Withholding tax relief in France in case of intermediate partnerships

IStR 22/24, page 894-900
According to a judgement of the Administrative Court of Montreuil obtained by the law firm Sagasser & JVA, the number of fiscally transparent companies interposed between a French company and the beneficial owners of the income does not prevent withholding tax relief under applicable tax treaties if the identity and the tax residence of the ultimate beneficial owner can be proven.

In principle, the treatment of income from French sources is governed by the provisions of the double taxation treaty concluded between France and the country in which the beneficial owner of the income is resident. However, partnerships that are transparent for tax purposes are not resident for tax purposes. In this case, the partners are deemed to be the beneficial owners of the income generated by these entities in France.

However, in cases where fiscally transparent companies which as such are not beneficiary of a treaty are interposed, the French authorities have so far refused to take into account the tax residence of the beneficial owners of income from France from the second level of interposition onwards, due to an existing administrative instruction.

The judges of the Montreuil Administrative Court have now rejected this restriction in a case in which two German partnerships in the legal form of a GmbH & Co KG were interposed between a French corporation and the German tax resident partners, whose identity and tax residence were duly proven.

Since the authorities did not lodge an appeal, the judgement is likely to lead directly to decisions in similar constellations.

This decision is not only a success for taxpayers, but also indirectly confirms that paying agents are now obliged to document the identity and tax residence of beneficial owners across several levels of ownership, both for tax purposes and to combat money laundering.

However, the decision also opens up new structuring options, particularly in an international context, for income from French sources involving tax-transparent companies, primarily for dividends, but also, for example, for licence fees and interest income subject to withholding tax.

We are at your disposal to examine the prospects of success of similar cases involving various jurisdictions and, if necessary, to support you in the preparation and follow-up of an administrative or judicial dispute.