(French Administrative Supreme Court, March 12, 2014, no. 362528, Sté Céline)
In a decision dated March 12, 2014, no. 362528, the French Administrative Supreme Court ruled on the issue of the tax treatment of tax credits resulting from withholding taxes levied abroad that a company is unable to offset against its corporate income tax liability due to a tax loss position.
In the case at hand, company Céline, which had licensed its trademark, received royalties from its Italian and Japanese licensees that were subject to withholding taxes. However, due its tax loss position, the company could not offset the related tax credits granted by the applicable tax treaties.
As a result, being unable to utilize any tax credit, Céline chose to consider the unrelieved foreign withholding taxes as expenses and, therefore, to apply the provisions of Article 39, 1, 4° of the French tax code, which allows the deduction of taxes incurred by a company and levied in the same fiscal year.
Based on a strict reading of the applicable treaties’ provisions, the French Administrative Supreme Court upheld the Versailles Administrative Court of Appeal’s position (Versailles Administrative Court of Appeal, July 16, 2012, no. 11VE01877, Société Céline), and ruled that the deduction of a tax paid abroad is possible only to the extent that the treaties’ provisions do not expressly prohibit such deduction, regardless of the taxpayer’s loss-making situation which could prevent the taxpayer from offsetting the treaty tax credit against its corporate income tax liability.
Consequently, considering the wording of the applicable tax treaties, the French Administrative Supreme Court disallowed such deduction.
This decision may however be criticized to the extent that the purpose of international tax treaties is to avoid double taxation by allocating or sharing the right to tax and not to modify the tax base of a taxpayer.
The French Administrative Supreme Court’s reasoning results in a worsening of the taxpayer’s tax situation in cases where an applicable tax treaty excludes deduction. Indeed, in the absence of any tax treaty, a loss-making taxpayer is able to offset the foreign tax against its results in accordance with French domestic law and, therefore, such taxpayer would be treated better than a taxpayer who would benefit from a tax treaty where such treaty limits the right to deduct foreign taxes.
In this respect, it is interesting to note that the French Administrative Supreme Court takes care to point out that “a bilateral tax treaty concluded to avoid double taxation cannot, in itself, directly be the legal basis of a decision relating to taxation” and yet comes to a solution that approves the tax authorities’ decision to disallow the deduction of tax credits, which would have been deductible in the absence of any tax treaty.
With this decision, the French Administrative Supreme Court definitively refuses to recognize the principle of non-aggravation. The recognition of this principle would have been appreciated, as this would have allowed a deduction that is authorized under French domestic law and economically justified.