• Imputation of Cross-Border Tax Losses under Tax Treaties
  • November 12, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • In a decision dated July 8, 2015, the Appeal Court of Versailles provided an unprecedented precision in respect of the so-called generalized tax credit ("GTC") method used by certain double tax treaties entered into by France in order to eliminate double taxation situations.

    Under the GTC method, a French individual with foreign-sourced income must include such income to its taxable income in France and receive a tax credit equal to the fraction of the French income tax corresponding to the relevant foreign-sourced income. The double tax treaties entered into by France generally use the GTC method for foreign-sourced income that is not subject to a withholding in the source country (i.e., income items other than dividends, interest, royalties, etc.).

    In its July 8, 2015 decision, the Appeal Court held that, under the double tax treaty entered into between France and Germany on July 21, 1959 ("FR/GER Treaty"), the GTC method prevents the relevant individual from deducting its foreign-sourced tax losses from its taxable income in France.

    The Appeal Court noted that, although such a deduction would be allowed under domestic law, the language of Articles 12 and 20 of FR/GER Treaty prevents any deduction insofar as only positive income (bénéfices et revenus positifs or Gewinne und andere positive Einkünfte) must be taken into account to determine the French income tax that would have been imposed on the relevant foreign-sourced income.

    This decision, which is now final, should also be applicable to all double tax treaties using the GTC method and the same language as Article 20 of the FR/GER Treaty in relation to positive income.

    However, double tax treaties using the GTC method but a broader language (i.e., without specifying "positive") should be regarded as allowing French individuals to deduct from their taxable income in France the foreign-sourced tax losses (provided always such losses would be deductible under domestic law), in accordance with official guidelines issued by the FTA.