Double taxation risk for non-resident executive corporate officers of French companies

Some French jurisdictions recently challenged the criterion of physical presence to allocate the right to tax salaries paid to non-resident executive corporate officers of French companies.

According to the Versailles Administrative Court of appeal (October 18 2022, Axa Group Operations), the remuneration paid to an executive corporate officer of a French company is deemed to correspond to an activity performed in France, even if such a corporate officer is not physically present permanently in France.

The Court stated that

“(…) business travel and teleworking in Switzerland were merely part of the performance of the corporate mandate and could not be dissociated from it. Accordingly, the remuneration paid by the French company to Mr A was consideration for actual management duties that had to be regarded as being performed daily in France, even though he was not physically present in France every day. 

(…) As such, this remuneration constitutes income from a French source within the meaning of Articles 4 and 164 B of the French General Tax Code. As a result, the tax authorities were entitled to subject all the remuneration paid by Axa Technology Services to Mr A to withholding tax, without the applicant company being able to usefully argue that he performed his duties in Switzerland or other foreign countries for part of the year. (…)”

No decision of the French supreme administrative Court on the subject

The taxpayer appealed to the French supreme administrative court on this decision, but no decisive position was taken by the Supreme Court on the subject of the physical presence used as a criterion of the allocation of the right to tax the remuneration.

In addition, the Paris administrative court of appeal recently took a position very similar to the one described above, according to which

“(…) although the taxpayer argued that her remuneration as president of the French company should have been subject to income tax after apportionment of the right to tax between the two countries (France and Switzerland, state of residence of the corporate officer), she provided no evidence to establish that the place where she carried out her duties as chairman and chief executive of the company, which was a French company with its registered office and place of business in France, was in another State, the fact that she was not permanently physically present on the French territory being irrelevant in this respect” (CAA Paris, 15 may 2024, 22PA03303).

Consequences of the challenge of the physical presence criterion for allocation of the right to tax

Based on these two decisions, there is currently a risk that non-resident executive corporate officers of French companies would be deemed performing their activities only in France, despite the fact that they would not be physically in France on a permanent basis, based only on the company’s registered office and place of business being located in France.

In this respect, their remuneration would qualify as French source income and therefore fully taxable in France. This would lead to a risk of double taxation on the part of the remuneration corresponding to time spent outside of France, since the residence State would most likely tax this part of the remuneration, in accordance with the terms of the applicable tax treaty.

Until the French supreme court makes a decision in relation to the question of the apportionment of the right to tax with respect to physical presence in the respective countries, we are in a situation where there would be, for executive corporate officers of French based companies, a presumption of performance of their duties fully in France, despite their actual physical presence on the French territory, and therefore a double taxation risk for the part of the compensation corresponding to time not spent in France. At this stage, we have no information as to which criteria the French tax courts would agree to take into account to overcome the presumption and align the right to tax with the physical presence.

What about employees?

Finally, it should be noted that such decisions were related to executive corporate officers, i.e. not employees bound to the French company by an employment contract. One could consider that the question of the allocation of the right to tax an employee’s salary should not raise the same issue with respect to an employment contract, more particularly if such contract expressly provides for the place(s) of performance of the activity, like the premises of the employer and the home of the employee. There is however at this stage no certainty on this point.

Stéphanie Le Men-Tenailleau from CELIA Alliance member firm Galahad created this article. For further information or to discuss any of the issues raised in this article, please contact us or contact  Stéphanie Le Men-Tenailleau.