Treatment of Partnerships in the 2008 France-U.K. Tax Treaty by Nicolas De Boynes and Andrew Howard

Volume 54, Number 5 May 4, 2009 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Treatment of Partnerships in the 2008 France-U.K. Tax Treaty by Nicolas de Boynes and Andrew Howard Reprinted from Tax Notes Int’l, May 4, 2009, p. 401 (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. Treatment of Partnerships in the 2008 France-U.K. Tax Treaty by Nicolas de Boynes and Andrew Howard Nicolas de Boynes is an associate with Sullivan & Cromwell LLP in Paris, and Andrew Howard is an associate with Sullivan & Cromwell LLP in London. t has traditionally been left to domestic courts to I. Domestic Approaches to Partnerships Imake sense of the various difficulties that arise in applying double tax agreements to partnerships (in the A. U.K. Domestic Treatment U.K., see Padmore1 and Memec;2 in France, see Kin- Put briefly, the U.K. corporation tax rules provide group3 and Diebold4). It is therefore interesting to see an for the profits of a partnership to be calculated at the attempt at an exhaustive code for the treatment of partnership level and assessed on each partner in ac- partnerships included in the long-negotiated new cordance with its partnership share as if the profits double tax treaty (DTT) between the U.K. and France, were earned directly by it. A non-U.K.-resident corpo- expected to be ratified shortly,5 replacing 2004’s abor- rate partner will therefore not be subject to U.K. corpo- tive agreement. ration tax on profits derived through a U.K. partnership unless it is trading in the U.K. through a Partnerships are a particular area of difficulty be- permanent establishment there. tween the U.K. and France as France does not yet sub- scribe to the ill-defined principle that partnerships are This treatment applies to all forms of U.K. partnership, including limited liability partnerships. Non-U.K. transparent for tax purposes, whereas the U.K. does. partnerships will be treated in the same way if they In this article we look at how some of the difficul- have similar characteristics to U.K. partnerships. HM ties have been addressed and others created. In particu- Revenue & Customs guidance says that it will ‘‘look at lar, a change is made to the general rules on treaty ex- the foreign commercial law under which the entity is emption from U.K. withholding tax to shut an formed and at the internal constitution of the entity. apparent loophole. Some possibilities of double taxa- How the entity is classified for tax purposes in any tion are resolved, but some difficulties remain. other country is not relevant.’’6 HMRC has published a list of entities that it has considered.7 The list indicates whether a particular entity has been considered to be ‘‘transparent’’ or 1Padmore v. IRC, [1987] STC 36. 2Memec Plc v. IRC, [1998] STC 754. 3CE, Apr. 4, 1997, no. 144211, RJF 5/97, no. 424. 4CE, Oct. 13, 1999, no. 191191, Dr. fisc. 1999, no. 52, comm. 6HM Revenue & Customs International Manual at INTM 948. 180010. 5The U.K. ratified the DTT on February 11, 2009. 7INTM 180030. TAX NOTES INTERNATIONAL MAY 4, 2009 • 401 PRACTITIONERS’ CORNER ‘‘opaque.’’ The Groupement d’Intérêt Economique, the So- expressed in the French reservations on article 4 of the (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. ciété en Nom Collectif, the Société en commandite simple, the OECD model convention:10 Based on the French do- Société en participation, and the Fonds Commun de Place- mestic tax law, a French partnership is viewed as liable ment à Risques have been considered to be transparent. to tax and is resident for tax treaty purposes. Most re- These are the main types of French entities that are cent tax treaties entered into by France specifically pro- referred to as partnerships in this article. vide that French partnerships are treated as residents.11 B. French Domestic Treatment 2. Foreign Partnerships and Transparency The French treatment of foreign partnerships has 1. ‘Translucent’ Approach to French Partnerships been recently reformed according to an important deci- The French approach to partnerships is based on the sion by the French Supreme Court (Diebold), which same principle as that applicable in the U.K.: The was later extended by official guidelines published by profits of the partnership are calculated at the partner- the French tax administration.12 While the traditional ship level and effectively taxed in the hands of the approach was that foreign partnerships are taxable enti- partners. However, France draws from there a conclu- ties by analogy to the treatment of French partner- sion that differs from the position of most OECD ships, the principle set by the guidelines is that regard- countries (including the U.K.). It considers that ‘‘the ing French-source income payable to a non-French fact that the partnership is a legal person precludes the partnership, non-French partnerships are transparent view that income simply ‘flows through’ this entity to for the purposes of applying DTTs, if the entities are the partners.’’8 Instead of treating the partners as if viewed as transparent for tax purposes in their state of they had received the profits directly, the French point residence. For example, French-source income may of view is that the partnership is the ‘‘taxable entity’’ benefit from reduced withholding tax rates under the even though the collection of the tax is at the level of applicable tax treaty signed between France and the the partners. Partnerships are thus viewed as ‘‘semi- state of residence of the partners under some condi- transparent’’ or ‘‘translucent.’’ tions. The scope of the guidelines is limited to divi- A non-French resident partner in a French partner- dends, interest, and royalties. ship will be subject to tax in France even if the French However, the traditional concept of ‘‘translucency’’ is partnership is not engaged in a trade or business in still used regarding inbound income received by French France. The rationale is that any item of income received partners through non-French partnerships. While the by a French partnership (including passive income) is French individual partners should be subject to tax in taxable in France because the partnership is a taxable France on their share of the partnership’s income (just entity. The collection of the tax is made at the level of like under a transparency regime), French corporate the partners (including nonresident partners). Even partners will not be taxable on that income on applica- though the tax is collected in the hands of the partners, tion of the French territoriality system because the in- the French Supreme Court (Conseil d’Etat) has ruled come is viewed as the income of a foreign partnership that tax treaties do not protect the nonresident partners (out of the scope of the French corporate income tax) against such taxation because the ‘‘taxable entity’’ is the and not the income of the French corporate partner. Sub- partnership (not the partners). While the partners do not sequent distribution by non-French partnerships will not have a PE in France, the fact that the assets generating be taxable income in the hands of the partners. passive income are held by a French partnership has al- The criteria under French law to determine the most the same consequence as reporting these assets in a question whether a non-French entity will be viewed as French PE of the partner (Kingroup). a partnership or as a corporation are not clearly settled. This approach also has an impact on whether the However, it is generally accepted that non-French enti- partnership should be viewed as ‘‘resident’’ according ties that have legal characteristics similar to French to DTTs. Under the widespread OECD approach, partnerships are subject to the translucent regime. The which is shared by the U.K., partnerships are not resi- main characteristic used to distinguish between a part- dent for purposes of the DTTs, but their partners nership and a corporation is the liability of the should be entitled to benefit from the treaties, pro rata partners/shareholders: Unlimited liability would indi- to their partnership share, in the state in which they cate a partnership, while a limited liability would indi- are resident.9 In contrast, the French tax administration cate a corporation. The tax treatment applicable in the has historically taken a position that is unique among state of residence is not relevant. One result is that an OECD countries, under which French partnerships English LLP would be viewed as opaque entity under must be treated as French residents. This position is French tax law. 10 8Reservations by France on the report on ‘‘The Application OECD Commentaries, C(4) no. 29. of the OECD Model Tax to Partnerships,’’ no. 12. 11For instance, article 4.6 of the France-Japan tax treaty. 9OECD Commentaries, C(1) no. 5. 12Inst. 29-3-2007, 4 H-5-07. 402 • MAY 4, 2009 TAX NOTES INTERNATIONAL PRACTITIONERS’ CORNER If the foreign partnership is viewed as a corporation III. Article 4.5 of the DTT (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. for French tax purposes, no tax will be due in France Article 4.5 makes specific provision for the applica- when the partnership receives the income, but any dis- tion of the DTT to six situations involving partner- tribution by the partnership to its French partners ships.16 We have grouped these into three categories: would be taxable in France as dividend income.

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