The double tax treaty between the UK and France has prevailed over French national law in a case concerning residency status.
Determining the tax residency status of an individual or household can sometimes be a complicated process for tax authorities, as was recently demonstrated in a case that went through the French courts.
Where residency status is not clear a number of tests are applied, both in relation to national law and any international tax treaties to which a country may be a signatory.
If there is conflict between national law and international law it is the latter that prevails, although perhaps not surprisingly the French tax authorities are often reluctant to accept an interpretation that is not in their favour.
In a case that was recently considered in the French courts, a French national appealed a decision of the French tax authority against his liability to additional income tax and social security contributions over the two-year period 2010/11 on the basis that he considered himself to be non-resident.
Under the terms of the French tax code, an individual is liable for income tax in France if they are resident; they are equally liable if they are non-resident but have income from France, although they are only taxed on their French income.
The law states that individual is considered to be resident if either;
- They have their main home in France;
- They carry out a full-time professional activity in France, or that;
- France is the ‘centre of their economic interests’.
It is sufficient that any one of these tests be met for an individual to be considered tax resident.
In this case the taxpayer was a documentary film maker, who received a salary and copyright income from a French company he owned, and which was the legal vehicle through which his films were produced.
The film production activities were carried on outside of France, but income earned from this activity was paid into his French bank account.
In addition to income from film production, he also had rental income from France, as well as rental income from the UK and the USA.
His total income from France over the two years amounted to nearly a €1m, whilst that from the UK and USA totalled approximately €300K.
He also had a permanent home available in both Paris and in London, although he had not owned the London properties during the period in question. The individual apparently made regular trips to France.
The value of the properties in London was estimated to be over €4m, twice the value of his home in Paris.
In addition, his partner, who was a UK national, lived in the London property, and the couple had a child born in the UK in 2011.
In considering his residency status the French tax authority came to the view that the centre of his economic interests was in France, notwithstanding that his film production activities were outside of France and that he held a substantial overseas property portfolio.
As a result they considered he was tax resident in France.
However, in their consideration of the case the court examined the terms of the UK-France Double Tax Convention 2008, which makes detailed provision for circumstances where an individual can be considered to be tax resident in more than one country.
In going through the various tests the court concluded that as the value of the property in the UK was substantially higher than the property in France, the centre of vital economic interest of the taxpayer was in the UK.
This was a conclusion reached despite the fact that most of his professional income was derived from France.
To illustrate just how these assessments can go either way, in another recent case a couple who lived in Monaco and who realised a substantial capital gain in France on the sale of shares of a France registered company were judged by a French court to be tax resident in France in that year, due the size of the gain in relation to their other income.