As a French tax resident, you are required to declare all of your income (from all sources), including your worldwide income, such as income from the Emirates, for example. If you declare your worldwide income in France, you may be subject to double taxation, meaning that your income is taxed in two countries at the same time.
However, it is important to note that some countries have entered into tax treaties with other countries to avoid double taxation. Indeed, international tax treaties prevent taxpayers from being taxed twice as a result of the simultaneous application of the tax legislation of both contracting states (in this case, France and the United Arab Emirates, as of July 19, 1989).
Focus on recent case law
As a reminder, case law refers to all decisions issued by courts and judicial bodies in the course of their activities. It constitutes a fully fledged source of law, alongside legislation and regulations. Case law therefore helps clarify legal rules by providing details on their interpretation and application. It is important for ensuring consistency in the administration of justice and equality before the law. Lawyers and legal professionals may also rely on case law to support their arguments in ongoing proceedings.
A recent
decision of the Council of State dated March 20, 2023 provides clarification regarding cases of double taxation between France and the United Arab Emirates.
What exactly happened in this case?
A person whom we will call Mr. X worked for a French company. Mr. X, who was seconded to the Emirates in 2013 to work there for several months, filed his annual tax return. When filing his tax return in France, he stated that he had received tax-exempt salaries for 2013, 2014, and 2015 because they came from the Emirates.
Following an audit, the tax authorities challenged this exemption, considering that he should have paid tax in France on his Emirati income because he did not pay tax in Dubai (indeed, there is no income tax in the Emirates).
The tax authorities therefore asked Mr. X to pay tax on his salary income for 2013, 2014, and 2015.
After numerous administrative setbacks, the case reached the Council of State.
In its decision of March 20, 2023, the Council of State presented a first analysis of the anti-abuse clause provided for in Article 19, Paragraph 1 of the France-United Arab Emirates agreement. The Council of State held that this anti-abuse clause applies only to UAE residents, in accordance with Article 19, Paragraph 2 of the Convention on the settlement of residency disputes.
It also specified that French tax credits applicable to Emirati salaries apply even if the salaries in question are not taxed in the UAE.
Using the international tax treaty when you have active income
As a reminder, active income refers to all income received in exchange for a professional or business activity carried out regularly, such as salaries, business profits, fees, etc. This differs from passive income, such as rent or interest, which is received without requiring regular activity.
This method, described above, has therefore been upheld by the Council of State. It is advantageous and consists of carrying out genuine professional activity in the Emirates even when the individual is a French tax resident.
Consequently, anyone carrying out professional activity in Dubai must declare all of their income (French AND Emirati) to the French tax authorities (including salaries and dividends paid). This is why the taxpayer must prove to the French authorities that they actively participate in the Emirati activity. This may be demonstrated by frequent trips to the Emirates.
Once active participation in the Emirati activity has been proven, the French authorities will be required to take into account the individual's total worldwide income, from which the effective tax rate will be calculated (see
Tax residence in France: who is considered a tax resident?).
Once the effective tax rate has been determined, it will be applied only to income from French sources.
Let us take the example of a French tax resident working in Dubai.
We will assume that this person earns 30,000 euros per year in France and earns 70,000 euros per year in salary in the Emirates. Based on what was stated above, the tax rate will be calculated on 100,000 euros, which is the sum of the French and Emirati income, namely 30,000 + 70,000. However, this effective rate will be applied only to income from French sources, namely 30,000 euros. The 70,000 euros from Emirati sources will not be taken into account in order to comply with the international tax treaty between France and the United Arab Emirates.
The procedure results from a combination of French tax returns numbered 2042, 2042 C, and 2047, which make it possible to override domestic law and highlight certain provisions of the international tax treaty concluded between France and the United Arab Emirates.
The international treaty between the two countries is an excellent way to optimize your tax position when you are a French tax resident and receive most of your salaries and/or dividends in the Emirates.
French tax resident and administrative resident in the Emirates
It is therefore legally possible to retain your tax residence in France, be an administrative resident in the Emirates, and receive salaries that are fully exempt from tax when they come from the UAE (provided, of course, that you are genuinely working from the UAE)!
If you have any questions regarding this decision, please contact us at the following address:
support@merritt.group.
[Shortcut for this article:
https://merri.tt/conseil-etat-200323]
Merritt Group
