Comments on the Treaty 22/05/1968

Commentaries on the UK/France Convention for the avoidance of Double Taxation on taxes on income which was signed on 22 May 1968 and which came into force on 29 October 1969

Definitions essential to the understanding of the rules explained on the following page:

State of origin : State where the income arises.

State of residence : State of residence of the beneficiary of the income.

Non-exclusive taxation in
the State of origin : The State of residence has the right to tax but must grant a tax credit in order to avoid double taxation .

Exclusive taxation in the State of residence : The State of origin does not have the right to tax.

Exclusive taxation in the State of origin : The State of residence does not have the right to tax or has the right to tax but must cancel this taxation by granting a tax credit of the same amount.

Resident of a
Contracting State : The terms "resident of the Contracting State" and "resident of the other Contracting State" mean a person who is resident in France or a person who is resident in the UK, according to the context requirements.

The taxes which are the subject of this Convention are : Article 1

*In France:
- Income tax,
- General social security contributions,
- Contributions for the repayment of the social debt,
- Corporation tax,
- Contributions on corporation tax.

*In the United Kingdom:
- Income tax,
- Capital gain tax,
- Corporation tax .

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Territoriality: Article 2

*France:
- The European and Overseas Departments,
- The adjacent maritime zones.

*United Kingdom:
- Great-Britain,
- Northern Ireland,
- The adjacent maritime zones.

Channel Islands and Isle of Man are not in the scope of the DTA.

Taxation rules applying to the various income

Taxation methods used in France

When France is the state of origin, taxation is done through withholding tax:
- Final and definitive withholding tax: the income does not have to be declared
by the taxpayer.
- Other withholding tax: the income must still be declared by the taxpayer.

N.B : In France, when the taxation methods are not mentioned, the normal provisions of the law apply (an annual return has to be submitted).

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Persons concerned : Article 3


*The residence position of individuals

In France, in accordance with Article 4B of the General Tax Code, are resident individuals who:
- have there, their permanent home or who have there their habitual abode (their habitual abode is presumed if they spend there more than 183 days),
- carry out a professional activity in France (except if its justified that it has an accessory one),
- have in France the centre of their vital interests.

Government employees posted in a foreign State who do not pay tax in that State on their whole income are also regarded as French residents for tax purposes.

*The residence position of legal entities

Legal entities (or groups regarded as such for tax purposes) are resident in France if they have their registered office there.

*The residence position of a person who is resident in both Contracting States

If an individual is resident in France but also in the UK according to the domestic laws of both countries, the various criteria of the Convention are applied, one after the other, in the exact order they are written in, until his residence position is determined.

N.B : These criteria, whether they are those provided for by our domestic laws or by the Convention, exclude one another. According to the Convention, legal entities are resident of the State in which their place of effective management is situated.

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Income derived from immovable properties: Article 5

Right to tax

Income from immovable properties is taxed in the State where the property is situated. Nevertheless, the taxation in that State does not prevent the other State from taxing that same income. Double taxation is avoided by granting a tax credit.

The income concerned is :
- Income from real property coming from the letting of empty properties (rents, for example),
- real property rights (bare ownership and usufruct),
- farms or forestry developments which are assimilated to immovable assets,
- the rights granted for the exploitation of mineral deposits and any other natural resources.
- Income from shares in companies which are subject to the same tax regime as income derived from immovable assets (real estate company endowed with the taxation transparency: Art. 1655 ter of the French General Tax Code, companies of share-ownership: Article 239 octiès of that same Code).

N.B : Ships and aircraft are never regarded as immovable properties.

French taxation methods

These incomes must be declared before the 30th June of the following year using a tax form n° 2042 with, if there is any income from real property, a tax form n° 2044.

Besides, if a property is rented out furnished and provides a gross amount of rents superior to € 23 000, a specific return has to be submitted to the local tax office competent for the area where the property is situated.

When the gross amount of rent is inferior to € 23 000, it must be entered on the following lines: lines NO to PO of the tax return n° 2042 C.

For taxpayers who do not live in France, the taxation incurred can only be inferior to 20% of the net income if they can justify that the average rate of taxation of the French income, calculated on all their income of a French or foreign origin, would be inferior to 20%. The average rate can then be applied (Article 197 A of our General Tax Code).

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Profits made by enterprises: Article 6

The right to tax

The principle is that profits are only taxed in the State of residence.
Nevertheless, if there is a commercial or industrial activity carried out in another State, this activity is taxable in that other State if carried out through a permanent establishment.
If there is such an establishment, there will be non-exclusive taxation in the State where the permanent establishment is situated.

The term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
The second paragraph of Article 4 of the Convention gives a definition of the permanent establishment and lists the kind of establishments that can be regarded as permanent establishments.

Methods of taxation

Subject to some special rules, the profits of the permanent establishment are determined as if this establishment was an enterprise distinct from the company it depends from.

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Maritime or air transportation carried out on an international level Article 7

Definition

It is defined as all transportation carried out by ships or aircraft which are operated by an enterprise which has its place of actual management in a State and it rules out ships and aircraft which are only operated between places situated in the other State. Profits derived by an enterprise from international traffic are only taxable in the State where that enterprise has its place of actual management.

The right to tax

Taxation only in the State where the enterprise has its actual place of management.

Therefore, it departs from the rule of taxation by the State where the permanent establishment is situated.

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Channel Fixed Link: Article 7A

- Regarding the statutory companies
The construction and the operation of that fixed link have been granted to two statutory companies, one French, the other one British.

The right to tax

Paragraphs 2 to 5 of Article 7A lay down the rules which apply to the taxation of profits made by these two statutory companies. Those profits are calculated by dividing expenses and receipts in half and are exclusively taxable in France or in the United-Kingdom whether they belong to the French or to the UK statutory company.

- Concerning the employees of these statutory companies or of their associated companies

The right to tax

Salaries of employees who work in the Tunnel and carry out their duties on both side of the Frontier between France and the United-Kingdom are, in accordance with paragraph 6 (a)(b) of Article 7A, taxable in the State where the employer has its actual place of management when the employer is one of the statutory companies or an associated company as defined in paragraph 1-f of Article 7A.

Remuneration of other employees are taxed in accordance with the provisions of Article 15 of the Convention.

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Dividends: Article 9

Definition

The definition of dividends includes all income subjects to the tax regime of profits allocations, that is to say official profit allocations but also all income subjects to the allocation regime according to the law of the State where the distributing company is resident.

According to the Convention, the term "dividends" includes disguised or secret allocations (in France: Articles 109 to 115 of the General Tax Code).

It also includes the French and the UK tax credits and the French prepayment.

The right to tax

The right to tax belongs to the State the beneficiary of the dividends is resident in. Nevertheless, the State of residence of the distributing company (State of origin) has also the right to tax these dividends.

In this case, double taxation is avoided by the deduction of a tax credit (which corresponds to the tax withheld in the State of origin of the income) on the tax owed by the beneficiary of the State where he is resident.

- French source dividends

Dividends paid by a company which is resident of France come usually with a tax credit which is equal to 50% of their amount. When they are paid to UK residents (individuals or legal entities), they are taxable in the UK. These dividends are also taxable in France but, when their beneficial owner is a UK resident, the tax so charged shall not exceed:

- 5% of the gross amount of the dividends if the beneficial owner is a company which controls the company paying those dividends;

- in all other cases, 15% of the gross amount of the dividends.

The withholding tax applied in France is final and definitive.

Allocation of a tax credit

*Beneficiaries
- individuals,
- legal entities,
- pension funds.

*Do not benefit from a tax credit :
UK companies which hold directly or indirectly, on their own or with others, shares which give them the control of more than 10% of the voting rights in the French distributing company.
The allocation of a tax credit regards only products distributed by French companies who are affected by the provisions of Article 159ter1 of the French General Tax Code.
Finally, the transfer of the tax credit is subordinated to the taxation of the dividends and of the tax credit in the State of residence of the beneficiary. The UK residents must declare, the dividend and the amount of tax credit received. The deduction at source which is made is regarded as a tax credit deductible from the UK tax.

Methods to put ceilings on the deduction at source or on the grant of a tax credit.

When France is the State of origin, to have a ceiling of the deduction at source granted, one has to fill the following forms:
- RF 1 GB for individuals and legal entities when the beneficiary of the dividends is not entitled to a tax credit
- RF 4 GB for individuals and legal entities to obtain the grant of a tax credit.
These forms should be sent to the paying agent. They can be obtained from the Tax Department of the French Embassy (see useful addresses).

Refund of the prepayment (précompte)

Residents of a State who do not benefit from the transfer of the tax credit can obtain the refund of the prepayment subject to the deduction of the withholding tax. The repayment can only be for the fraction of the prepayment which has been paid to the French treasury by the distributing company.

- UK source dividends :

*System which applies to UK source dividends paid to residents of FRANCE up to 5th April 1999.

Dividends paid by a company which is resident in the UK are accompanied by a UK tax credit equal to 20/80 of the dividend paid to residents of FRANCE.

However, according to Article 9, paragraph 1 b of the Convention, the United-Kingdom can levy a tax of 15 % on the total formed by the dividend and the tax credit. This tax of 15 % is deducted from the amount of the tax credit. The tax credit surplus will be paid by the UK Treasury to the French resident shareholder.

* Beneficiaries :

- individuals
- pension funds approved for tax purposes by FRANCE
- French companies that control less than 10 % of the voting rights of the UK company which pays the dividends.

* Cannot benefit from the tax credit : French companies which control at least than 10 % of the voting rights of the distributing company cannot benefit from the UK tax credit for dividends paid to them by their UK subsidiaries.

N.B : When they do not give right to a UK tax credit, dividends received by French companies are exempt from any tax in the UK (paragraph 1, Article 9 of the Convention).

According to the Convention, to be able to benefit from the exemption, the beneficiary of the dividends must be liable to tax on his income in France.

Tax credit granting methods

N.B : There is not, in the UK, any deduction at source on dividends paid to non-residents.
The grant of UK tax credit has to be requested by the beneficiary of the dividends that give right to it, using the following forms :

- FRA/Individuals/credit n° 5093 (FRA/personnes physiques/crédit n° 5093) if the beneficiary is an individual;

- FRA/company/credit n° 5094 (FRA/société/crédit n° 5094) if the beneficiary is a company which holds less that 10 % of the voting rights of a distributing company and which is not excluded from the benefit of the UK tax credit in the above-mentioned cases.

These forms can be obtained from the Tax Department of the French Embassy (see useful addresses).

* System which applies to UK source dividends paid to residents of FRANCE as from 6th April 1999.

From that date, the United-Kingdom brought down the rate of tax credit to 1/9 of the amount of the dividend. Therefore, residents of FRANCE who receive UK source dividends cannot lay claim anymore to a payment by the UK Treasury, with regard to the tax credit, when this payment is inferior to 15 % of its amount.

As there is no transfer of the tax credit, residents of France who receive dividends which have their origin in the UK should not fill the above-mentioned forms anymore (FRA/individuals or companies).

To benefit from a tax credit chargeable to French tax, they must mention, on their income tax return n° 2042, and that when the dividends have been cashed in France for a gross dividend of € 100, a taxable income of € 111,11 (that is € 100 + 1/9 of 100) giving right to a tax credit chargeable to French tax in the limit of the latest. The amount of tax credit is then mentioned on the tax credit certificate issued by the paying agent. Conditions relating to the beneficiaries stay unchanged.

Regime EC parent-company/subsidiary

Dividends paid to a parent company situated in the United-Kingdom.
EC Directive n° 90/435 of 23/07/1990 provides for the exemption of the deduction at source and rules out the taxation on distributions of dividends when carried out by a subsidiary situated in a Member State to the benefit of its parent company situated in another Member State to the condition that the latest holds at least 25 % of its share capital.

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Interests: Article 11

Definition

Some investments bear interests (bonds, government loans, short-term notes, bank deposits, current accounts and debt-claims in general).

Right to tax

The additional clause dated 15 October 1987 modifies the tax regime of interests as it abolishes, in both States, the deduction at source of 10% provided for, initially, by the 1968 Convention.

Therefore, according to paragraph 1 of new Article 11, interests coming from a contracting State and paid to a resident of the other contracting State are only taxable in that other State if that resident is the real beneficiary.

To benefit from that exemption, residents of each countries must:

- be resident of the other State, according to Article 3 of the Convention,

- not have a permanent establishment in the State of origin or a fixed base with which the debt-claim from which the interest arises is effectively connected.

Methods

Requests for exemptions regarding French source interests have to be made on the following forms:
- RF 2 GB for interests from bonds and debt-claim of every kind
Requests for exemptions regarding UK source interests have to be made on the following forms:
- FRA/individuals n° 5090
- FRA/companies n° 5091
These forms can be obtained from the Tax Department of the French Embassy (see useful addresses).

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Royalties: Article 12

Definition

The term "royalties" means payments of any kind received for the following activities :

- use of or right to use any copyright of literacy, artistic or scientific work;
- use of or right to use any patent, trade mark, design and model, plan, secret formula or process).

The right to tax

Income coming from these activities are only taxable in the State where the beneficiary is resident.

There are two exceptions to this rule:

- if the beneficiary has a permanent establishment in the other State. In these conditions, income are taxable in the State where the establishment is situated;

- if the royalties, which have been paid, are in excess of normal conditions of business agreements. In these conditions, only the amount of the royalty regarded as normal is taxable in the State where the beneficiary is resident. The excess part of the payments shall be taxed using the tax treatment of dividends (Article 9 of the Convention).

Besides, it is important to point out that a clause to prevent the misuse of the law has been inserted by the additional clause of 15 October 1987. This allows to thrust away, from the royalties advantageous tax regime (exemption at source), the excess part of the payment regarded by mistake as part of the royalty. The excess part is regarded as a disguised profit allocation.

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Capital gains: Article 13

* Gains from the alienation of immovable property
including alienation made by enterprises, are taxable in the State in which such property is situated. The same rule applies to company stock transfers with an immovable preponderance.

The right to tax

Non-exclusive taxation in the State of origin (that is, the State in which the property is situated). When France is the State of origin, occasional capital-gains, if they do not benefit from one of the existing exemptions, are subject to a final and definitive withholding tax of a 1/3 at the time of the sale. When these profits are usual (profits made by estate agents) there is a 50% withholding tax.

* Gains from the alienation of movable property
Gains made by a permanent establishment or by a fixed base are taxed in the State where the permanent establishment of the fixed base is situated (Article 13 § 2).

The right to tax

Gains from the alienation of movable property, made by a permanent establishment or a fixed base:

- non-exclusive taxation in the State of origin
(that is, the State where the permanent establishment or the fixed base is situated).

- Gains made from the alienation of a substantial amount of company shares are taxable in the State where the company is resident (Article 13 § 4).

Non-exclusive taxation in the State of origin (that is, the State of residence of the company which shares are sold). When France is the State of origin, the gains are liable (except for exemption applying to particular cases) to a fixed withholding tax of 16% at the time of their sale.

- Gains from the alienation of a ship or aircraft exploited in international traffic
(Article 13 § 3).

The right to tax

They are only taxable in the State where the company has its place of actual management. Exclusive taxation in the State of origin (that is, the State where the place of actual management is situated).

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Independent professional activities: Article 14

Income derived from independent professional activities are only taxable in the State of residence. Nevertheless, if an activity is carried out in the other State, income derived from that activity is also taxable there if the activity is carried out from a fixed base (that is, a permanent professional installation) but only so much of it as is attributable to that fixed base.

The right to tax

- If there is no fixed base:
exclusive taxation in the State of residence.
- If there is a fixed base: non-exclusive taxation in the State of origin
(that is, the State where the fixed base is situated).

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Wages and salaries coming from the private sector: Article 15

The right to tax

General rule (Article 15 § 1)

Salaries from the private sector are only taxable in the State of residence except if the employment is carried out in the other State. If this is the case, the State where the professional activity is carried out has also the right to tax them.

There will be exclusive taxation in the State of residence if the employment is not carried out in the other State.

There will be non-exclusive taxation in the State of origin (that is, the State where the employment is carried out) if the employment is carried out in the other State.

When France is the State of origin, salaries are liable to withholding tax as mentioned hereafter :

JPEG

These limits for 2007 are subject to modification each year.

In all cases, salaries must be mentioned on the annual income tax return.

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Employees sent on temporary missions (Article 15 §)

Employees, resident of a State and sent on a temporary mission in the other State are only taxable in the State of residence if the following conditions are met (these conditions are cumulative) :

- the employee does not stay in the State of the temporary mission more than 183 days;
- the remuneration is paid by an employer who is not a resident of that State;
- the remuneration is not borne by a permanent establishment or by a fixed base which the employer has in the other State.

The general rule applies if one or more of these conditions are not met: taxation in the State where the activity is carried out for remuneration received in payment of that activity without prejudice to a taxation in the State of residence which must make sure that there is no double taxation.

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Payments received by directors of foreign companies: Article 16

These payments are taxable in the State of residence of the company which pays them. 

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Entertainers and athletes: Article 17

Income received by entertainers and athletes whatever their name (salaries or non commercial receipts) are taxable in the State where the corresponding activities took place. It is the same for all income which are directly linked with the artist notoriety.

The right to tax

Non-exclusive taxation in the State of origin, that is the State where the activity has been carried out. That means that the State where the beneficiary is resident has also the right to tax.

- Artists who work on an independent basis and who do not have any fixed base in France (for example, a UK artist who appears in France).
When France is the State of origin, this income is subject to a 15 % deduction at source which does not absolves it from income tax.

- Artists working as employees: According to Article 7 § 2 of the Convention, France maintains the right to tax those who are residents of France on income derived from activities carried out in the United-Kingdom.

This income is therefore taxable in France in accordance with the normal provisions of the law (income tax return n° 2042 – salaries group). Double taxation is avoided by the grant of a tax credit corresponding to the UK tax.

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Private pensions and annuities: Article 18

Definition

The term "pension" means any periodic payment made in consideration of a previous employment.

The term "annuities" means a stated sum payable periodically, at stated times, during life or during a specified period of time.

The right to tax

Private pensions and life annuities are only taxable (exclusive taxation) in the State where the beneficiary is resident. Therefore, when these sums are paid by a French resident debtor to a UK resident there is no taxation in France.

On the opposite, the payment of this type of income by a UK resident debtor to a French resident is exempt from any deduction at source in the UK.

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Remuneration paid out of public funds: Article 19

The right to tax : General rule

Remuneration paid by a State or by one of its subdivisions to an individual in respect of services rendered to this State or its subdivisions are only taxable in that State. There is, therefore, exclusive taxation in the State of origin (that is, the State which pays the remuneration).
On the French side, the result is that wages, salaries, annuities and pensions paid by the French Government or by a local authority to French nationals resident in the United-Kingdom are taxable in France.
Vice versa, wages, salaries, annuities and pensions paid by the UK Government or by a local authority to UK nationals resident in France are taxable in the United-Kingdom.


Exception

Nevertheless, they are only taxable in the State where the services are rendered if the beneficiary lives there and fulfils the following conditions :

- he is not a national of the State which pay the remuneration,
- he is a national of the State where he lives.

In this case, there will be exclusive taxation in the State of residence.

Remuneration which are excluded from the scope of application of Article 19 § 1

Are excluded from provisions of Article 19 § 1, remuneration paid in respect of services rendered in connection with any trade or business. This remuneration comes under rules applying to private sector salaries.

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Teachers and professors: Article 20

Members of the teaching profession of one of the two States who go temporarily in the other Member State in order to teach in a university, a secondary school, a primary school or in another educational institution belonging to that State are not taxable there on income derived from these activities for a period which can not exceed two years from the date they arrived.

If their stay exceeds two years, conditions are then not met any more and the remuneration received are taxed retroactively.

According to the above-mentioned provisions, French professors/teachers who go to the United-Kingdom to teach are not taxable in that State but they will be liable to French tax for remuneration received from the French Government during that period.

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Students and business apprentices: Article 21

This article exempts, in each of the two Member States, Foreign source payments received by students and apprentices of the other State who are coming to study or to do their training.

These payments must be made for the sole purpose of their maintenance, education or training. This exemption from tax has no length of time attached to it.

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Items of income not dealt with in the foregoing Articles of the Convention: Article 22

Items of income not dealt with in the foregoing Articles of the Convention shall only be taxable in the State where the beneficiary is resident except if that beneficiary has, in the other Member State, a permanent establishment or a fixed base which is at the origin of that income. In that case, the income is taxable in the State where the permanent establishment or the fixed base is.

The State of residence maintains the right to tax but must make sure that there is no double taxation.

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Published on 02/05/2014

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