OD FLASH | Bercy clarifies the tax treatment of withholding taxes levied on foreign income

International tax treaties are bilateral agreements designed to avoid double taxation of taxpayers – individuals or companies – and to prevent tax evasion. Such treaties, when in place, set out the taxation regime for cross-border income and often allow a tax credit in the country of residence, equivalent to the tax paid abroad, known as a ‘withholding tax’, thereby preventing double taxation of the same income.

Should there be an international tax treaty signed with France, the tax treatment is, in general, carried in two phases:

• First, the withholding tax is paid in the country from which the income is paid, at the rate provided for in the convention (‘conventional rate’).

• Then, tax is withheld in France, country of residence of the taxpayer, where he can claim a tax credit equivalent to this withholding tax, up to the limit of the applicable French tax, provided that the withholding tax has actually been paid abroad.

So far, the guidelines provided by the tax authorities (BOI-BIC-CHG-40-30 no. 30, dated 3 October 2018) were based on the Administrative Supreme Court (‘Conseil d’Etat’) decision of 20 November 2002[1] according to which the deduction of a tax paid by a taxpayer in a country bound to France by a tax treaty could not legally be refused on the sole ground that the said country, had breached the provisions of the treaty. The guidelines added that withholding taxes levied in a foreign country in breach of an international treaty could continue to be deducted, in accordance with the general principle of deduction set out in article 39, 1-4° of the French General Tax Code, but did not give entitlement to a tax credit, as referred to in the provisions of the convention.

However, uncertainty remained as to what constituted ‘a withholding tax levied in breach of an international tax convention’ and in particular the treatment of a withholding tax levied at a higher rate than the one set out in the treaty.

In particular, the question was whether, in the given circumstances, the withholding tax should be deducted in full, or split in two so that a differentiated treatment could be applied, i.e. a tax credit for the withholding tax paid at the rate provided for in the tax treaty and a deduction for the remainder.

With the publication of a ruling dated 16 December 2024, completing the existing guidelines, the French tax authorities have provided an answer:

‘Taxes levied by a Country or territory in breach of the provisions of the applicable tax treaty do not give entitlement to a tax credit and may only be deducted from net income.

This rule applies to the entire withholding tax: it cannot be split in two to apply a tax credit at the rate provided for in the treaty; the withholding tax must be deducted in full from the profit’.

Consequently, the tax authorities have clearly defined ‘a withholding tax levied in contravention of an international tax treaty’ as a withholding tax levied at a higher rate than the conventional rate.

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[1] Council of State, 9 / 10 SSR, 20 November 2002, 230530.