In an international context where personal and professional mobility are increasingly frequent, bilateral agreements play a key role in fostering cooperation between countries, particularly in terms of taxation.
A bilateral tax treaty is an agreement concluded between two States to determine the rules applicable to the taxpayers who could be liable to tax in both States, and to avoid double taxation. The Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains of June 19, 2008 (hereafter “the Franco-British Convention”), perfectly illustrates this objective. It secures the tax position of nationals with links to both France and the UK, by providing them with a clear legal framework, while eliminating the risk of double taxation.
This agreement is a key instrument in Franco-British relations, and anyone considering expatriation or extending their business activities in France should be familiar with it.
Like the Franco-Mauritian and Franco-American conventions, the Franco-British Convention is a legal tool that Citizen Avocats uses or interprets on a daily basis. You will find below a summary of its main rules, depending on the type of income envisaged. Bear in mind, of course, that in matters of international taxation, each situation deserves to be considered on a case-by-case basis, through a personalized consultation.
Employment income
Employment income corresponds to wages, salaries and other similar remuneration received in respect of employment.
Under the Franco-British Convention, such employment income is taxable only in the State in which it is received, unless the activity from which it derives is carried out in the other State.
There are, however, some exceptions to this simple principle.
For example, remuneration received by a French resident in respect of employment in the UK is only taxable in France if they have spent less than 183 days in the UK over 12 consecutive months, if the employer is not himself resident in the UK, and does not have a permanent establishment there.
Real estate income
Real estate income corresponds to income from the ownership, operation or rental of real estate, including income from farming or forest operations.
Under the Franco-British Convention, income from real estate is taxable in the State where the property is located. This rule is systematically applied in bilateral treaties signed by France.
It applies regardless of the owner’s tax residence and covers all types of income from real estate: rents, rental income, direct or indirect operating income, etc.
This rule is not affected by the interposition of an entity such as a société, company, trust or partnership, since income derived from the direct use, rental or enjoyment of the property remains taxable in the State where the property is located, regardless of the nationality or place of effective management of the entity.
Thus, a French resident receiving income from a property in the UK will be taxable in the UK on that income, and vice versa.
Dividends
Dividends are income distributed to a company’s associates or shareholders, in return for their shareholding. Dividends may be paid on shares, participation certificates, dividend-right certificates, founders’ shares or other profit shares, but exclude income from receivables. In this section, we focus on dividends paid between companies in the same group.
By default, these dividends are taxable in the beneficiary’s country of residence. However, the country where the dividends originate (i.e. the country of the distributing company) may also levy a withholding tax at a maximum rate of 15% if the dividends are paid to a beneficial owner.
The situation is slightly different when dividends are paid between companies belonging to the same international group. In this case, if the company receiving the dividends is subject to corporation tax in its country of residence and holds (directly or indirectly) more than 10% of the capital of the distributing company, then taxation is only levied in the country of receipt, and not in the country of distribution.
Interests
Interest refers to income from claims of all kinds, with or without mortgage guarantees or participation clauses, and in particular income from public funds and bonds. The term “interest” does not include income considered as dividends.
Under the Franco-British Convention, interest paid from one State to a resident of the other is in principle taxable only in the State of residence of the beneficiary (the one receiving the interest).
However, if such interest relates to an activity carried on through a permanent establishment situated in the State of origin, it may be taxed in that State according to the rules applicable to business profits.
Where there is a special relationship between the debtor and the beneficiary (e.g. two companies in the same group), if the interest paid exceeds the amount that would have been agreed in the absence of such relationship, only the “normal” part of the interest (the notion implicitly envisaged is that of usual market conditions) benefits from the regime set out in the Franco-British Convention.
Company profits
Business profits correspond to the results obtained from the exercise of an industrial, commercial, craft or liberal activity by a company or entrepreneur. To determine these profits, deductions are made from the turnover for expenses incurred in connection with the activity, including management expenses and general administrative costs incurred in this way.
Under the terms of the Franco-British Convention, such profits are taxable exclusively in the State of which the company is resident, unless it carries on business in the other State through a permanent establishment.
In this case, only the profits attributable to the permanent establishment may be taxed in the State where it is located. The remaining profits remain taxable in the company’s State of residence.
Let’s take the example of a British company whose main business is based in London, but which decides to open a branch in Bordeaux to meet local demand. As long as it does not have a permanent establishment in France, all of its profits will remain taxable in the United Kingdom. However, if the Bordeaux branch is classified as a permanent establishment, France will be able to tax the profits directly attributable to the activity carried out by that local branch.
Property wealth tax
According to the 2008 Convention, taxation of immovable property is, in principle, the monopoly of the State where it is located. However, wealth tax does not specifically fall within the scope of the Franco-British Convention, meaning that property located abroad may be included in the calculation of wealth tax for French tax residents.
For example, a French tax resident owning a property in the UK would still be liable to the IFI on that property, even though the UK, for its part, applies no equivalent tax.
Moreover, the taxpayer will not benefit from any tax credit, since the United Kingdom does not levy a tax of a comparable nature. The property is fully integrated into the IFI tax base, with no possibility of compensation.
For example, James, a French tax resident, owns a second home in Brighton. Although it is located in the UK, which has no wealth tax, he will have to declare it to the French authorities. The value of the second home will be included in the calculation of the IFI.
We regularly deal with Franco-British tax issues and work with the English law firm SO Legal Ltd to help our clients secure and optimise their cross-border taxation arrangements.
Article co-written by Ms Zoé Bourdarie (trainee solicitor) and Mr Simon Deceuninck (partner).
