• Corporate Tax Treatment of Loans Between A French Head Office and A Non-French Branch
  • June 8, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • A French bank, acting from its head office, had advanced loans to various branches located in China, Philippines, India, Singapore, and Thailand. In certain cases, the interest paid on the loans was subject to WHT in the source country, and the head office took the position that it was entitled to a tax credit (TC) under the relevant treaties between France and the source jurisdictions. In other instances, no effective foreign WHT was applied to the interest, and the head office had taken the position that it was entitled to a TC under the "tax sparing" mechanism of the relevant applicable treaties. During a tax audit, the FTA took the view that no TC was available to the head office in either case.

    The lower court has decided in favor of the FTA with a reasoning which is somewhat confusing and not very convincing (TA Montreuil, February 9, 2015, n°1303525 and 1308999).

    The court's starting point was the traditional method of application of international tax treaties by French courts: a given situation is first analyzed under the relevant French domestic tax rules, and then it is ascertained whether the applicable treaty (if any) modifies the solution provided under the domestic rules.

    In respect of the loan made by the head office to the Philippines branch, the court took the view that the treaty was not applicable (because the branch is not a Philippines tax resident), and therefore no TC was available, given that French domestic rules do not provide any TC in the absence of an applicable treaty. While it is true that the branch was not a tax resident, the more relevant question would have been whether the interest paid by the branch was of Philippines source.

    In the case of the other jurisdictions and the relevant treaties between them and France (China, Singapore, India, and Thailand) the court started its analysis with a reminder of the basic applicable rules: a resident of jurisdiction A which receives interest from a source in jurisdiction B is liable to tax in A in respect thereof, unless such interest is attached to a permanent establishment (PE) A may have in B (in which case the interest is taxable in B).

    In this case, the court seemed to take the view that, while the bank did have a PE in each of the relevant jurisdictions and the loans were attached to the relevant PEs, the profits made on the loans could not be attached to these PEs, i.e. the interest was taxable only in France. The court concluded that the exclusive taxation in France meant that no TC was available in respect of any WHT. Again, it is difficult to follow the reasoning used by the court: i) either the loan claim was attached to the PE as per the court's suggestion, in which case it is not clear why the related interest was taxable in France, or ii) the interest was taxable in France, as per the court's conclusion, and it is not clear why the TC was not available.

    The situation should be, hopefully, clarified at the Appeal Court level.