France and United States: Tax treaty – scope of the mutual assistance clause

In brief

The Tax Court of Appeal of Paris judges, in a dispute concerning the statute of limitations for tax collection, that the United States does not have a legal instrument on mutual assistance for tax collection that is “equivalent” to the one provided for by Council Directive 2010/24/EU of 16 March 2010. Such an interpretation of the tax treaty concluded between France and the US could have consequences on other tax regimes, and in particular on French exit tax.

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In more detail

The case at hand concerned a US citizen taxpayer, who was subject to additional income tax and social surtaxes following a tax audit in 2014, on French-sourced rental income derived in 2011 and 2012, at a time where he was not a French tax resident.

The collection of these amounts was initiated on 30 April 2015, when the taxpayer was a US tax resident, and was followed by a formal notice to pay on 23 July 2019, when the taxpayer was a French tax resident. The Administrative Court of Montreuil (TA Montreuil, 8 January 2021, No. 1910548) rejected the request of discharges of the additional income tax and social surtaxes and confirmed that the French tax authorities were not barred by the statute of limitations when the formal notice was delivered in July 2019.

The taxpayer considered that the public accountant’s action for collection was time-barred as of April 2019, pursuant to Article L. 274 of the French Book of Tax Procedures (FBTP). This Article provides that the action for collection is barred by a four-year statute of limitation period starting on the day of the tax assessment or issuance of the assessment notice. This period is extended by two years for taxpayers established in a non-EU Member State with which France have not concluded a legal instrument on mutual assistance for collection with a scope similar to the Council Directive 2010/24/EU of 16 March 2010.

The taxpayer lodged an appeal before the Paris Tax Court of Appeal, which rejected his request and confirmed the decision of the lower court. The decision of the Tax Court of Appeal provides two valuable clarifications, on the application of this additional two-year period, and on the scope of the tax treaty concluded between France and the US:

Whether the additional two-year period applies is assessed on the date of the interruptive act. On this date, if the taxpayer is not a tax resident of France, nor of an EU Member State or of another State that has concluded a tax treaty as referred to in Article L. 274 of the FBTP, the additional two-year period will apply.

In this case, the taxpayer was a US tax resident at the time of collection in 2015, therefore the statute of limitation’s period was assessed at that date, taking into account his non-tax resident situation. The fact that he was a French tax resident on 23 July 2019, i.e., the date of the formal notice to pay, had no impact on the application of the additional two-year period.

In order to confirm the application of this additional two-year period, the Tax Court of Appeal had to construe the terms of the tax treaty concluded between France and the US The Tax Court of Appeal concluded that the treaty did not have a similar scope to the Council Directive 2010/24/EU of 16 March 2010, on the grounds that Article 28 of the tax treaty, relating to assistance in collection, excludes such assistance “with respect to citizens, companies, or other entities of the Contracting State”.

In this case, since the taxpayer was a US citizen, France could not have requested the assistance for collection from the US, as Article 28§5 prevents such a request for their nationals.

Given the terms of the decision of the Tax Court of Appeal, such analysis of the tax treaty may trigger consequences on other tax regimes referring to a treaty having a similar scope to the Council Directive 2010/24/EU of 16 March 2010. This is notably the case for the French exit tax for individuals transferring their tax residence outside of France.

When a taxpayer transfers his or her tax residence outside France and falls within the scope of the exit tax, payment of the tax due on the unrealized capital gains may be deferred. This tax deferral is either:

1. Automatic, if the taxpayer is established in a European Union Member State or in another State or territory that has concluded with France an administrative assistance agreement to fight tax fraud and tax evasion as well as a mutual assistance agreement for collection with a scope similar to the Council Directive 2010/24/EU of 16 March 2010.
2. Upon request when the transfer is in another country, in which case the taxpayer must offer guarantees to the French tax authorities no later than 90 days before the transfer of the tax residence outside France.

If this position of the Tax Court of Appeal was followed by the French tax authorities, it could trigger complex and potentially costly situations for taxpayers transferring their tax residence to the United States who fall within the scope of the exit tax, since they would be required to request the tax deferral, and set up guarantees which may be challenging depending on the assets held (French or foreign securities, etc.), or even costly (bank guarantees, collateral, etc.).

However, to date, it seems to us that the French tax authorities’ position concerning the tax treaty concluded between France and the US is clear and it will be essential to review whether this position is maintained in the future. Indeed, several indications point in this direction:

The United States are listed in the exit tax Form’s instructions (2074-ETD), which lists countries for which the automatic tax deferral applies, which is an indication of the French tax authorities’ position, although it is not enforceable against the French tax authorities. It should be noted, however, that those instructions are not up to date, since the online version is currently the 2022 version concerning transfers of residence that took place in 2021. It will be interesting to follow whether the French tax authorities amend this list following this decision.

Most importantly, the United States are listed in the French tax authorities guidelines mentioning States that have entered into an administrative assistance agreement with France to fight tax evasion and avoidance, as well as a mutual assistance agreement for collection with a similar scope to the Council Directive 2010/24/EU of 16 March 2010, and for which the automatic tax deferral is applicable (BOI-ANNX-000445-31/10/2012). However, this list has not been updated since October 2012, whilst Article 167 bis of the French Tax Code has been amended several times; however, it seems to us that there are arguments to consider that this list is still enforceable.

If the French tax authorities were to adopt a more rigorous position regarding the tax treaty concluded between France and the US, it could be argued that the assessment of the similar scope will have to be made for each taxpayer. Indeed, §5 of Article 28 prevents the implementation of assistance for collection by a State against a taxpayer who is citizen of that State. However, in the case of a French taxpayer who transfers his or her tax residence to the United States, nothing would prevent France from requesting the assistance for collection of the US for this taxpayer. It could therefore be considered that the tax treaty concluded between France and the US, in this case, has a similar scope.

In that respect, the French Tax Supreme Court ruled on the same provisions (French Tax Supreme Court, 26 January 2021, No. 429381 and 429410), and had indicated that it is up to the tax judge to determine whether a legal instrument relating to mutual assistance “is applicable to the concerned individual”, which could suggest that the assessment is made for each individual taxpayer. In this decision, which was favorable to the taxpayer and concerned Switzerland, the French Tax Supreme Court considered that the tax treaty concluded between France and Switzerland had a similar scope to the EU directive. However, the French tax authorities do not seem to adopt this position for Switzerland.¹

It is therefore important to monitor the position of the French tax authorities on the interpretation of tax treaties and their scope, as the consequences for taxpayers may be significant. In practice, a taxpayer transferring his or her tax residence to the United States should contact the “Exit tax” tax office in order to confirm this point sufficiently ahead of the transfer of residence project.