Friendship treaties can also serve as tax avoidance tools when double taxation treaties are absent.
France: Non-Discrimination and the Treaty of Establishment with Panama
by Stefan N. Frommel, London
Conseil d'Etat: Resources Management Corporation S.A., 16 December, 1991
A. The facts
Resources Management Corporation was a company limited by shares incorporated in Panama. The company had issued 5,000 shares in bearer form and only two of the shareholders were known to the French tax authorities: a Mr. Arias and a Mr. Suarez, each holding one share. The remaining 4,998 shares were in the hands of shareholders who had not been identified.
Resources Management owned a villa in Eze-sur-Mer, on the Còte d'Azur; it had no other property or other activities in France. The villa was – the whole year round an free of charge – atthe disposal of Mr. Chofaras, a Greek national, who lived in Paris, at avenue de l'Are de Triomphe.
Resources Management had never filed a tax return. The tax authorities assessed the company to corporation tax for the years 1974 to 1977. For 1974 to 1976 the tax was assessed on the basis of the real rental value of the property. For 1977 it was assessed on three times the real rental value, according to article 209A, which came into force on 1 January, 1977.
Only the assessment for 1977 is relevant for our purposes.
B. The Conclusions of the Commissaire du Gouvernement
In his conclusions, M. Fouquet made the observations summarized below and requested the court to discharge the assessment for 1977.
(a) The administration argued that tax treaties traditionally allocate the right to tax income from immovable property to the Contracting State in which such property is situated. M. Fouquet observed:
The court had previously decided (in Le Beau Logis and Quadriga) that the non-discrimination clauses in the tax ([...])
As a result of these decisions the Government has asked Parliament to abolish Article 209A and replace it with the 3 percent annual tax on the market value of French real property (article 990D of the General Tax Code).
Article 7 of the treaty with Panama, being similar (analogue) to the non-discrimination clauses found in the vast majority of tax treaties, should be given the same effect.
It was not contested that “nationals”, the term used in the treaty, applied not only to individuals but also to legal persons, according to Royal, which he cited.
(b) The administration argued that article 7 of the treaty with Panama did not refer to “corporation tax”. M. Fouquet observed:
The wording of article 7 (“duties, levies, taxes, or contributions, of whatever denomination”) was sufficiently wide to include corporation tax.
Moreover, it was no longer relevant, since Nicolo, that the law of 29 December 1976 (at the origin of article 209A) was subsequent to the treaty.
(c ) The administration argued that the treaty with Panama was not valid because it had not been ratified by the president of the Republic, M. Fouquet replied:
According to the decision in Navigator (1965), the treaty had been properly introduced into French law by a decree of the President followed by publication in the Official Journal.
(d) To conclude, M. Fouquet mentioned Société Panagest, where the court,following his own submissions, had applied article 209A to two Panamanian companies: “Lack of sufficient time”, he said, had prevented him from discovering earlier the existence of the treaty with Panama.
Following Carboline-Europe (1986), he added, “the equality-of-treatment clause in a treaty is of [concern to] public policy (ordre public) and must be applied by the court ex officio, [even if it has not been pleaded by the taxpayer].”
C. The Decision
The relevant part of the decision reads as follows:
“As far as the year 1977 is concerned:
“Whereas, according to article 209A of the General Tax Code, in force at the time: 'If a legal person (personne morale) whose seat (siège) is situated outside France, has at its disposal one or more real properties or grants the use of such property either gratuitously or for a rent inferior to the real rental value, it is subject to the corporation tax on a basis which cannot be lower than three times the real rental value of the said property'; that for 1977 the petitioner has been subject to corporation tax, according to that provision, on a base equal to three times the rental value of the aforementioned villa; that, however, petitioner invokes the provisions of article 7 of the treaty of establishment between France and Panama of 10 July, 1953, published by virtue of decree 58-438 of 12 April, 1958 in the Official Journal of 23 April, 1958, according to ([...]) within the territory of the other Party, to any other or higher duties, levies, taxes, or contributions, of whatever denomination than those which are imposed on the nationals'; that these provisions form an obstacle to the fixed rate taxation (taxation forfaitaire) foreseen by article 209A of the General Tax Code; that the company limited by shares Resources Management Corporation is, accordingly, entitled to demand the discharge of the assessment to corporation tax to which it was subjected for the year 1977.
“[The court] decides: …
“The company limited by shares Resources Management Corporation is discharged from the assessment to corporation tax and ancillary penalties to which it was subjected for the year 1977.”
VI. A Point That Was Not Raised: Abuse of Rights
A word of caution for anyone planning to use Panamanian companies to hold French real estate: beware of the doctrine of abus de droit. It was not raised in Resources Management, but might well be invoked in other cases.
In French tax law, the expression abus de droit (abuse of rights) refers to unacceptable tax avoidance. Outside the tax field it has a different meaning and refers to a doctrine that has been developed by the French courts and become a “general principle of law”: a person acts unlawfully, or he made use of a right with the intention or purpose of causing harm to another person. Transposed to taxation matters, the doctrine means this: although a taxpayer has a right to arrange his affairs in any way which is legal, he abuses that right if he exercises it solely to avoid tax.
VII. Are Panamanian Companies Protected from the 3 Percent Annual Tax on the Market Value of French Real Property?
A short note, signed with the initials “O.F.” (Olivier Fouquet?) is appended to the report of Resources Management in the Revue des Sociétés. ([...]) … times the rental value of French real property) appeared to be “transposable” to the “new” 3 percent annual tax on the market value of the property (imposed by article 990D which replaced article 209A) because the Cour de Cassation had also decided (in Société Royal) that a non-discrimination clause in a “bilateral treaty” was an obstacle to application of this tax.
This analysis is correct and is shared by another commentator, M. Phillipe Derouin.
Comparing Société Royal with Resources Management it is apparent that both decision have three fundamental points in common:
A tax that is discriminatory because it applies only to companies which have their seat outside France (both taxes are closely related: one replaced the other).
A treaty with a non-discrimination clause (both clauses have similar wording).
A constitutional principle of supremacy of treaties over domestic legislation (both taxes were enacted after conclusion of the treaties).
In this circumstances, unless the Constitution is amended or the treaty is renegotiated, it is doubtful that the 3 percent tax imposed by article 990D of the General Tax Code could ever apply to Panamanian companies.
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