In more detail

To determine the tax treatment of income from the UAE received by a French tax resident, on 20 March 2023, the Tax Supreme Court gave a literal interpretation of the Tax Treaty and strictly applied the treaty provisions.

In this case, a taxpayer was seconded to the UAE by their employer. As part of their activity, they traveled and lived there, although their wife and children stayed in France. After claiming a tax exemption for their salary based on Article 81 A of the French Tax Code (FTC) regarding expatriate employees, which was refused by the administrations as the relevant requirements were not met, the taxpayer attempted to justify their non-taxation in France based on the applicable treaty provisions.

Indeed, Section 1 of Article 19 of the Tax Treaty provides for the elimination of double taxation by crediting a tax credit equal to the French tax on compensation income from the UAE. Nevertheless, the tax court of appeal denied the application of Section 1 for Section 2 of Article 19 of the Tax Treaty, which provides for the elimination of double taxation by deducting the actual tax paid by the UAE.

The provisions of Article 19 of the Tax Treaty are very specific insofar as Section 1 governs the special case of "French resident" and Section 2 the "residents of UAE or who are established therein" and that have their "tax domicile in France for the purposes of French domestic law."

For the taxpayer, the concept of French or UAE "resident" set out in Section 1 and Section 2 of Article 19 refers to the tax residency as defined in Article 4 of the Tax Treaty. However, the tax authority and the tax court of appeal did not follow this analysis, ruling that Section 2 of Article 19 could not result from the outcome of a conflict of residence as per the treaty provisions.

Having recalled the principle of subsidiarity of tax treaties and ruled that the taxpayer should be considered a tax resident of France according to French domestic law, the Tax Supreme Court applied Article 4 of the Tax Treaty to determine the taxpayer's situation under the Tax Treaty provisions.

According to Section 1 of Article 4 of the Tax Treaty, a resident of France is "any person who […] is liable to tax therein." Moreover, a resident of the UAE is "any person domiciliated […] in the United Arab Emirates."

Being subject to tax in France as a French tax resident and domiciliated in the UAE as a result of their secondment, the Tax Supreme Court determined that the taxpayer is in a situation of dual residence. Therefore, the Tax Supreme Court applied Section 2 of Article 4 of the Tax Treaty, which rules on cases of dual residence in favor of the state in which the taxpayer has the center of vital interests, in this case, France.

As a French resident, according to the Tax Treaty, the Tax Supreme Court agreed with the taxpayer, ruling that the provision of Section 1 of Article 19 of the Tax Treaty should apply. Consequently, income from the UAE will be taxable in France, subject to the application of a tax credit equal to the French tax.

In addition, the Tax Supreme Court confirmed that the tax credit in France is not subject to the effective taxation of UAE-sourced income nor subject to actual double taxation.

On the one hand, this decision underlines the importance of the concept of residence in bilateral tax treaties. On the other hand, it underlines that provisions of these treaties are to be interpreted strictly, even if the application of the Tax Treaty provisions regarding the elimination of double taxation would result in the absence of taxation in both states.