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France China double tax convention. Is an individual a tax resident because of his liability to tax or is he liable to tax in consideration of his state residency?

France China double tax convention. Is an individual a tax resident because of his liability to tax or is he liable to tax in consideration of his state residency?

Published on : 18/11/2020 18 November Nov 11 2020
Advice to enterprises
Advice to individuals

The French administrative suprême court (Conseil d’État) ruled, with regard to the tax treaty between France and China of 30 May 1984, that the mere fact of being subject to tax in China is not sufficient to be considered as a Chinese resident and therefore to benefit from the provisions of this treaty[1].

Background
A manager of a newly opened factory in Shanghai received dividends from French companies. At the same time, he received wages from the Chinese factory for work carried out in China.

Under French domestic law, a withholding tax at a rate of 30% is levied by paying institutions established in France on the occasion of a dividend distribution to a person established abroad. Tax treaties may provide for a lower rate.

The tax treaty between France and China provides that dividends paid to a beneficial owner established in China are taxed in China, with the possibility for France to levy tax, but the rate of the latter is capped at 10% of the gross amount of the dividends.

The benefit of the reduced rate provided for by the Convention assumes, for the person who avails himself of it, that he is a tax resident of one of the two countries. The Convention of 30 May 1984 between France and China, in its wording applicable to the facts, considers as resident of a State: "any person who, under the legislation of that State, is liable to tax in that State by reason of his domicile, residence, place of management or any other criterion of a similar nature" (Article 4, §1).

For the taxpayer, there is little doubt that his tax residence is in China, where he pays taxes on the wages he receives in China.

For the tax authorities, the mere fact of paying taxes in a State does not necessarily imply tax residence.


Legal issue
Is the tax liability on income from local sources sufficient to determine residency or, on the contrary, is it necessary to go into more detail about the reasons for this tax liability in order to subvert, if necessary, the residency status?

Solution
According to the administrative supreme court, taxation in a State solely on the basis of the existence of income originating there does not, in itself, lead to recognition of the status of resident. It is necessary to focus on the conditions for which the person has been subject to tax in that State.

In order to deduct, in respect of taxes paid in a State, that a taxpayer is a resident, such taxes must be paid by reason of the personal links between that State and the taxpayer in question. Liability to tax must therefore be based not only on the existence of income from local sources, but also on the fact that the taxpayer's domicile, residence or other personal ties are in that State.

Consequently, in the case in point, a person who has received dividends from French sources and who has no personal link with China such that he can be considered as a tax resident of that State cannot benefit from the reduced rate provided for in the tax treaty between France and China.


Malick DIOUF law firm, situated, in the Yvelines department, provides advice and assistance in your claims before tax authorities or before French jurisdictions.

 
 
[1] CE, 8e et 3e ch., 9 juin 2020, n° 434972, préc.
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