French landmark decision on the “beneficial owner” concept for tax treaty purposes

Fri 20 Jan 2023

A landmark decision on beneficial ownership could significantly impact the French tax authorities’ approach to tax audits concerning royalties. In its decision on French company Sté Planet dated 20 May 2022, the French Administrative Supreme Court (Conseil d’État) ruled for the first time that when French-sourced royalties are paid to a foreign person who is the recipient but not the beneficial owner, then the applicable tax treaty shall be the one concluded between France and the beneficial owner’s state of residence.

Tax treaties and beneficial ownership

In this case, Sté Planet made royalty payments to recipient companies situated in Belgium and Malta. Based on the provisions of the double tax treaties concluded between France and these two jurisdictions, France is prevented from applying a 25% domestic withholding tax on outbound royalty payments, provided that the recipient can be regarded as the beneficial owner.

During a tax audit of Sté Planet, the French tax authorities claimed that the Belgian and Maltese tax treaties to prevent the application of the French withholding tax did not apply, as the recipients paid the royalty amounts to a company established in New Zealand.

Due to this, the French tax authorities argued that they could not regard the Belgian and Maltese intermediary companies as the beneficial owners of the royalty payments. In their view, the ultimate beneficiary of the royalties was the company established in New Zealand. Due to this, the double tax treaty concluded between France and New Zealand (1979), under which France applies a withholding tax of up to 10% on outbound royalty payments, was the only treaty applicable.

The case was brought to the French Administrative Supreme Court, which ruled for the first time that when there is a discrepancy between the apparent recipient and the beneficial owner of royalties, the tax treaty between France and the beneficial owner’s state of residence shall be applied.

A game-changing ruling

In its decision, the French Supreme Court relied on an extensive reading of the royalty provision contained in the tax treaty between France and New Zealand. This provision refers to royalties paid to a resident of the other contracting state. Read literally, this could give the impression that the treaty provision does not apply to the present case since the royalties were paid to the Belgian and Maltese companies.

To support the broader interpretation and consider that “the provisions of Art. 12(2) of the tax treaty concluded between France and New Zealand shall apply to French-sourced royalties whose beneficial owner is a resident of New Zealand, even if they were paid to an intermediary recipient established in a third country”, the French judges indicated that they regarded the purpose of this provision in the light of the OECD Commentary on the Model Tax Convention from 1977 to 2017.

The OECD member consensus is that the royalty provision should cover royalties “arising in a Contracting State and beneficially owned by [not necessarily paid to] a resident of the other State”.  This is currently reflected in Art. 12 of the OECD Model.

In the Sté Planet case, Céline Guibé, the French Government Commissioner (rapporteur public), used this consensus as a tool to interpret the royalty provision treaty between France and New Zealand.

The focus on beneficial ownership of royalties applied by the French Supreme Court in the Sté Planet case should apply to most French tax treaties. All the more so in respect of recent treaties following the current wording of Art. 12 of the OECD Model.

Practical implications

The French Supreme Court has returned the case to the Court of Appeal (Cour Administrative d’Appel de Marseille) for them to assess whether the New Zealand company indeed meets the conditions to be qualified as the beneficial owner.

In practice, however, the Sté Planet case is likely to significantly impact the French tax authorities’ approach to tax audits concerning royalties.  Up to now, they have tended to rely on the beneficial ownership criteria as an anti-abuse mechanism only, with the aim of denying the application of a relevant tax treaty to outbound passive income.

From now on, taxpayers should be able to request the application of the royalties’ provision contained in the tax treaty of the beneficial owner’s state, provided the provision is consistent with the current and historic OECD Model.

As indicated by the French Government Commissioner’s conclusions in the Sté Planet case, this does not, however, oblige the French tax authorities to identify the beneficial owner in cases where that beneficial owner is neither known nor identifiable.

In such cases, it will be up to the taxpayer to disclose the beneficial owner’s identity in order to apply the provisions of the treaty between the beneficial owner’s jurisdiction and France.  The alternative is that no French tax treaty will apply and withholding on royalty payments will be at the 25% French domestic rate.