Withholding Tax on Nonresidents (Article 182 A of the French Tax Code): Tax Residence Under Article 4 B of the French Tax Code Takes Precedence Over the Franco-Swiss Tax Treaty

In a recent decision, the French Administrative Supreme Court ruled on the applicability of the withholding tax provided for in Article 182 A of the French Tax Code (FTC) to the remuneration received by an employee seconded from Switzerland to France to perform the duties of managing director of a French company (French Administrative Supreme Court, 8e and 3e ch., 5 Feb. 2024, n° 469771).

In this case, the employee’s family lived in Switzerland and he worked in France for part of the year, since he traveled abroad and only occasionally worked in Switzerland.

However, the French Tax Authorities, and then the French Administrative Supreme Court, refused to apply the withholding tax on a pro rata basis to the periods during which the employee carried out his functions while in France.

The French Administrative Supreme Court ruled that a corporate officer who carries on a nonincidental professional activity in France should be considered a French tax resident within the meaning of Article 4 B of the FTC, even if he is a Swiss tax resident under the terms of the Franco-Swiss tax treaty.

While this decision departs from the classic concept of allocating the right to tax between states according to the place where an employee actually carries out their professional activity, it is even more surprising in that it disregards the provisions of the applicable tax treaty.

In this respect, the French Administrative Supreme Court overturned the French Tax Authorities’ guidelines under which the concept of “resident,” assessed within the meaning of the tax treaty in question, takes precedence over that of “tax domicile” resulting from the provisions of Article 4 B of the FTC.

This reasoning seems to us all the more paradoxical given that establishing tax residence is easier when applying the alternative criteria set out in Article 4 B of the FTC, whereas the criteria are hierarchical under tax treaties.

From a practical point of view, the consequence of this decision would be that corporate officers of companies established in France would be subject to withholding tax (“Prélèvement à la source”) under less favorable terms and conditions and with more onerous formalities for the company (failure to comply, which could result in the application of penalties).

This decision calls for the utmost caution regarding the conditions under which a corporate officer of a company established in France carries out their functions. The practice of the French Tax Authorities will therefore need to be carefully monitored to see whether they intend to apply this ruling across the board when assessing the tax residence of employees seconded to France.