On 2 February 2022, the French Administrative Supreme Court ruled that a company benefiting from a temporary and partial corporate income tax exemption should be considered liable to tax and therefore a tax treaty resident. The French tax authorities sometimes challenge the withholding tax exemptions/reductions provided by tax treaties by claiming that the foreign entity is not a resident of the contracting state under the treaty (Conseil d’Etat, 2 February 2022, n° 443018).

As a reminder, only residents of one of the contracting states can claim the benefits of a tax treaty. Most tax treaties signed by France provide, in accordance with the OECD model treaty, that the term “resident of a Contracting State.

In that case,  a French company had paid fees for services provided by a Tunisian company. According to article 11 of the France-Tunisia tax treaty, such payments are taxable only in Tunisia (note that, here, Tunisian resident without a permanent establishment in France made such payments).

The French tax authorities issued a corrective assessment as they considered that the Tunisian company was not a Tunisian resident for purposes of the France-Tunisia treaty. The Tunisian company benefited, according to Tunisian law, from the “total export company” regime under which it was not taxable, for the first 10 tax years, on profits derived from the export of goods and services.

Consequently, the French Supreme Administrative Court found that the “total exporter” exemption only applied to profits from exports. Therefore, the court ruled that the Tunisian company was subject to corporate income tax due to its activities in Tunisia, even if it had not paid any taxes in Tunisia in the years concerned. Accordingly, the court ruled that the Tunisian company was a tax treaty resident company entitled to the benefits of the France-Tunisia tax treaty, such as: withholding tax exemption for service fees.