Austry Cahier

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France

Branch Reporters

Stphane Austry

Michel Collet

311

IFA 2010

* CMS Bureau Francis Lefebvre, Paris1 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.

Summary and conclusions

France is a written law and a civil law country; anti-avoidance provisions thus havea written source. They are codified in statute (code gnral des impts: French taxcode (FTC)). They derive mainly from tax law1 and tax treaties.

France applies a territorial principle. Corporations are subject to corporateincome tax on income that is attributable to their French based activity only andnot attributable to foreign operations through permanent establishments (PEs) orsubsidiaries. Foreign companies may be subject to French corporate tax on theirFrench source income. French resident individuals, however, are liable to personalincome tax on their worldwide income.

With as many as 112 double tax treaties (DTTs) in force, France has the mostextended tax treaty network. To prevent treaty shopping, France has implemented anumber of anti-abuse provisions pursuant to an interesting and constant develop-

ment mainly in response to the sophistication of international transactions.The first development dealt with domestic legislation for anti-abuse provi-

sions. The first statutory anti-abuse provision is the general abuse of law (abus dedroit). The abus de droitmay apply to both domestic and international arrange-ments and its scope has been extended since its codification in 1941, notably bythe Conseil dtat (French Supreme Administrative Court) case law and mostrecently in 2008.

This provision allows the French tax authorities (FTA) to challenge anyarrangements which are either fictitious or genuine but designed solely to avoid orevade 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 inter-national tax abuse.Specific anti-avoidance provisions were enacted later, to prevent international

abusive transactions for companies and individuals. They target specific types ofincome (interest income, dividends, etc.) or schemes (rent-a-star companies, etc.).

In France tax treaties prevail over domestic law. However, issues should beaddressed first through the filter of domestic law either in terms of classification ofincome or in terms of treatment. Only then should one look at the tax treaty and


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determine whether the treaty allows the domestic treatment. This is referred to asthe so-called subsidiarity principle.

The same principle applies to domestic anti-abuse provisions. The general stat-utory anti-abuse abus de droitshould be characterized first under domestic law tostrike down an abuse of tax treaty. Also specific anti-abuse provisions may apply aslong as the relevant tax treaty allows it. For instance, in Schneider, French con-trolled foreign company (CFC) rules could not apply in the absence of a PE of theCFC 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 interestin relying on some of them. For instance, and as in some other countries, the bene-ficial ownership test may well become a powerful tool to the FTA. The tax treaty

beneficial ownership test, which may also be viewed as already existing in domes-tic law, may be stapled to the domestic abus de droit.

Because anti-abuse provisions have a written source, they evolve less easily thanin common law countries. However, this does not prevent the FTA and courts fromfocusing more and more on the economic substance of transactions. This trendtranslates into a more demanding requirement for taxpayers to justify the businesspurpose and the economic substance of transactions. Recent case law went througha risk analysis and an in-depth scrutiny of the terms of a transaction with their cor-responding consequences for the parties. To some extent it may be considered thatthe 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 droitmay soften the import-ance of this requirement if the tax benefit claimed by the taxpayer does not prove tocontradict the objective of the measure based on legislative history.

If the case law of the European Court of Justice (ECJ) may be viewed as havingfuelled that recent development of the French courts, on the other hand, the ECJ hasnot hesitated to strike down domestic anti-abuse provisions as being too broad andnot sufficiently narrow to target actual abusive transactions where the provisionsare 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 espe-cially France, is to gain access to information regarding international transactionsand taxpayers in order to reduce the gap between taxpayers and the tax authoritiesin the knowledge and understanding of ever more sophisticated transactions.Obviously, access to information also leads to more efficient tax audits. Franceconsidered at some point introducing disclosure requirements (as in the USA andthe UK). France is now currently one of the leading countries seeking trans-parency and exchange of information with non-cooperative states. The FTA hasalready made it clear that it is looking forward to testing the recently signed agree-ments 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 withholdingtax of 50 per cent and the disallowance of payments made to non-cooperativecountries.

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1. Domestic anti-avoidance provisions with aninternational scope

1.1. General overview

French tax law provides numerous provisions allowing the FTA to counter taxavoidance or evasion.

Provisions with a general focus have been used to fight tax avoidance in whollydomestic situations before being also applied to international or cross-borderarrangements. These include the abus de droit, an abnormal act of management(acte anormal de gestion) provision and the general right of the authorities toreclassify contracts or arrangements.

The abuse of law2 has been playing a more important role in international situ-ations for the past few years. Legal provisions of the abuse of law were redrafted inthe 2008 Supplementary Finance Act to codify the most recent developments fromthe Conseil dtatcase law. The abuse of law is now a favourite tool available to theFTA in an international context.

In addition to general anti-avoidance provisions, French tax law provides for arange of specific provisions which are designed for international arrangements.These provisions have been adopted since 1972 in order to prevent abusive arrange-ments in a cross-border context, which could only with difficulty have been chal-lenged by the FTA under the general anti-avoidance provisions. Almost all of these

provisions have been modified in the past few years in order to comply with non-discrimination principles in DTTs and/or in EU law.

A critical provision addressing indirect transfer of benefits to a foreign affiliate(codified under article 57 of the FTC) is not addressed in this report since it relatesto transfer pricing issues which go beyond the scope of the present report.3

1.2. General anti-avoidance provisions with 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 arrangementwhen certain conditions are met;

aside from the abuse of law, the FTA may reclassify a transaction based onthe actual intent of the parties. The difference from the abuse of law may bevery slight but this provision applies even where the intention may not be taxavoidance;

the abnormal act of management provision allows the FTA to challenge the taxdeductibility 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

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2 Codified in art. L.64 of the Tax Procedural Code (Livre des Procdures Fiscales (LPF)).3 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 sit-uations, 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. Thefollowing developments focus on the abuse of law procedure, which is in Francethe only general statutory anti-avoidance tool which may apply equally to domesticand international arrangements.

In principle, agreements are deemed to be real and binding, including agree-ments between related parties. If they provide for reciprocal obligations, theseobligations are deemed to be normal. Accordingly, taxpayers may exercise full dis-cretion 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 disre-

gard the form of a transaction if it does not reflect the real nature or reach of theintended transaction. The scope of the abuse of law has been defined by thejurisprudence further to an interesting development. The 2008 Amending FinanceAct extended the scope of the abuse of law with the introduction of the generalprinciple 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 developedby civil courts and was codified 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 first 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 efficiency of the abuse of law

for international investments and financial transactions has been confirmed.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 theactual nature and objective of the transactions, which were to avoid tax.7

In addition to fictitiousness, the Conseil dtathas determined8 that the abuseof 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 struc-turing actual transactions in a tax efficient manner. Taxpayers may seek to tax planif transactions are real with a business purpose, even if this is ancillary.9

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4 The first case law recognizing a sui generisright for the FTA to challenge the validity of transac-tions in the case of tax avoidance or obvious evasion was rendered by the Cour de cassation, on 20August 1867. Major amendments of the 1941 Law were enacted afterwards by statutes or lawsdated 27 December 1963, 8 July 1987 (Aicardi Law) and 30 December 2008 (Amending FinanceAct for 2008).

5 CE, 18 February 2004, Min. c/ Socit Pliadeand CE, 18 May 2005, SA Sagal.6 The CE held that abuse of law provisions are compliant with EC law.7

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.

8 CE, 10 June 1981, no. 19,079.9 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.


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Subsequent decisions confirmed the extension to non-fictitious acts being exclus-ively tax driven: but, until the year 2004, only a little case law dealt with interna-

tional applications. Most of it was applied to rent-a-star arrangements,

10

prior tothe introduction of special anti-abuse provisions11 (article 155A of the FTC, seesection 1.3.2).

The application of the abuse of law procedure was first raised on outboundtransactions in treaty shopping cases. French source royalties were paid to a Dutchcompany with a zero withholding tax treatment thanks to the tax treaty betweenFrance and the Netherlands. The royalties were then passed on almost entirely to anon-treaty-protected entity formed in the Dutch Antilles.12 A lower tax court deter-mined that the transaction was not abusive13 since the FTA, alleging that the Dutchcompany was the financial transparent agent (mandataire), failed to justify it (thesame 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 whenFrench companies structured their investments through foreign subsidiaries (some-times benefiting from favourable tax treatments locally) in order to receive tax-free dividends in France. The lower tax courts considered that the abus de droitwas not applicable based on the fictitious argument with foreign companies sincethe companies were duly incorporated and managed in accordance with domesticlegislation.

However, in 2004 and 2005, the Conseil dtatbroke new ground in introducingthe notion of corporate substance based on the solely tax driven argument, in thePliadeand Sagalcases.15

Plaide and Sagal were rendered on the same transaction for two differentinvestors. The structure well known at that time consisted in taking the benefitof the participation exemption regime on dividends without falling within the scopeof the CFC rules which required a higher percentage of ownership. French com-panies were investing their excess cash in an exempt entity (a Luxembourg holding29 company) which managed a financial portfolio. No tax was borne on the incomeand on its repatriation in Luxembourg. The investment, consisting of convertingtaxable interest into tax free dividends, was a typical example of abuse of law in aninternational context. The Conseil dtatdetermined in both cases that the Luxem-bourg company had no other purpose than avoiding tax and was part of a scheme

(montage). The Luxembourg company was regarded as having no corporate sub-stance. For instance, the Conseil dtathighlighted the fact that shareholders neverattended shareholder meetings other than through proxies and that the Luxembourgcompany did not have the operating capacity to manage the financial assets: themanagement was performed by the financial promoter of the investment through aservice agreement. Finally, taxpayers failed to demonstrate the business purpose ofthe use of a company in Luxembourg for the management of financial assets (yield

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10 See for instance: CE, 17 January 1979, nos. 5,118 and 5,654, CE, 4 December 1981, no. 29,742.11 Law of 20 December 1972 (art. 18).12 Answer from the Minister of Finance to Senator Legendre, 19 December 1996, no. 16,589.13

See TA Lille, 18 March 1999, Fountain Industries.14 CAA Nancy, 14 March 1996, SARL Inter Selectionin a back-to-back loan situation where a Frenchcompany paid interest to its German parent company to which funds were lent by an entity in theDutch Antilles. See also TA Paris, 29 October 1998, St Van Ommeren Tankers.

15 See note 5.


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was regarded as comparable to that which could have been obtained from Franceand 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 theabuse of law was not restricting the freedom of establishment within the EU. TheConseil dtatdetermined that since the abuse of law was only designed to preventa purely artificial arrangement, it could justify the restriction of the EU freedom ofestablishment. The prevention of tax avoidance is considered as an overriding justi-fication of public interest.

In 2006 the Conseil dtatenlarged the scope of the abuse of law in Janfin16 totax credit arrangements. At this time, the abuse of law could only apply to abusivetransactions aimed at reducing the taxpayers taxable income and not, for instance,to tax credit transactions. The Conseil dtatdetermined that, aside from the abuseof law procedure as codified at that time, fraus legis as an overriding principle could apply.

On this occasion, the Conseil dtatmodified the definition of the abuse of law:while still referring to (a) the fictitiousness of contracts, conventions or any otherarrangements, it decided that (b) the abuse of law would be characterized only ifthe transaction aimed solely at avoiding tax and resulted in the accrual of a taxadvantage the grant of which would be, notwithstanding the formal application ofthe conditions laid down by the provisions of laws or other relevant texts, contraryto the purpose of those provisions. In other words, if the transaction had no otherpurpose than avoiding tax, it should also contradict the objective of the tax measurewhich was claimed.

This new approach was confirmed by the Conseil dtatin very recent landmarkdecisions17 where it adopted a restrictive approach in determining whether theclaim of a tax benefit actually contradicted the objective of the test. With respect tothe benefit of tax credits attached to dividends (avoir fiscal), the Conseil dtat,exploring the purpose of the legal provision granting the tax credit, referred to thecontent of the legislative history or travaux prparatoiresonly. In the absence ofany reference to a contingent holding requirement with respect to the shares, thestripping transactions around the coupon with very short holding periods were notconsidered as abusive.

This new approach in tax case law had been applied in an international context

in Bank of Scotland

18

with a transaction referred to as a dividend stripping arrange-ment. The transaction consisted in a US based group with a French subsidiary sell-ing on a temporary basis newly issued preferred stocks (through their strippingrights or usufruct) by the distributing company to the Bank of Scotland, a bankbased in the UK. As a consequence, the UK bank could claim a refund of avoir fis-calfrom the FTA thanks to the UKFrance tax treaty that the US based parent com-pany could not have obtained under the USAFrance treaty. The FTA denied thebank the refund. The Conseil dtat reclassified the whole transaction as a loanfrom the bank to the US group with the principal reimbursed through the Frenchsource dividends, the interest being the cash refund of the avoir fiscal by theFrench treasury.

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16 CE, 27 September 2006, Janfin.17 CE, 7 September 2009, SA AXA and Socit Henri Goldfarb.18 CE, 29 December 2006, Bank of Scotland.


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The Conseil dtatcarried out a risk analysis and determined based on the rightand guarantee of the bank to receive an amount equal to the predetermined divi-

dends and avoir fiscal that the bank was not exposed to the risks of an equity holderand as a consequence the transaction was regarded as pure financing. The reclassi-fication of the transaction based on the abuse of law led the Conseil dtatto con-sider that the bank was not the beneficial owner of the dividend. The US parent wasregarded as entitled (in other words, the beneficial owner) to the dividend and assuch as having assigned it to the Bank to service its financing. Without the use ofthe abuse of law for reclassification purposes, it is doubtful whether the Bankwould have been disregarded as the beneficiary since it enjoyed the ownershiprights on the French source dividend.

Bank of Scotlandmay be viewed as a good illustration of the new tendency ofFrench courts to take a much more pragmatic approach based on an itemized anal-

ysis of the contracts and agreements concluded by the taxpayers. This underlyinggrowing trend in France that combines the traditional legal approach of French lawwith a more economic substance-over-form approach19 has been confirmed in othercases 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 codified the extension of the abus de droittofraus legis reflecting also ECJ case law on abusive transactions, with effect for taxreassessment notices issued from 1 January 2009.

Similarly to the case law definition resulting from Janfin, the legal definition ofthe abuse of law now includes contracts, conventions or any other arrangementswhich 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 theformal application of the conditions laid down by the provisions of laws orother relevant texts (including necessarily DTTs), contrary to the purpose ofthose provisions (see above for an analysis of the application of this notion bycourts).

The abuse of law, which now includes fraus legis, may apply to every tax benefit. Itmay still trigger an 80 per cent penalty, which is reduced to 40 per cent for tax -payers who did not initiate the abuse of law or were not its main beneficiaries. Allparties involved in a transaction regarded as an abuse of law may be held jointlyliable. The burden of proof on the intention to conceal or disguise income for taxavoidance purposes must be demonstrated by the FTA unless the review by anindependent committee (Comit de labus de droit fiscal) is in favour of the FTA.

In summary, the application of the abuse of law theory broadly depends on acase-by-case analysis and on whether the FTA is able to demonstrate the absence ofa single business purpose and, if so, a contradiction with the objective of the taxmeasure which is claimed by the taxpayer.

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19 For a detailed analysis of substance over form in France, see 2002 IFA, vol. 87a, Form and Sub-stance in Tax Law.

20 See CAA Bordeaux, 6 July 2006, Banque Populaire Centre Atlantique.


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21 Generally, it is required that this provision is included in a DTT. Some provisions require an agree-ment solely dedicated to the administrative assistance providing for an exchange of information

(e.g. art. 123bisof the FTC). See the appendix for an extensive list of such provisions.22 Arts. 119 ter, 119 quaterand 182B of the FTC. Directive 90/435/CEE of 23 July 1990 (ParentSubsidiary Directive) and Directive 2003/49/CE of 3 June 2003 (Interest and Royalty Directive).

23 Art. 210B 3 of the FTC. Directive 90/434/CEE of 23 July 1990 (Merger Directive) (art. 11).

1.3. Specific anti-abuse provisions with international focus or

effect

The FTA may also challenge abusive international transactions or situations basedon specific anti-abuse provisions, which are specifically designed for internationalarrangements.

1.3.1. Favourable tax treatments subject to the existence ofinternational control

French tax law provides for specific anti-abuse provisions under which a tax bene-fit in an international context is subject to the ability to have access to informationin 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 anexchange of information clause.21

Some of these provisions are aimed at pressuring other states to adopt a moretransparent policy. The current French crusade for transparency is the continuationof that policy.

The EU exemption of withholding tax on passive income, as introduced inFrench law,22 is subject to anti-abuse provisions: as for dividends, the exemption isdenied if the beneficiary is controlled by non-resident companies, unless the bene-ficiary justifies that the main purpose, or one of the main purposes, of the owner-ship structure is not to benefit from the withholding tax exemption; as for interest

and royalties, the exemption is denied if the beneficiary is controlled by non-EUresident companies and if the main purpose, or one of the main purposes, of theownership structure is to benefit from the withholding tax exemption.

With respect to transfer of business as a going concern and demergers, Frenchlaw may provide for a rollover relief regime which may require in certain cir-cumstances a ruling addressing, among other criteria, the question of whether themain purpose or one of the main purposes of the transaction is tax fraud or taxevasion.23

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

The FTC provides also for numerous specific anti-abuse provisions, the purposeof which is either to avoid the transfer of profits abroad or to prevent the non-repatriation of income transferred in low-tax jurisdictions. Some anti-abuse provi-sions may apply only to legal entities or only to individuals.


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1.3.2.1. Anti-abuse provisions applicable to legal entities orcompanies: main principles

CFC rules: article 209B24 attributes to the French controlling company theprofits of CFCs established in low-tax jurisdictions. The French company istreated as receiving deemed distributions from the CFC. Automatic exclu-sions may apply for CFCs established in other EU Member States or if estab-lished outside the EU if an active business is carried on which does notpredominantly correspond to intra-group services.25 Otherwise, CFC rulesmay still not apply if the taxpayer can justify that the main effect of the CFCis not to locate profits in a low-tax jurisdiction.

Under article 238 bis-0 I,26 an enterprise which has transferred or transfersoutside 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 itsown interest or to undertake on its behalf a current or future commitment,must include in its taxable income the profits deriving from the managementor disposal of these assets or from any assets purchased with the sales pro-ceeds. This provision applies only to transfers outside France.

Article 238A27 shifts the burden of proof on to the taxpayer for the deductibil-ity of expenses made to a person located or established outside France, andbenefiting from a low-tax regime. A taxpayer is deemed to benefit from alow-tax regime when no tax applies or if the effective tax rate is lower than 50per 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 terof the FTC provides for a 20 per cent withholding taxon payments made by an SIIC (French equivalent of the US REITs) to a com-pany exempt from tax or subject to tax amounting to less than two-thirds ofthe comparable French tax liability (i.e. 11.11 per cent).

Article 21228 provides for thin capitalization rules applicable to wholly domes-tic 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 orindirectly own 10 per cent or more of the financial rights in a foreign entityestablished in a low-tax jurisdiction and generating at least 50 per cent of pas-sive income. Individuals are taxed on 125 per cent of the profits of the foreignentity pro rata share their rights to dividends.

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24 Law of 18 January 1980.25 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.26 Law of 5 January 1993.27

Law of 27 December 1973.28 The first thin capitalization rules were enacted by the Decree dated 9 December 1948 creating theFTC.

29 Law of 31 December 1998.


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signing of the treaty).36 In this respect, the Conseil dtat applies the approachadopted for interpreting French domestic law.

Guidelines issued by the FTA are not a source of law but may play a major rolein the interpretation of international tax rules. The statement of practice on theFranceAlgeria treaty is referred to as the international policy doctrine of Francefor treaties with comparable provisions.37

1.4.2. The subsidiarity principle and the predominance of taxtreaties

To determine the principle and rules of taxation in France of some cross-borderincome, one must first 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 first be performed under French domesticlaw in order to determine whether the tax should be levied and under which classi-fication. It is only then and only if the domestic law leads to French taxation thatthe treaty provisions will be applied in order to determine whether the right to taxthe income is ultimately attributed to France. This principle has been recognizedunder French law for a long time by numerous decisions.38 In Schneider, the well-known decision rendered in 2002,39 the Conseil dtat provided for a recitalreaffirming strongly this principle which has been repeatedly confirmed in subse-quent case law:

if, pursuant to article 55 of the [French] Constitution, a bilateral conventionconcluded with a view to avoiding double taxation supersedes domestic tax lawon specific items, it cannot be in itself a legal basis for a decision pertaining totaxation; consequently, in addressing a claim against a tax treaty, the judge shallperform his analysis under the domestic tax law in the first instance in order todetermine whether the challenged tax is validly assessed and, to the extent it isthe case, under which legal classification; the judge shall then, as the case maybe, compare this classification with the provisions provided for by the conven-tion in order to determine if the convention prevents the application of thesaid [domestic] tax law

In 2008, Aznavour40 reasserted this principle by insisting on the fact that the clas-sification of the income and the determination of the taxpayer have to be made pur-suant to French domestic principles even if French domestic law operated areclassification or redetermination under an anti-abuse provision (anti-rent-a-starcompany provision in the particular case).

French courts are not bound by the classification or interpretation of a givenincome or activity which would be provided in the other state party to the treaty. In

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36 Art. 31, s. 4 and art. 32 of the Vienna Convention. See CE, 13 October 1999, no. 190,083, Banquefranaise de lOrient, CE, 30 December 2003, no. 233,894 sect., SA Andritz.

37

BOI 14 B-3-03 of 22 May 2003.38 CE, 19 December 1975, nos. 84,77491,895. For more recent decisions, see for instance CE, 17March 1993, Memmi.

39 CE, 28 June 2002, Schneider Electric.40 CE, 28 March 2008, Aznavour.


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Maletthere was a conflict of classification of an income between France and theUSA leading to double exemption. The Conseil dtat determined that France

could not tax on the ground that the conflict resulted in a double exemption. Thesolution (i.e. double exemption) derived from the classification based on Frenchdomestic law.41

The subsidiarity principle under French law appears to be in line with the OECDguidelines, provided under article 1, 22(1):

to the extent that the application of the rules referred to in paragraph 22 resultsin a recharacterisation of income or in a redetermination of the taxpayer who isconsidered to derive such income, the provisions of the Convention will beapplied taking into account these changes...

The subsidiarity principle applies whether the applicable tax treaty is compliantwith the OECD model convention or not42 and even where the DTT does not referto the interpretation of domestic law.

The subsidiarity principle also applies where French law directly refers to thetreaty definitions, pursuant to article 209-I of the FTC.43

1.4.3. Application of domestic anti-abuse provisions in tax treatysituations: 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 theDTT 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 thequestion of whether the domestic abus de droitmay be applied in a tax treaty.44If this issue were to be raised, one may refer to Schneiderand Aznavourto con-sider that no conflict should arise since the abuse of law would operate a reclassifi-cation 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 situationwas addressed in Schneider45 and, as a result, article 209B was amended.

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41 CE, 26 February 1992, Malet.42 CE, 11 April 2008, Cheynel.43 See CE, 20 June 2003, Interhome AG; CE, 5 April 2006, Midex, regarding the concept of perman-

ent establishment, CE, 31 July 2009, Thoroughbred Racing Overseas Stud Farms, regarding real

estate income of a non-resident company.44 With the exception of the Bank of Scotlandcase law, where abuse of law was applied to abuse oftax treaty provisions (see section 1.5 below for more details on this question).

45 See above note 43.


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Schneider was a French resident company which owned 100 per cent of Para-mer, a Swiss resident company subject to a low-tax regime. The sole purpose of

Paramer was to manage financial assets. Consequently, the FTA regarded Parameras a CFC for the purpose of article 209B. The court applied the so-called subsidi-arity principle and held that article 209B led to the profits of Paramer being taxedin France before turning to the DTT between France and Switzerland (in its redac-tion applicable at that time) and concluding that in the absence of a PE of Paramerin France, its business income could not be taxed in France.

Article 209B was amended in 2005 and the profits of a CFC are now defined asdeemed distributions in order to remedy the tax treaty business profits and PEissues. As a result, the application of article 209B should now depend on the word-ing of the DTT, and on the definition of the dividends under the DTT. If dividends,under the applicable tax treaty, include deemed dividend distributions, article 209B

is applicable. Otherwise, the profits of the foreign company should fall into thescope of the other income article and accordingly France should, in most cases,be allowed to tax the CFC deemed distributed profits. Also, numerous specific pro-visions 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 afamous French singer tax resident in Switzerland and performing concerts inFrance through a company (promoter) established in the UK. Under domestic law

preventing rent-a-star arrangements and subject to conditions (which wereregarded as met in Aznavour), the income deriving from the performance was tax-able in the hands of the artiste.

The presumption of article 155A led the Conseil dtatto determine (a) that thetreaty with the UK should not apply since the UK company was not regarded as thetaxpayer pursuant to the domestic presumption and (b) that the income being soderived by the artiste (even though there was no information on the arrangementswith 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 andsportsmen article). This decision raises many issues but appears to be an extreme

expression of the subsidiarity principle since tax treaty treatment should beaddressed based on a domestic analysis deriving also from presumptions based ondomestic 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 com-panies of the same group (i.e. companies which fulfilled the conditions for theparticipation exemption regime), but they fully applied if the parent companywas a non-French company since a non-resident parent company was not liableto tax in France. In Andritz,47 the Conseil dtatruled that this distinction was

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46 See above note 44.47 CE, 30 December 2003, SA Andritz.


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discriminatory and did not comply with the non-discrimination clause of theFranceAustria treaty.

As a result,

48

the thin capitalization rules were modified by a law dated 30December 2005, in order to make them compliant with DTTs (and with EC law), inextending 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 167bisof the FTC, applic-able until 31 December 2004) gave rise to some case law, especially in the contextof EU law (as seen above in section 1.3.2). The application in a DTT context hasalso been addressed in case law rendered in non-EU situations (i.e. a French resid-ent moving to Switzerland), but the court determined that the exit tax was compat-

ible with the DTT.49To date, the question of the applicability of other anti-abuse provisions in a DTT

context remains to be addressed.

1.5. Abuse of the tax treaty: domestic law principles or

interpretation of the treaty?

The benefits of a tax treaty may not be granted to transactions which tend to takeabusive advantage of the provisions of the DTT. Even if French law does not pro-vide for specific legislation dedicated to the abuse of a DTT itself, such an abuse

may be sanctioned based on domestic law principles.50

This is confirmed in Schnei-derwhich strongly reaffirms the subsidiarity principle. The abuse of a tax treaty islegally granted in the statutory general anti-avoidance abus de droit. Abuse of taxtreaties may be sanctioned only based on the statute and not on the DTT itself (seeSchneider).51 Unless an abus de droit is characterized under domestic law, therecan be no situation of abuse of a tax treaty.

In Bank of Scotland52 the cross-border dividend stripping transaction givingrise to a refund of tax credit granted based on the UK DTT was successfully chal-lenged based on the abuse of law. Resorting to the DTT condition of beneficialownership would not have been sufficient as it would have been difficult to deny to

the UK recipient bank the status of beneficial owner since the Bank of Scotlandenjoyed all the ownership rights on the dividend received. For the FTA to be able tochallenge the transaction in reclassifying the sale transaction into a loan and

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48 And also in Coral Gestion, rendered the very same day by the Conseil dtat, thin capitalizationrules were considered as contrary to the EU principle of freedom of establishment.

49 TA of Paris, 3 July 2008, Daumen: the taxpayers were still French residents when art. 167bistrig-gered taxation of their latent capital gains, so that the FranceSwitzerland treaty could not apply intheir case.

50 OECD commentaries under art. 1, 9(1) to 9(3).51 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 purposecannot, unless a specific provision would allow doing so, lead to disregard provisions of the taxconvention.

52 CE, 29 December 2006, Bank of Scotland(see above for a description of the facts, under sec-tion 1.3).


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accordingly to consider the borrower in the US seller as the actual owner of thedividend having assigned its payment to the lender, the UK bank for the pur-

pose 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 subsidiarityprinciple appears consistent with 9(2) of the OECD commentaries, under article 1which 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 definition of the abuse of law in France does not precisely complywith 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 justifythat tax is the exclusive purpose and not the main purpose of the taxpayer, asstated 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 therelevant provisions.

Regarding 22(2) of the OECD commentaries under article 1 reminding statesto comply with the relief for double taxation provisions in DTTs as long as there isno 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 with-out any specific provisions in the tax treaty allowing this. If the predominant viewis that the subsidiarity principle calls for an affirmative answer, another reading ofSchneidermay lead to another conclusion:

Even if it were established that one of the purpose of the tax convention is theprevention of tax avoidance and evasion, this purpose cannot, unless a specific pro-vision would allow doing so, lead to disregard provisions of the tax convention

Bank of Scotlandcould also be viewed as confirming that interpretation with theuse of the treaty test of beneficial ownership as solidifying the reclassificationmade based on the abuse of law. It is, however, the reporters opinion that the scopeof the abuse of law under French law is wide enough to cover covert and overtabuse of a tax treaty with no need for a specific provision.

2. General and specific anti-avoidance provisions intax treaties

2.1. General overview

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

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53 Regarding income and capital tax treaties applicable as of 1 July 2009 (other tax treaties may applyonly regarding specific taxes, such as inheritance tax or registration tax).

54 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 comparablesubject to some differences based on the context with the treaty partner.

French tax treaty policy generally resorts to a core of general and specific anti-avoidance provisions (as detailed below under sections 2.3 and 2.4). All the anti-abuse provisions of the OECD model convention are not included in DTTs sincethe French approach to anti-abuse refers to the intention of the taxpayers despitethe legal form of the arrangement. Also anti-abuse provisions, such as limitation ofbenefits (LOB), with a list of objective tests are not necessary, given the wide scopeof the domestic abuse of law theory (see section 2).

Introduction of anti-abuse provisions in DTTs generally depends on a widerange of criteria: the treaty partner, whether it is a low-tax country or not (e.g. with Luxem-

bourg or Malta: exempt holding companies are excluded from treaty benefits);

the date of signature of the treaty and the corresponding French internationaltax policy;55

the course of the negotiations: some anti-abuse provisions may be laid downby the other contracting state (e.g. LOB provisions);56

EU law, since this has a major influence on tax treaty provisions even fortreaties with third countries (see section 3).

French treaties generally may also include more specific anti-avoidance provisionswhich may not correspond to the recommendations of the OECD.

2.2. Specific treaty provisions allowing application of domestic

ant i-avoidance provisions

DTTs may include specific clauses in order to allow the application of domesticanti-avoidance provisions. This may be the case in relation to thin capitalizationrules (article 212 of the FTC), CFC rules (article 209B of the FTC), and rent-a-starcompany rules (article 155A of the FTC). Fifty out of 112 tax treaties specificallystipulate a provision allowing application of article 212, and 20 out of 212 allowapplication of article 209B.

In the treaty recently negotiated with Qatar, a specific provision also allows theapplication of article 123 bisand 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-abuseprovisions of their domestic laws agreed by the two competent authorities)

Specific 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 confirmedSchneider in determining that the business income article of the FranceSwitzerland treaty prevented France from taxing the profits of a Swiss com-

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55

For example, as provisions intended to limit the availability of benefits under tax treaties were notincluded in the OECD model convention before 1977, most tax treaties signed before that date donot contain any such provisions.

56 E.g. in the 2007 amendment to the FranceJapan treaty.57 TA Paris, 2 December 2008, Nord Est.


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pany in the absence of a PE (prior to the 2005 revision of article 209B). How-ever, the court held that a specific provision introduced into the treaty by the

1997 amendment allowed the application of article 209B. In Aznavour58 the Conseil dtatprovided an interesting clarification on theapplication of article 155A to a Swiss resident artiste in the context of a taxtreaty including a provision on artistes and sportsmen compliant with theOECD model convention (article 17(1)) even though the precision added laterby article 17(2) of the model was not yet featured in the treaty. Mr Aznavourwas a Swiss resident, and the remuneration relating to his activities per-formed in France was paid to a UK resident company. The provisions of thetreaty under their redaction applicable to the case stipulated that incomederived by [an artiste who is a Swiss resident] from his personal activities assuch exercised in [France] may be taxed in [France]. The new paragraph

attributing the right to tax to the country of source (France) where income inrespect of personal activities exercised by an entertainer or a sportsman in hiscapacity as such accrues not to the entertainer or sportsman himself but toanother person was introduced later. This did not prevent the Conseil dtatfrom determining that article 155A was applicable and that the income paidto the UK company for performances in France was taxable in France.

No case law has been published, to date, regarding other specific treaty provisionsallowing application of domestic anti-abuse provisions in a tax treaty context.

2.3. General anti-avoidance provisions in tax treaties

2.3.1. Beneficial ownership

The beneficial ownership test is an anti-avoidance provision included in mostFrench DTTs.59 It is generally viewed as an important anti-treaty shopping measureand yet the concept has not been precisely defined in a tax treaty context. It gaverise to two major cases in Diebold60 and Bank of Scotland.61 In Diebolda Dutchtransparent partnership, a CV held by two Dutch resident partners received royal-ties from a French debtor free of withholding tax; 68 per cent of the royalty incomewas then paid to a Swiss entity. The FTA first denied the treaty benefit based on the

abuse of law consisting of a fictitious arrangement aiming at avoiding withholdingtax which would have been due with a direct payment to the Swiss entity. Havingsome difficulties in justifying that the CV was fictitious, the FTA claimed that theCV, as being not liable to tax (as a transparent entity), could not claim the treatybenefit. In any event, argued the authorities, the CV could not be regarded as thebeneficial owner of the royalty payments since payments made to the Swiss entitywere regarded as excessive. The Conseil dtat broke new ground in looking

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58 See above section 1.4.3.4 for details on the facts.59 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 (divi-dends, interest, royalties). Some tax treaties may provide for the beneficial owner requirementunder the other income clause.

60 CE, 13 October 1999, Diebold Courtage.61 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 confirm thezero withholding tax treatment. Also, the Conseil dtataddressed the beneficial

ownership test even though it was not provided in the treaty. The Conseil dtatconsidered that in the absence of justification on the excessiveness of the paymentto the Swiss entity, it could not be held that the CV was not the beneficial owner ofthe royalty. A few lessons may be drawn from this decision.

The definition of beneficial ownership appears narrow. The Conseil dtatdis-regarded the fact that all the operating substance of the CV lay in the Swiss entityand that the remaining profit to the partners looked more like an intermediary fee(10 per cent). One may consider that the treaty definition targets mainly mere con-duit companies/entities, i.e. persons who derive income in the capacity of inter-mediary, agent, or nominee. This appears to be a narrow definition. In Bank ofScotland, the Conseil dtathad to resort to the abuse of law to reclassify the trans-action even though the decision was also based on the failure to meet the beneficialownership test. This may appear as the confirmation of a narrow understanding ofthe test in a treaty context.62

The FTA and courts may refer to that test even though it is not provided in thetreaty.63 Based on an a contrario interpretation of Diebold, most practitionersagreed that the application of all tax treaties should be regarded as contingent to thebeneficial owner test being passed, irrespective of whether the treaty concernedincluded a specific beneficial owner provision.

To some extent, the tax treaty beneficial ownership test echoes the domesticjurisprudence whereby the authorities may ignore abusive interpositions of per-

sons. Interestingly enough, one may refer to that test without the abuse of law if thearrangement is not regarded as purely tax driven. However, Diebold illustrates thatjudges generally have a more restrictive approach than the FTA when it comes tothe content of the concept,64 despite the wide scope of application of the beneficialowner requirement, in practice.

2.3.2. Exchange of information

A clause providing for an exchange of information is included in almost all Frenchtax treaties65 (as provided in the OECD model convention, article 26): it may also

be a specific agreement providing only for an exchange of information relating totax matters.66

Introduction of such a clause is generally initiated by the FTA, when negotiat-ing a treaty, as it considers that the exchange of information with the other state isone of the major anti-tax fraud provisions (as the beneficial owner concept and

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62 In a dividend stripping transaction between a US parent company and a UK bank in relation toFrench 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 sec-tion 1.5 for the relation between beneficial ownership and abuse of law.

63 Thirty-one of the tax treaties in force do not specifically stipulate a beneficial owner requirement.64

See also CAA Nancy, 14 March 1996, SARL Inter Selection, and TA Lille, 18 March 1999, SARLFountain Industries France.65 In 98 out of 112 tax treaties in force as of 1 July 2009.66 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.


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other specific anti-abuse provisions may be). The exchange of information has beenplaying a major role in international situations in recent months (see the OECD

publication of white, grey and black lists of cooperative and non-cooperative coun-tries, in 2009).France has played an active part in that process and, in the year 2009, has initi-

ated various negotiations to implement an exchange of information with taxhaven jurisdictions (with which the exchange of information provision was notOECD 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 underdomestic tax law: the FTC provides for numerous favourable tax treatments subjectto an exchange of information (e.g. withholding tax on dividends, tax credits andother rebates).68

2.3.3. LOB provision

The LOB provision is one of the recommendations of the OECD to combat anti-conduit companies, in a comprehensive way rather than a provision dedicated tospecific conduit situations (commentary under article 1(20)).

France does not usually include an LOB provision in its DTTs: an LOB clauseappears in only 3 of Frances 112 treaties (with the USA, Japan and, in somerespects, Switzerland). France is not familiar with this provision as it requires anobjective analysis of the situation: the issue is whether the tests are met or not, irre-spective of the intention of the taxpayer. In France, the issue of whether a transac-

tion 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 treaties

French DTTs provide for different types of specific anti-abuse provisions in orderto prevent tax fraud and tax evasion. Some of them conform to the OECD recom-mendations; some have been imposed by the other contracting state since they donot correspond to the traditional international tax policy of France. Also some mayaddress 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 con-vention, almost all French tax treaties provide for a specific provisiondesigned to prevent the rent-a-star companies.69 Under this article, artistesand sportsmen are taxed in the country where they perform their activities.Intermediary entities may be disregarded. This provision is consistent withthe corresponding domestic anti-avoidance provision (article 155A of theFTC);

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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 thisreport).

68 See above under section 1.3 for examples of such provisions and the appendix for an extensive list-ing of these provisions.

69 At least 99 out of 112 tax treaties.


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a provision limiting the benefits of the tax treaty if the income is taxed in theother contracting state only on a remittance basis;

a provision to prevent abuse of the domicile or residence: this provision isincluded in almost all DTTs with Middle Eastern countries. It allows Franceto tax the income of the entity established in the other country, irrespective ofthe provisions of the treaty. This provision is similar to that of CFC rules(article 209B of the FTC, as stated above). For instance, the FranceOmantreaty provides (article 19) that:

Where a person who is a resident of the Sultanate of Oman or who is estab-lished there is fiscally domiciled in France for the purposes of French internallaw or is a subsidiary directly or indirectly controlled for more than 50 percent by a company with its place of effective management in France, the

income of that person shall be taxable in France notwithstanding any otherprovision of this Convention.

2.4.2. Main specific provisions

The main specific treaty provisions which may be considered as being initiated bythe 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 thosesold through the permanent establishment, or commercial services of thesame or similar nature as those carried out through the permanent establish-ment, are deemed taxable at the level of the permanent establishment

The main purpose test: some DTTs provide for a main purpose test provisionor one of the main purposes test, generally applicable to passive income(dividends, interest, royalties, more rarely other income).70 The common word-ing is:71

The provisions of the Convention shall apply only if the beneficial owner ofthe dividends shows, where required to do so by the tax administration of theother Contracting State, that the holding in respect of which the dividends arepaid has not, as its principal purpose or as one of its principal purposes, thepurpose of taking advantage of this Article

There are anti-double exemption provisions, which allow for taxation in astate, without regarding the tax treaty, where a double exemption exists (a)either because of a conflict of classification of the income between the twocontracting states (e.g. the DTTs with Kazakhstan or Austria) or (b) if the

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70 Sixteen out of 112 tax treaties provide a main purpose provision. Only 6 of these 16 tax treatiesprovide for a main purpose test under the clause applicable to other income.

71 FranceAlbania treaty, art. 10(8).


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income is not taxed in the other contracting state (e.g. the DTTs with Italy orSaudi Arabia).

Provisions specifically designed to deny treaty benefits to specific entitieswhich benefit from a preferential tax regime, as provided by the OECD com-mentaries, under article 1(21). For instance, in the FranceLuxembourg DTT,holding 1929 companies (i.e. benefiting from a tax exemption) are not in thescope of the treaty. Under the FranceJapan DTT, a provision denies exemp-tion of withholding for dividends received by a tokumei kumiai(a Japaneselegal entity subject to a favourable tax regime).72

Anti-conduit companies: under the treaty with Switzerland, a specific anti-abuse provision denies the benefit of the tax treaty if the other company isowned 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 do-mestic legislation but also DTTs, even with third countries, must comply with EU law.

3.1. Relationship between EU law and domestic legislation

Anti-abuse provisions must comply with the treaty establishing the European Com-

munity which provides for four fundamental freedoms also applicable to tax mat-ters: freedom of movement for workers, freedom of establishment, freedom ofgoods and services and freedom of movement of capital. If domestic legislationrestricts the use of one of these freedoms, it is not applicable, unless it is justifiedby imperative reasons of public interest and is necessary and proportionate to meetthe overriding requirement of general interest, e.g. to combat tax evasion,73 or toguarantee the effectiveness of fiscal supervision.74 The freedom of movement forcapital applies also in relations with non-EU Member States.

In the past, domestic anti-abuse legislation has already been struck down asbeing 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 asEU directives, when these derivative rules are introduced in domestic law. Forinstance, articles 119 terand 119 quaterof the FTC introduced the EU exemptionson dividends, interest and royalties subject to an anti-abuse provision which is atransposition of the anti-abuse provision included in the relevant EU directive.77

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72 Other DTTs may include similar provisions: the treaties with Malta or with Switzerland (no reducedwithholding tax on dividends where the holding company is owned by a non-EU company).

73 ECJ, 12 December 2002, C-324/00, Lankhorst-Hohorst GmbH.74 ECJ, 20 February 1979, C-120/78, Rewe-Zentral, so-called Cassis de Dijon.75

Regarding CFC legislation (art. 209B, or art. 123bis: CAA Nancy, 22 August 2008, Rifaut); thincapitalization rules (art. 212: CE, 30 December 2003, Coral Gestion).76 Regarding the exit tax legislation: ECJ, 11 March 2004, C-9/02, de Lasteyrie du Saillant.77 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. Relationship between EU law and tax t reaties

The anti-abuse provisions of tax treaties must also comply with EU law: if not, theycannot be applicable.78 This is why tax courts have held that even though the taxtreaty would allow the application of a domestic anti-avoidance provision (e.g. arti-cle 212), the latter may not be applicable if it does not comply with EU law.79

EU law also has a major influence in the negotiating process of tax treaties: theFTA may not negotiate a provision which could prove non-EU law complianteither vis--visEU countries or non-EU countries (e.g. the LOB provision of theFranceUSA treaty was renegotiated in January 2009: EU compliant clarificationshave been included even though they may still be challenged).

Appendix

Some specific anti-abuse provisions consist of the denial of favourable tax treat-ment if the income is not derived from a qualifying tax treaty jurisdiction or from aqualifying entity: allowances and tax credits (personal income tax or corporate income tax):

articles 199 terdecies0 A and B, 199 quindecies, 200 terdecies, 200 quaterde-cies, 220 terdecies, 244 quaterB, 244 quaterJ, 244 quaterU;

capital gains tax regime: articles 150-0A, 150-0D bis, 150U, 151 septiesA,

163 bisG, 200B, 244 bisA; withholding tax: articles 117 quater, 119 bis2, 125A, 125D, 187, 1672; tax regime of capital risk entities (FCPRs, SCRs, etc.): articles 38.5, 39 terde-

cies5, 150-0B, 163 quinquiesB, 163 quinquiesC 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 bisAB.

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78 ECJ, 21 September 1999, C-307/97, Compagnie de Saint-Gobain.79 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 ofestablishment, it could not in the end be applicable.

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