(Montreuil Administrative Court, Dec. 30, 2013, SA Caixa Geral de Depositos)

The Montreuil Administrative Court ruled on the hitherto unanswered question of whether the French branch of a Portuguese company could deduct a tax paid in the United Kingdom on the grounds of domestic law, in the absence of an applicable tax treaty, although the same tax created a right to a tax credit in the Portugal.

In this case, the French branch of the Portuguese bank SA Caixa Geral de Depositos participated in financing pools in the United Kingdom in a banking syndication led by the Royal Bank of Scotland.  In these transactions, the branch received interest paid by British clients through the Royal Bank of Scotland, on which the British HM Revenue & Customs applied a 10% withholding tax pursuant to the Portugal-United Kingdom Tax Treaty.

SA Caixa Geral de Depositors initially requested HM Revenue & Customs for tax relief for the withholding taxes based on the France-United Kingdom Tax Treaty, which it argued was applicable and pursuant to which interest is taxable only in the country of residence.

As HM Revenue & Customs persisted in applying the Portugal-United Kingdom Tax Treaty, arguing that the French branch was not a tax resident and that, consequently, the France-United Kingdom Tax Treaty was not applicable, SA Caixa Geral de Depositos argued that the UK-source interest had been subject to double taxation, and it sent a claim to the French tax authorities to be able to deduct the withholding taxes to calculate its French branch's taxable earnings for the 2006 to 2008 fiscal years, pursuant to Article 39-1-4° of the French Tax Code.

The French tax authorities rejected SA Caixa Geral de Depositos's claim, arguing that the France-United Kingdom Tax Treaty of June 19, 2008, was applicable, and did not allow deductibility in France for the tax paid in the United Kingdom.  According to the tax authorities, HM Revenue & Customs' error could not authorize a double deduction, both in France and in Portugal.

The Lower Administrative Court nevertheless ruled in the taxpayer's favor, stating that the French branch, which qualified as a permanent establishment within the meaning of the France-Portugal Tax Treaty, and whose profits were taxable in France, had the right to deduct the British withholding taxes pursuant to domestic law, which provides that its profits must, "be determined after deduction of 'all charges', which notably means, subject to the specific tax treaty provisions providing otherwise, taxes of any nature for which the company is liable in the foreign State on the interest from such State."  The Lower Administrative Court stated that the France-United Kingdom Tax Treaty of June 19, 2008, pointed out by the tax authorities, did not apply to the fiscal years at issue because it entered into force at the end of 2009. Nor did the France-United Kingdom Tax Treaty of May 22, 1968, apply, according to the Lower Administrative Court, because the French branch, which did not have legal entity status and which profits attributed to it only are taxable in France, was not a tax resident within the tax treaty's meaning.

Hence, as the Lower Administrative Court stated, the fact that SA Caixa Geral de Depositos benefited from tax credits in Portugal for the British withholding taxes, pursuant to the Portugal-United Kingdom Tax Treaty, has no incidence on the dispute's outcome.

Consequently, the company obtained a discharge for the disputed taxes.  This decision is final, as the tax authorities did not appeal it.

While the French Administrative Supreme Court had already laid down the principle that a foreign tax is deductible in the absence of specific tax treaty provisions (French Administrative Supreme Court, Nov. 20, 2002, no. 230530, SA Éts Soulès et Cie), this decision clarifies the reasoning applicable to triangular situations involving a permanent establishment.  Although in this particular case this outcome leads to double elimination of the double taxation of the British-source interest (tax deduction in France and tax credit in Portugal), allowing the taxpayer to "have its cake and eat it, too" (as stated by the public rapporteur), the outcome is nevertheless based on a strict application and articulation of the principles of domestic and treaty law.