil dtat broke new ground in introducing
the notion of corporate substance based on the solely tax driven argument, in the
Pliade and Sagal cases.15
Plaide and Sagal were rendered on the same transaction for two different
investors. The structure well known at that time consisted in taking the benet
of the participation exemption regime on dividends without falling within the scope
of the CFC rules which required a higher percentage of ownership. French companies were investing their excess cash in an exempt entity (a Luxembourg holding
29 company) which managed a nancial portfolio. No tax was borne on the income
and on its repatriation in Luxembourg. The investment, consisting of converting
taxable interest into tax free dividends, was a typical example of abuse of law in an
international context. The Conseil dtat determined in both cases that the Luxembourg company had no other purpose than avoiding tax and was part of a scheme
(montage). The Luxembourg company was regarded as having no corporate substance. For instance, the Conseil dtat highlighted the fact that shareholders never
attended shareholder meetings other than through proxies and that the Luxembourg
company did not have the operating capacity to manage the nancial assets: the
management was performed by the nancial promoter of the investment through a
service agreement. Finally, taxpayers failed to demonstrate the business purpose of
the use of a company in Luxembourg for the management of nancial assets (yield
10
11
12
13
14

15

See for instance: CE, 17 January 1979, nos. 5,118 and 5,654, CE, 4 December 1981, no. 29,742.
Law of 20 December 1972 (art. 18).
Answer from the Minister of Finance to Senator Legendre, 19 December 1996, no. 16,589.
See TA Lille, 18 March 1999, Fountain Industries.
CAA Nancy, 14 March 1996, SARL Inter Selection in a back-to-back loan situation where a French
company paid interest to its German parent company to which funds were lent by an entity in the
Dutch Antilles. See also TA Paris, 29 October 1998, St Van Ommeren Tankers.
See note 5.

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was regarded as comparable to that which could have been obtained from France
and management fees were not considered as lower). In Sagal, the Conseil dtat
had also to address the issue of whether disregarding an EU entity based on the
abuse of law was not restricting the freedom of establishment within the EU. The
Conseil dtat determined that since the abuse of law was only designed to prevent
a purely articial arrangement, it could justify the restriction of the EU freedom of
establishment. The prevention of tax avoidance is considered as an overriding justication of public interest.
In 2006 the Conseil dtat enlarged the scope of the abuse of law in Jann16 to
tax credit arrangements. At this time, the abuse of law could only apply to abusive
transactions aimed at reducing the taxpayers taxable income and not, for instance,
to tax credit transactions. The Conseil dtat determined that, aside from the abuse
of law procedure as codied at that time, fraus legis as an overriding principle
could apply.
On this occasion, the Conseil dtat modied the denition of the abuse of law:
while still referring to (a) the ctitiousness of contracts, conventions or any other
arrangements, it decided that (b) the abuse of law would be characterized only if
the transaction aimed solely at avoiding tax and resulted in the accrual of a tax
advantage the grant of which would be, notwithstanding the formal application of
the conditions laid down by the provisions of laws or other relevant texts, contrary
to the purpose of those provisions. In other words, if the transaction had no other
purpose than avoiding tax, it should also contradict the objective of the tax measure
which was claimed.
This new approach was conrmed by the Conseil dtat in very recent landmark
decisions17 where it adopted a restrictive approach in determining whether the
claim of a tax benet actually contradicted the objective of the test. With respect to
the benet of tax credits attached to dividends (avoir scal), the Conseil dtat,
exploring the purpose of the legal provision granting the tax credit, referred to the
content of the legislative history or travaux prparatoires only. In the absence of
any reference to a contingent holding requirement with respect to the shares, the
stripping transactions around the coupon with very short holding periods were not
considered as abusive.
This new approach in tax case law had been applied in an international context
in Bank of Scotland18 with a transaction referred to as a dividend stripping arrangement. The transaction consisted in a US based group with a French subsidiary selling on a temporary basis newly issued preferred stocks (through their stripping
rights or usufruct) by the distributing company to the Bank of Scotland, a bank
based in the UK. As a consequence, the UK bank could claim a refund of avoir scal from the FTA thanks to the UKFrance tax treaty that the US based parent company could not have obtained under the USAFrance treaty. The FTA denied the
bank the refund. The Conseil dtat reclassied the whole transaction as a loan
from the bank to the US group with the principal reimbursed through the French
source dividends, the interest being the cash refund of the avoir scal by the
French treasury.
16
17
18

316

CE, 27 September 2006, Janfin.

CE, 7 September 2009, SA AXA and Socit Henri Goldfarb.
CE, 29 December 2006, Bank of Scotland.

AUSTRY, COLLET
The Conseil dtat carried out a risk analysis and determined based on the right
and guarantee of the bank to receive an amount equal to the predetermined dividends and avoir scal that the bank was not exposed to the risks of an equity holder
and as a consequence the transaction was regarded as pure nancing. The reclassication of the transaction based on the abuse of law led the Conseil dtat to consider that the bank was not the benecial owner of the dividend. The US parent was
regarded as entitled (in other words, the benecial owner) to the dividend and as
such as having assigned it to the Bank to service its nancing. Without the use of
the abuse of law for reclassication purposes, it is doubtful whether the Bank
would have been disregarded as the beneciary since it enjoyed the ownership
rights on the French source dividend.
Bank of Scotland may be viewed as a good illustration of the new tendency of
French courts to take a much more pragmatic approach based on an itemized analysis of the contracts and agreements concluded by the taxpayers. This underlying
growing trend in France that combines the traditional legal approach of French law
with a more economic substance-over-form approach19 has been conrmed in other
cases since then.20

1.2.2. The legal scope of the abuse of law as from 1 January 2009
The 2008 Amending Finance Act has codied the extension of the abus de droit to
fraus legis reecting also ECJ case law on abusive transactions, with effect for tax
reassessment notices issued from 1 January 2009.
Similarly to the case law denition resulting from Jann, the legal denition of
the abuse of law now includes contracts, conventions or any other arrangements
which are:
(a) either fictitious or
(b) real, but where the transaction aims solely at evading tax normally due, and
results in a tax advantage the grant of which would be, notwithstanding the
formal application of the conditions laid down by the provisions of laws or
other relevant texts (including necessarily DTTs), contrary to the purpose of
those provisions (see above for an analysis of the application of this notion by
courts).
The abuse of law, which now includes fraus legis, may apply to every tax benet. It
may still trigger an 80 per cent penalty, which is reduced to 40 per cent for taxpayers who did not initiate the abuse of law or were not its main beneciaries. All
parties involved in a transaction regarded as an abuse of law may be held jointly
liable. The burden of proof on the intention to conceal or disguise income for tax
avoidance purposes must be demonstrated by the FTA unless the review by an
independent committee (Comit de labus de droit scal) is in favour of the FTA.
In summary, the application of the abuse of law theory broadly depends on a
case-by-case analysis and on whether the FTA is able to demonstrate the absence of
a single business purpose and, if so, a contradiction with the objective of the tax
measure which is claimed by the taxpayer.
19

20

For a detailed analysis of substance over form in France, see 2002 IFA, vol. 87a, Form and Substance in Tax Law.
See CAA Bordeaux, 6 July 2006, Banque Populaire Centre Atlantique.

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1.3. Specific anti-abuse provisions wit h international focus or
effect

The FTA may also challenge abusive international transactions or situations based
on specic anti-abuse provisions, which are specically designed for international
arrangements.

1.3.1. Favourable tax treatments subject to the existence of

international control
French tax law provides for specic anti-abuse provisions under which a tax benet in an international context is subject to the ability to have access to information
in the country of residence of the foreign counterpart, either based on a directive
applicable to EU countries or based on a treaty providing for qualifying an
exchange of information clause.21
Some of these provisions are aimed at pressuring other states to adopt a more
transparent policy. The current French crusade for transparency is the continuation
of that policy.
The EU exemption of withholding tax on passive income, as introduced in
French law,22 is subject to anti-abuse provisions: as for dividends, the exemption is
denied if the beneciary is controlled by non-resident companies, unless the beneciary justies that the main purpose, or one of the main purposes, of the ownership structure is not to benet from the withholding tax exemption; as for interest
and royalties, the exemption is denied if the beneciary is controlled by non-EU
resident companies and if the main purpose, or one of the main purposes, of the
ownership structure is to benet from the withholding tax exemption.
With respect to transfer of business as a going concern and demergers, French
law may provide for a rollover relief regime which may require in certain circumstances a ruling addressing, among other criteria, the question of whether the
main purpose or one of the main purposes of the transaction is tax fraud or tax
evasion.23

1.3.2. Anti-abuse provisions against transfer of profits at large

The FTC provides also for numerous specic anti-abuse provisions, the purpose
of which is either to avoid the transfer of prots abroad or to prevent the nonrepatriation of income transferred in low-tax jurisdictions. Some anti-abuse provisions may apply only to legal entities or only to individuals.

21

22

23

318

Generally, it is required that this provision is included in a DTT. Some provisions require an agreement solely dedicated to the administrative assistance providing for an exchange of information
(e.g. art. 123bis of the FTC). See the appendix for an extensive list of such provisions.
Arts. 119 ter, 119 quater and 182B of the FTC. Directive 90/435/CEE of 23 July 1990 (Parent
Subsidiary Directive) and Directive 2003/49/CE of 3 June 2003 (Interest and Royalty Directive).
Art. 210B 3 of the FTC. Directive 90/434/CEE of 23 July 1990 (Merger Directive) (art. 11).

AUSTRY, COLLET
1.3.2.1. Anti-abuse provisions applicable to legal entities or
companies: main principles

CFC rules: article 209B24 attributes to the French controlling company the
profits of CFCs established in low-tax jurisdictions. The French company is
treated as receiving deemed distributions from the CFC. Automatic exclusions may apply for CFCs established in other EU Member States or if established outside the EU if an active business is carried on which does not
predominantly correspond to intra-group services.25 Otherwise, CFC rules
may still not apply if the taxpayer can justify that the main effect of the CFC
is not to locate profits in a low-tax jurisdiction.
Under article 238 bis-0 I,26 an enterprise which has transferred or transfers
outside France, directly or indirectly, some of its assets to a person or an
organization in a trust or a similar type of entity, to have them managed in its
own interest or to undertake on its behalf a current or future commitment,
must include in its taxable income the profits deriving from the management
or disposal of these assets or from any assets purchased with the sales proceeds. This provision applies only to transfers outside France.
Article 238A27 shifts the burden of proof on to the taxpayer for the deductibility of expenses made to a person located or established outside France, and
benefiting from a low-tax regime. A taxpayer is deemed to benefit from a
low-tax regime when no tax applies or if the effective tax rate is lower than 50
per cent of the rate of French corporate income tax (33 1/3 per cent) bringing
the low-tax test to less than 16.66 per cent.
Also, article 208C II ter of the FTC provides for a 20 per cent withholding tax
on payments made by an SIIC (French equivalent of the US REITs) to a company exempt from tax or subject to tax amounting to less than two-thirds of
the comparable French tax liability (i.e. 11.11 per cent).
Article 21228 provides for thin capitalization rules applicable to wholly domestic transactions or cross-border financings.

1.3.2.2. Anti-abuse provisions applicable to individuals

Article 123 bis29 of the FTC extends CFC rules to individuals who directly or
indirectly own 10 per cent or more of the financial rights in a foreign entity
established in a low-tax jurisdiction and generating at least 50 per cent of passive income. Individuals are taxed on 125 per cent of the profits of the foreign
entity pro rata share their rights to dividends.

24

Law of 18 January 1980.

The passive income of the CFC should not exceed 10 per cent of its whole profit; or its passive
income and related party transactions should not exceed 50 per cent of its whole profit.
Law of 5 January 1993.
Law of 27 December 1973.
The first thin capitalization rules were enacted by the Decree dated 9 December 1948 creating the
FTC.
Law of 31 December 1998.

25

26
27
28

29

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Article 155A30 attempts to prevent the use of abusive artiste and sportsmen
companies. Income received by a foreign entity for services provided by one
or more individual artistes or sportsmen, whether French or foreign resident,
performing services in France, is taxed in the hands of the individual if the
company is controlled by the artistes or has no other activity or is established
in a low-tax jurisdiction.
Until 31 December 2004, an exit tax in the form of a capital gains tax on substantial shareholdings applied to individuals migrating from France. Rollover reliefs
were clawed back based on the fair market value of the stock at the time of the
transfer of domicile. The exit tax was repealed in 200431 pursuant to an ECJ ruling
which held that this exit tax was contrary to the EU freedom of establishment.32
1.4. Relationship between domestic anti-avoidance provisions and
t ax treat ies

1.4.1. Sources of international tax rules in France and general

overview of the traditional interpretation principles
International tax rules have two major sources: domestic law and tax treaties. Rules
enacted within the EU (Treaty on European Union, Treaty establishing the European Community and regulations, directives and other decisions issued by the EU
Council of Ministers) are also a major source of international tax law but, since
they are beyond the scope of this report, these will be analysed briey and separately (under section 3 below).
French domestic tax rules are subject to a strict hierarchy (the lower rule has to
comply with higher rule(s)). Starting from the highest, at the apex is the Constitution of 4 October 1958 and the principles laid out in the preamble,33 EU law and
international treaties (including DTTs), laws, decrees, ministerial orders.
Case law is not a source of law: the courts are supposed to apply the law and to
interpret it. French courts play a major role in interpreting domestic legal principles34 and DTTs.35 Interpretation of DTTs is made pursuant to the principles of
interpretation set forth in the Vienna Convention, dated 23 May 1969, on treaty law.
Thus, a literal reading is primarily applied, based on the commonsense meaning of
the words used in the treaty, on its objectives of the provision and also its context.
It is only where this method leads to an ambiguous meaning or to an unreasonable
outcome that other methods can be applied, mainly the analysis of the negotiations
history and content (including OECD commentaries published at the time of the
30
31
32
33

34

35

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Law of 20 December 1972.

By a Law of 30 December 2004, applicable from 1 January 2005.
ECJ, Lasteyrie du Saillant, 11 March 2004, C-9/02.
Declaration of the Rights of Man and of the Citizen (Dclaration des droits de lhomme et du
citoyen), fundamental principles of the Laws of the Republic (Principes fondamentaux reconnus par
les lois de la Rpublique).
Since a key case rendered in 1989, French judges may examine whether a subsequent law complies
with a (previous) treaty: CE, 20 October 1989, Nicolo.
Only since a case rendered by the CE on 29 June 1990, GISTI: before that, the question of the interpretation of a treaty (where not clear) was not handled by the courts but referred to the Ministry of
Foreign Affairs.

AUSTRY, COLLET
signing of the treaty).36 In this respect, the Conseil dtat applies the approach
adopted for interpreting French domestic law.
Guidelines issued by the FTA are not a source of law but may play a major role
in the interpretation of international tax rules. The statement of practice on the
FranceAlgeria treaty is referred to as the international policy doctrine of France
for treaties with comparable provisions.37

1.4.2. The subsidiarity principle and the predominance of tax

treaties
To determine the principle and rules of taxation in France of some cross-border
income, one must rst address the domestic treatment irrespective of the tax treaty:
this principle of the priority of domestic law is also referred to as the subsidiarity
principle. More precisely, analysis must rst be performed under French domestic
law in order to determine whether the tax should be levied and under which classication. It is only then and only if the domestic law leads to French taxation that
the treaty provisions will be applied in order to determine whether the right to tax
the income is ultimately attributed to France. This principle has been recognized
under French law for a long time by numerous decisions.38 In Schneider, the wellknown decision rendered in 2002,39 the Conseil dtat provided for a recital
reafrming strongly this principle which has been repeatedly conrmed in subsequent case law:
if, pursuant to article 55 of the [French] Constitution, a bilateral convention
concluded with a view to avoiding double taxation supersedes domestic tax law
on specic items, it cannot be in itself a legal basis for a decision pertaining to
taxation; consequently, in addressing a claim against a tax treaty, the judge shall
perform his analysis under the domestic tax law in the rst instance in order to
determine whether the challenged tax is validly assessed and, to the extent it is
the case, under which legal classication; the judge shall then, as the case may
be, compare this classication with the provisions provided for by the convention in order to determine if the convention prevents the application of the
said [domestic] tax law
In 2008, Aznavour 40 reasserted this principle by insisting on the fact that the classication of the income and the determination of the taxpayer have to be made pursuant to French domestic principles even if French domestic law operated a
reclassication or redetermination under an anti-abuse provision (anti-rent-a-star
company provision in the particular case).
French courts are not bound by the classication or interpretation of a given
income or activity which would be provided in the other state party to the treaty. In
36

37
38

39
40

Art. 31, s. 4 and art. 32 of the Vienna Convention. See CE, 13 October 1999, no. 190,083, Banque
franaise de lOrient, CE, 30 December 2003, no. 233,894 sect., SA Andritz.
BOI 14 B-3-03 of 22 May 2003.
CE, 19 December 1975, nos. 84,77491,895. For more recent decisions, see for instance CE, 17
March 1993, Memmi.
CE, 28 June 2002, Schneider Electric.
CE, 28 March 2008, Aznavour.

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Malet there was a conict of classication of an income between France and the
USA leading to double exemption. The Conseil dtat determined that France
could not tax on the ground that the conict resulted in a double exemption. The
solution (i.e. double exemption) derived from the classication based on French
domestic law.41
The subsidiarity principle under French law appears to be in line with the OECD
guidelines, provided under article 1, 22(1):
to the extent that the application of the rules referred to in paragraph 22 results
in a recharacterisation of income or in a redetermination of the taxpayer who is
considered to derive such income, the provisions of the Convention will be
applied taking into account these changes...
The subsidiarity principle applies whether the applicable tax treaty is compliant
with the OECD model convention or not42 and even where the DTT does not refer
to the interpretation of domestic law.
The subsidiarity principle also applies where French law directly refers to the
treaty denitions, pursuant to article 209-I of the FTC.43

1.4.3. Application of domestic anti-abuse provisions in tax treaty

situations: significant case law
In France, improper use of a tax treaty is more generally sanctioned pursuant to the
domestic anti-abuse provisions than to the anti-abuse provisions included in the
DTT itself. This position is close to 9(2) of the OECD commentaries, under article 1.
1.4.3.1. Abuse of law
To the best of the reporters knowledge, there is no case law which addressed the
question of whether the domestic abus de droit may be applied in a tax treaty.44
If this issue were to be raised, one may refer to Schneider and Aznavour to consider that no conict should arise since the abuse of law would operate a reclassication under domestic law, which takes us back to domestic law and the principle
of subsidiarity.
1.4.3.2. Article 209B of the FTC (CFC rules)
The question of the applicability of article 209B of the FTC in a tax treaty situation
was addressed in Schneider 45 and, as a result, article 209B was amended.
41
42
43

44

45

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CE, 26 February 1992, Malet.

CE, 11 April 2008, Cheynel.
See CE, 20 June 2003, Interhome AG; CE, 5 April 2006, Midex, regarding the concept of permanent establishment, CE, 31 July 2009, Thoroughbred Racing Overseas Stud Farms, regarding real
estate income of a non-resident company.
With the exception of the Bank of Scotland case law, where abuse of law was applied to abuse of
tax treaty provisions (see section 1.5 below for more details on this question).
See above note 43.

AUSTRY, COLLET
Schneider was a French resident company which owned 100 per cent of Paramer, a Swiss resident company subject to a low-tax regime. The sole purpose of
Paramer was to manage nancial assets. Consequently, the FTA regarded Paramer
as a CFC for the purpose of article 209B. The court applied the so-called subsidiarity principle and held that article 209B led to the prots of Paramer being taxed
in France before turning to the DTT between France and Switzerland (in its redaction applicable at that time) and concluding that in the absence of a PE of Paramer
in France, its business income could not be taxed in France.
Article 209B was amended in 2005 and the prots of a CFC are now dened as
deemed distributions in order to remedy the tax treaty business prots and PE
issues. As a result, the application of article 209B should now depend on the wording of the DTT, and on the denition of the dividends under the DTT. If dividends,
under the applicable tax treaty, include deemed dividend distributions, article 209B
is applicable. Otherwise, the prots of the foreign company should fall into the
scope of the other income article and accordingly France should, in most cases,
be allowed to tax the CFC deemed distributed prots. Also, numerous specic provisions in DTTs allow France to apply its CFC rules.
1.4.3.3. Article 155A of the FTC: artiste and sportsmen companies
The applicability of article 155A in a DTT context was addressed in Aznavour,46 a
famous French singer tax resident in Switzerland and performing concerts in
France through a company (promoter) established in the UK. Under domestic law
preventing rent-a-star arrangements and subject to conditions (which were
regarded as met in Aznavour), the income deriving from the performance was taxable in the hands of the artiste.
The presumption of article 155A led the Conseil dtat to determine (a) that the
treaty with the UK should not apply since the UK company was not regarded as the
taxpayer pursuant to the domestic presumption and (b) that the income being so
derived by the artiste (even though there was no information on the arrangements
with the UK company) was taxable in France based on the treaty with Switzerland
(which attributed to France the right to tax the remuneration under the artistes and
sportsmen article). This decision raises many issues but appears to be an extreme
expression of the subsidiarity principle since tax treaty treatment should be
addressed based on a domestic analysis deriving also from presumptions based on
domestic anti-abuse provisions.
1.4.3.4. Article 212 of the FTC: thin capitalization rules
Until 31 December 2006, thin capitalization rules did not apply between companies of the same group (i.e. companies which fullled the conditions for the
participation exemption regime), but they fully applied if the parent company
was a non-French company since a non-resident parent company was not liable
to tax in France. In Andritz,47 the Conseil dtat ruled that this distinction was
46
47

See above note 44.

CE, 30 December 2003, SA Andritz.

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discriminatory and did not comply with the non-discrimination clause of the
FranceAustria treaty.
As a result,48 the thin capitalization rules were modied by a law dated 30
December 2005, in order to make them compliant with DTTs (and with EC law), in
extending their full application to domestic parent companies.
1.4.3.5. Other specific provisions
The former regime of the exit tax (ex-articles 167 and 167bis of the FTC, applicable until 31 December 2004) gave rise to some case law, especially in the context
of EU law (as seen above in section 1.3.2). The application in a DTT context has
also been addressed in case law rendered in non-EU situations (i.e. a French resident moving to Switzerland), but the court determined that the exit tax was compatible with the DTT.49
To date, the question of the applicability of other anti-abuse provisions in a DTT
context remains to be addressed.
1.5. Abuse of the t ax t reat y: domestic law principles or
interpret at ion of the treaty?

The benets of a tax treaty may not be granted to transactions which tend to take
abusive advantage of the provisions of the DTT. Even if French law does not provide for specic legislation dedicated to the abuse of a DTT itself, such an abuse
may be sanctioned based on domestic law principles.50 This is conrmed in Schneider which strongly reafrms the subsidiarity principle. The abuse of a tax treaty is
legally granted in the statutory general anti-avoidance abus de droit. Abuse of tax
treaties may be sanctioned only based on the statute and not on the DTT itself (see
Schneider).51 Unless an abus de droit is characterized under domestic law, there
can be no situation of abuse of a tax treaty.
In Bank of Scotland 52 the cross-border dividend stripping transaction giving
rise to a refund of tax credit granted based on the UK DTT was successfully challenged based on the abuse of law. Resorting to the DTT condition of benecial
ownership would not have been sufcient as it would have been difcult to deny to
the UK recipient bank the status of benecial owner since the Bank of Scotland
enjoyed all the ownership rights on the dividend received. For the FTA to be able to
challenge the transaction in reclassifying the sale transaction into a loan and
48

49

50
51

52

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And also in Coral Gestion, rendered the very same day by the Conseil dtat, thin capitalization
rules were considered as contrary to the EU principle of freedom of establishment.
TA of Paris, 3 July 2008, Daumen: the taxpayers were still French residents when art. 167bis triggered taxation of their latent capital gains, so that the FranceSwitzerland treaty could not apply in
their case.
OECD commentaries under art. 1, 9(1) to 9(3).
CE, 28 June 2002, Schneider Electric: Even if it were established that one of the purposes of the
[FranceSwitzerland] tax convention is the prevention of tax avoidance and evasion, this purpose
cannot, unless a specific provision would allow doing so, lead to disregard provisions of the tax
convention.
CE, 29 December 2006, Bank of Scotland (see above for a description of the facts, under section 1.3).

AUSTRY, COLLET
accordingly to consider the borrower in the US seller as the actual owner of the
dividend having assigned its payment to the lender, the UK bank for the purpose of reimbursement the FTA had to resort to the abuse of law.
Therefore, the French view of the abuse of the DTT based on the subsidiarity
principle appears consistent with 9(2) of the OECD commentaries, under article 1
which refer to domestic provisions as the main and necessary source (see above)
and not with 9(3) which covers jurisdictions with distinct abuses of DTTs.
Moreover, the denition of the abuse of law in France does not precisely comply
with the main recommendation of the OECD on the abuse of tax conventions
(9(5), under article 1). The abuse of law is stricter for the FTA which must justify
that tax is the exclusive purpose and not the main purpose of the taxpayer, as
stated by the OECD.
Otherwise, both French law and the OECD require the cumulative criteria
regarding the favourable treatment to be contrary to the object and purpose of the
relevant provisions.
Regarding 22(2) of the OECD commentaries under article 1 reminding states
to comply with the relief for double taxation provisions in DTTs as long as there is
no clear evidence of an abuse, the position of the FTA remains uncertain.
Last but not least, one may still wonder if the abuse of law may be applied without any specic provisions in the tax treaty allowing this. If the predominant view
is that the subsidiarity principle calls for an afrmative answer, another reading of
Schneider may lead to another conclusion:
Even if it were established that one of the purpose of the tax convention is the
prevention of tax avoidance and evasion, this purpose cannot, unless a specic provision would allow doing so, lead to disregard provisions of the tax convention

Bank of Scotland could also be viewed as conrming that interpretation with the
use of the treaty test of benecial ownership as solidifying the reclassication
made based on the abuse of law. It is, however, the reporters opinion that the scope
of the abuse of law under French law is wide enough to cover covert and overt
abuse of a tax treaty with no need for a specic provision.

2. General and specific anti-avoidance provisions in

tax treaties
2.1. General overview

France has the largest tax treaty network with 112 DTTs.53 France being an OECD
country, most of its DTTs comply with the OECD model convention in use at the
time of their signature.54 To date, the FTA has not issued its own model convention
that could be used as an alternative to the OECD model convention. France tends,
53

54

Regarding income and capital tax treaties applicable as of 1 July 2009 (other tax treaties may apply
only regarding specific taxes, such as inheritance tax or registration tax).
Except for a few tax treaties with developing countries which follow the UN model convention.

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however, to have a consistent international tax policy with DTTs being comparable
subject to some differences based on the context with the treaty partner.
French tax treaty policy generally resorts to a core of general and specic antiavoidance provisions (as detailed below under sections 2.3 and 2.4). All the antiabuse provisions of the OECD model convention are not included in DTTs since
the French approach to anti-abuse refers to the intention of the taxpayers despite
the legal form of the arrangement. Also anti-abuse provisions, such as limitation of
benets (LOB), with a list of objective tests are not necessary, given the wide scope
of the domestic abuse of law theory (see section 2).
Introduction of anti-abuse provisions in DTTs generally depends on a wide
range of criteria:
the treaty partner, whether it is a low-tax country or not (e.g. with Luxembourg or Malta: exempt holding companies are excluded from treaty benefits);
the date of signature of the treaty and the corresponding French international
tax policy;55
the course of the negotiations: some anti-abuse provisions may be laid down
by the other contracting state (e.g. LOB provisions);56
EU law, since this has a major influence on tax treaty provisions even for
treaties with third countries (see section 3).
French treaties generally may also include more specic anti-avoidance provisions
which may not correspond to the recommendations of the OECD.
2.2. Specific t reat y provisions allowing application of domestic
anti-avoidance provisions

DTTs may include specic clauses in order to allow the application of domestic
anti-avoidance provisions. This may be the case in relation to thin capitalization
rules (article 212 of the FTC), CFC rules (article 209B of the FTC), and rent-a-star
company rules (article 155A of the FTC). Fifty out of 112 tax treaties specically
stipulate a provision allowing application of article 212, and 20 out of 212 allow
application of article 209B.
In the treaty recently negotiated with Qatar, a specic provision also allows the
application of article 123 bis and 238A of the FTC. A general provision allowing
application of domestic anti-abuse provisions as a whole has also been included
(Nothing in this Convention shall prevent the States from enforcing the anti-abuse
provisions of their domestic laws agreed by the two competent authorities)
Specic treaty provisions allowing application of (a) article 209B (CFC rules)
and (b) article 155A (anti-rent-a-star companies) have been addressed in case law:
In Nord Est,57 the CFC rules were applied to a French company with respect
to the profits of its Swiss subsidiary. The lower tax court of Paris confirmed
Schneider in determining that the business income article of the France
Switzerland treaty prevented France from taxing the profits of a Swiss com55

56
57

326

For example, as provisions intended to limit the availability of benefits under tax treaties were not
included in the OECD model convention before 1977, most tax treaties signed before that date do
not contain any such provisions.
E.g. in the 2007 amendment to the FranceJapan treaty.
TA Paris, 2 December 2008, Nord Est.

AUSTRY, COLLET
pany in the absence of a PE (prior to the 2005 revision of article 209B). However, the court held that a specific provision introduced into the treaty by the
1997 amendment allowed the application of article 209B.
In Aznavour 58 the Conseil dtat provided an interesting clarification on the
application of article 155A to a Swiss resident artiste in the context of a tax
treaty including a provision on artistes and sportsmen compliant with the
OECD model convention (article 17(1)) even though the precision added later
by article 17(2) of the model was not yet featured in the treaty. Mr Aznavour
was a Swiss resident, and the remuneration relating to his activities performed in France was paid to a UK resident company. The provisions of the
treaty under their redaction applicable to the case stipulated that income
derived by [an artiste who is a Swiss resident] from his personal activities as
such exercised in [France] may be taxed in [France]. The new paragraph
attributing the right to tax to the country of source (France) where income in
respect of personal activities exercised by an entertainer or a sportsman in his
capacity as such accrues not to the entertainer or sportsman himself but to
another person was introduced later. This did not prevent the Conseil dtat
from determining that article 155A was applicable and that the income paid
to the UK company for performances in France was taxable in France.
No case law has been published, to date, regarding other specic treaty provisions
allowing application of domestic anti-abuse provisions in a tax treaty context.
2.3. General anti-avoidance provisions in t ax t reat ies

2.3.1. Beneficial ownership

The benecial ownership test is an anti-avoidance provision included in most
French DTTs.59 It is generally viewed as an important anti-treaty shopping measure
and yet the concept has not been precisely dened in a tax treaty context. It gave
rise to two major cases in Diebold 60 and Bank of Scotland.61 In Diebold a Dutch
transparent partnership, a CV held by two Dutch resident partners received royalties from a French debtor free of withholding tax; 68 per cent of the royalty income
was then paid to a Swiss entity. The FTA rst denied the treaty benet based on the
abuse of law consisting of a ctitious arrangement aiming at avoiding withholding
tax which would have been due with a direct payment to the Swiss entity. Having
some difculties in justifying that the CV was ctitious, the FTA claimed that the
CV, as being not liable to tax (as a transparent entity), could not claim the treaty
benet. In any event, argued the authorities, the CV could not be regarded as the
benecial owner of the royalty payments since payments made to the Swiss entity
were regarded as excessive. The Conseil dtat broke new ground in looking
58
59

60
61

See above section 1.4.3.4 for details on the facts.

The beneficial owner concept can be found in at least 81 (out of 112) tax treaties. A few treaties
(6) do not include a beneficial owner clause with respect to all three types of passive income (dividends, interest, royalties). Some tax treaties may provide for the beneficial owner requirement
under the other income clause.
CE, 13 October 1999, Diebold Courtage.
CE, 29 December 2006, Bank of Scotland: see above under section 1.

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through the CV and in considering the tax residence of the partners to conrm the
zero withholding tax treatment. Also, the Conseil dtat addressed the benecial
ownership test even though it was not provided in the treaty. The Conseil dtat
considered that in the absence of justication on the excessiveness of the payment
to the Swiss entity, it could not be held that the CV was not the benecial owner of
the royalty. A few lessons may be drawn from this decision.
The denition of benecial ownership appears narrow. The Conseil dtat disregarded the fact that all the operating substance of the CV lay in the Swiss entity
and that the remaining prot to the partners looked more like an intermediary fee
(10 per cent). One may consider that the treaty denition targets mainly mere conduit companies/entities, i.e. persons who derive income in the capacity of intermediary, agent, or nominee. This appears to be a narrow denition. In Bank of
Scotland, the Conseil dtat had to resort to the abuse of law to reclassify the transaction even though the decision was also based on the failure to meet the benecial
ownership test. This may appear as the conrmation of a narrow understanding of
the test in a treaty context.62
The FTA and courts may refer to that test even though it is not provided in the
treaty.63 Based on an a contrario interpretation of Diebold, most practitioners
agreed that the application of all tax treaties should be regarded as contingent to the
benecial owner test being passed, irrespective of whether the treaty concerned
included a specic benecial owner provision.
To some extent, the tax treaty benecial ownership test echoes the domestic
jurisprudence whereby the authorities may ignore abusive interpositions of persons. Interestingly enough, one may refer to that test without the abuse of law if the
arrangement is not regarded as purely tax driven. However, Diebold illustrates that
judges generally have a more restrictive approach than the FTA when it comes to
the content of the concept,64 despite the wide scope of application of the benecial
owner requirement, in practice.

2.3.2. Exchange of information

A clause providing for an exchange of information is included in almost all French
tax treaties65 (as provided in the OECD model convention, article 26): it may also
be a specic agreement providing only for an exchange of information relating to
tax matters.66
Introduction of such a clause is generally initiated by the FTA, when negotiating a treaty, as it considers that the exchange of information with the other state is
one of the major anti-tax fraud provisions (as the benecial owner concept and
62

63
64

65
66

328

In a dividend stripping transaction between a US parent company and a UK bank in relation to

French source dividends, the FTA could hardly sustain that the bank, owner of the stripping rights
(usufruct) attached to the stock, was not the beneficial owner of the dividends paid. See above section 1.5 for the relation between beneficial ownership and abuse of law.
Thirty-one of the tax treaties in force do not specifically stipulate a beneficial owner requirement.
See also CAA Nancy, 14 March 1996, SARL Inter Selection, and TA Lille, 18 March 1999, SARL
Fountain Industries France.
In 98 out of 112 tax treaties in force as of 1 July 2009.
Agreements were signed with Jersey, Guernsey, Isle of Man on March 2009, but they were not yet
in force at the time of this report.

AUSTRY, COLLET
other specic anti-abuse provisions may be). The exchange of information has been
playing a major role in international situations in recent months (see the OECD
publication of white, grey and black lists of cooperative and non-cooperative countries, in 2009).
France has played an active part in that process and, in the year 2009, has initiated various negotiations to implement an exchange of information with tax
haven jurisdictions (with which the exchange of information provision was not
OECD compliant, e.g. with Switzerland)67 or to update DTTs with other countries.
The existence of an exchange of information is also of major importance under
domestic tax law: the FTC provides for numerous favourable tax treatments subject
to an exchange of information (e.g. withholding tax on dividends, tax credits and
other rebates).68

2.3.3. LOB provision

The LOB provision is one of the recommendations of the OECD to combat anticonduit companies, in a comprehensive way rather than a provision dedicated to
specic conduit situations (commentary under article 1(20)).
France does not usually include an LOB provision in its DTTs: an LOB clause
appears in only 3 of Frances 112 treaties (with the USA, Japan and, in some
respects, Switzerland). France is not familiar with this provision as it requires an
objective analysis of the situation: the issue is whether the tests are met or not, irrespective of the intention of the taxpayer. In France, the issue of whether a transaction was designed to avoid tax or not is critical for the purpose of the abus de droit.
2.4. Specific anti-avoidance provisions in tax treat ies

French DTTs provide for different types of specic anti-abuse provisions in order
to prevent tax fraud and tax evasion. Some of them conform to the OECD recommendations; some have been imposed by the other contracting state since they do
not correspond to the traditional international tax policy of France. Also some may
address some regional issues such as the treaties with Middle Eastern countries.

2.4.1. Main traditional provisions

artistes and sportsmen: as provided under article 17 of the OECD model convention, almost all French tax treaties provide for a specific provision
designed to prevent the rent-a-star companies.69 Under this article, artistes
and sportsmen are taxed in the country where they perform their activities.
Intermediary entities may be disregarded. This provision is consistent with
the corresponding domestic anti-avoidance provision (article 155A of the
FTC);

67

A new version of the exchange of information was signed on 27 August 2009 with Switzerland
which is now compliant with OECD recommendations (it was not yet in force at the time of this
report).
See above under section 1.3 for examples of such provisions and the appendix for an extensive listing of these provisions.
At least 99 out of 112 tax treaties.

68

69

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a provision limiting the benefits of the tax treaty if the income is taxed in the
other contracting state only on a remittance basis;
a provision to prevent abuse of the domicile or residence: this provision is
included in almost all DTTs with Middle Eastern countries. It allows France
to tax the income of the entity established in the other country, irrespective of
the provisions of the treaty. This provision is similar to that of CFC rules
(article 209B of the FTC, as stated above). For instance, the FranceOman
treaty provides (article 19) that:
Where a person who is a resident of the Sultanate of Oman or who is established there is fiscally domiciled in France for the purposes of French internal
law or is a subsidiary directly or indirectly controlled for more than 50 per
cent by a company with its place of effective management in France, the
income of that person shall be taxable in France notwithstanding any other
provision of this Convention.

2.4.2. Main specific provisions

The main specic treaty provisions which may be considered as being initiated by
the other contracting states include:
Provisions on PEs to be taxed on a wider basis of income (i.e. profits not
directly made by the PE but which could be deemed related to its activities).
For instance, the FranceKazakhstan treaty (protocol, point 5(a)) states that:
profits generated by sales of goods of the same or similar nature as those
sold through the permanent establishment, or commercial services of the
same or similar nature as those carried out through the permanent establishment, are deemed taxable at the level of the permanent establishment

The main purpose test: some DTTs provide for a main purpose test provision
or one of the main purposes test, generally applicable to passive income
(dividends, interest, royalties, more rarely other income).70 The common wording is:71
The provisions of the Convention shall apply only if the beneficial owner of
the dividends shows, where required to do so by the tax administration of the
other Contracting State, that the holding in respect of which the dividends are
paid has not, as its principal purpose or as one of its principal purposes, the
purpose of taking advantage of this Article

There are anti-double exemption provisions, which allow for taxation in a

state, without regarding the tax treaty, where a double exemption exists (a)
either because of a conflict of classification of the income between the two
contracting states (e.g. the DTTs with Kazakhstan or Austria) or (b) if the

70

Sixteen out of 112 tax treaties provide a main purpose provision. Only 6 of these 16 tax treaties
provide for a main purpose test under the clause applicable to other income.
FranceAlbania treaty, art. 10(8).

71

330

AUSTRY, COLLET

income is not taxed in the other contracting state (e.g. the DTTs with Italy or
Saudi Arabia).
Provisions specifically designed to deny treaty benefits to specific entities
which benefit from a preferential tax regime, as provided by the OECD commentaries, under article 1(21). For instance, in the FranceLuxembourg DTT,
holding 1929 companies (i.e. benefiting from a tax exemption) are not in the
scope of the treaty. Under the FranceJapan DTT, a provision denies exemption of withholding for dividends received by a tokumei kumiai (a Japanese
legal entity subject to a favourable tax regime).72
Anti-conduit companies: under the treaty with Switzerland, a specific antiabuse provision denies the benefit of the tax treaty if the other company is
owned by entities which are not eligible entities pursuant to the treaty.

3. Relationship with EU law

EU law prevails over the domestic law of Member States and therefore not only domestic legislation but also DTTs, even with third countries, must comply with EU law.
3.1. Relationship bet ween EU law and domestic legislat ion

Anti-abuse provisions must comply with the treaty establishing the European Community which provides for four fundamental freedoms also applicable to tax matters: freedom of movement for workers, freedom of establishment, freedom of
goods and services and freedom of movement of capital. If domestic legislation
restricts the use of one of these freedoms, it is not applicable, unless it is justied
by imperative reasons of public interest and is necessary and proportionate to meet
the overriding requirement of general interest, e.g. to combat tax evasion,73 or to
guarantee the effectiveness of scal supervision.74 The freedom of movement for
capital applies also in relations with non-EU Member States.
In the past, domestic anti-abuse legislation has already been struck down as
being contrary to one of the four fundamental freedoms by domestic courts75 and
by the ECJ,76 which has triggered reforms.
Anti-abuse provisions must also comply with the EU derivative rules, such as
EU directives, when these derivative rules are introduced in domestic law. For
instance, articles 119 ter and 119 quater of the FTC introduced the EU exemptions
on dividends, interest and royalties subject to an anti-abuse provision which is a
transposition of the anti-abuse provision included in the relevant EU directive.77
72

73
74
75

76
77

Other DTTs may include similar provisions: the treaties with Malta or with Switzerland (no reduced
withholding tax on dividends where the holding company is owned by a non-EU company).
ECJ, 12 December 2002, C-324/00, Lankhorst-Hohorst GmbH.
ECJ, 20 February 1979, C-120/78, Rewe-Zentral, so-called Cassis de Dijon.
Regarding CFC legislation(art. 209B, or art. 123bis: CAA Nancy, 22 August 2008, Rifaut); thin
capitalization rules (art. 212: CE, 30 December 2003, Coral Gestion).
Regarding the exit tax legislation: ECJ, 11 March 2004, C-9/02, de Lasteyrie du Saillant.
Respectively, Directive 90/435/CEE of 23 July 1990 (for dividends) and Directive 2003/49/CE of 3
June 2003 (for interest payments).

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3.2. Relat ionship bet ween EU law and t ax t reat ies

The anti-abuse provisions of tax treaties must also comply with EU law: if not, they
cannot be applicable.78 This is why tax courts have held that even though the tax
treaty would allow the application of a domestic anti-avoidance provision (e.g. article 212), the latter may not be applicable if it does not comply with EU law.79
EU law also has a major inuence in the negotiating process of tax treaties: the
FTA may not negotiate a provision which could prove non-EU law compliant
either vis--vis EU countries or non-EU countries (e.g. the LOB provision of the
FranceUSA treaty was renegotiated in January 2009: EU compliant clarications
have been included even though they may still be challenged).

Appendix
Some specic anti-abuse provisions consist of the denial of favourable tax treatment if the income is not derived from a qualifying tax treaty jurisdiction or from a
qualifying entity:
allowances and tax credits (personal income tax or corporate income tax):
articles 199 terdecies 0 A and B, 199 quindecies, 200 terdecies, 200 quaterdecies, 220 terdecies, 244 quater B, 244 quater J, 244 quater U;
capital gains tax regime: articles 150-0A, 150-0D bis, 150U, 151 septies A,
163 bis G, 200B, 244 bis A;
withholding tax: articles 117 quater, 119 bis 2, 125A, 125D, 187, 1672;
tax regime of capital risk entities (FCPRs, SCRs, etc.): articles 38.5, 39 terdecies 5, 150-0B, 163 quinquies B, 163 quinquies C and C bis, 208D;
personal income tax: articles 81A, 122, 123 bis, 125-0A, 155B, 158, 168;
corporate income tax: articles 39C II, 209B, 209C, 210-0A, 239 bis AB.

78
79

332

ECJ, 21 September 1999, C-307/97, Compagnie de Saint-Gobain.

TA Cergy-Pontoise, 11 July 2002, St Ceia International: art. 212 of the FTC (thin capitalization
rules) was ruled applicable pursuant to the tax treaty but, since it was contrary to the freedom of
establishment, it could not in the end be applicable.