Legal background: Royalties paid by a company established in France to a foreign person are liable to a 331/3 % withholding tax (of the gross amount). This rate is increased to 75% (of the gross amount) when a royalty is paid to a person established in a non-cooperative State or Territory (NCST) pursuant to Article 238-0 A of the French Tax Code (list as at January 2014 : Botswana, Brunei, Guatemala, Marshall Islands, British Virgin Islands, Montserrat, Nauru and Niue).
This rate can be reduced in application of a double tax treaty. The benefit of the double tax treaty is generally only allowed to the beneficial owner of this revenue, notably when it relates to royalties.
Scheme in place: Company A, headquartered in France, has concluded with a foreign party Company B a contract under which Company A pays a royalty for the use of a brand.
Company B repays this royalty to Company C which is established in a State where there is no corporate income taxation, and with which France has not concluded a double tax treaty, but only a Tax Information Exchange Agreement. This State is not on the list of NCST pursuant to Article 238-0 A of the FTC.
Company B plays only a vehicle role for the payment of the royalty by Company A. The beneficial owner of the royalty is Company C. The royalty paid was subjected to withholding at the reduced rate mentioned in the double tax treaty between France and the State where Company B is established, while it should have been subject to the 331/3 % withholding tax rate.
Outcome of audit: The FTA is especially attentive to this type of operations. It uses international administrative assistance to confirm the identity of the beneficial owner of the royalty and confirm the lack of substance of the vehicle company. In this type of structure, the FTA will reassess the withholding tax and can apply an 80% penalty pursuant to the abuse of law procedure.