Under French tax law, the profits made by a French partnership or an economic interest grouping (GIE) are taxable in the name of the partners (each partner is liable to tax on the share of the profits corresponding to his rights).
In the Kingroup decision of 4 April 1997, the Conseil d’Etat ruled that, as the profits made by the partnership or GIE derived from a business in France, the non resident partner was liable to tax on his share of the profits, without any interference by the provisions of the applicable tax treaty in the case at hand.
The Conseil d’Etat confirmed this position in its Quality Invest decision of 11 July 2011 ruling that tax courts must check if the provisions of the tax treaties do not deprive France of its right to tax the non resident partners on their share of the partnership profits, and, if there are no such provisions - as in the case at hand - the non resident partner could not claim the benefit of any other provisions of the tax treaty, including the catch-all clause. The reason is that those provisions are only applicable to the profits made by the partnership and not to the share of these profits on which the non resident partner is liable to tax.
But there remains a chance that this rule may be changed by the Parliament. A wide-scale tax reform of partnerships was considered at the end of 2010. It was not enacted at that time but the draft legislation is still considered and might come back into the spotlight and include a modification of the rule applicable to non resident partners of French partnerships.
According to our information, the existence of discussions before the Parliament largely explains that there was no turnaround in the Conseil d’Etat case-law on that point.
By Stéphane Austry, partnerFlorent Ruault, associate