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3.6.2. Tax Residence Rules for Foreign Partnerships

There are no specific residence rules for foreign partnerships. The tax residence criteria are, therefore, the same as for any other legal entity, namely the place of effective management and control.

As regards their tax regime, the French tax authorities reason by analogy whether the foreign entity is similar to the partnership type of entities covered by Art. 8 of the French tax code. The French tax authorities begin, therefore, by identifying to what class, if any, of French partnerships the foreign partnership could belong to, according to its characteristics.

In the event of a similarity, the foreign partnership only has to declare its results arising from French activities. Furthermore, partners that are legal entities subject to corporate income tax shall only be taxable in France on their corresponding fraction of the sole profits relating to operations carried out in France, regardless of their tax residence.  

In the absence of similarity, the foreign partnership qualifies as an “other foreign entity” pursuant to Art. 206-1 of the French tax code, subject in all cases to French corporate income tax. Pursuant to Art. 120-2 of the French tax code, partners are deemed to have received dividends from this other foreign entity. The dividends are subject to French personal income tax, if the partner is an individual, or French corporate income tax, if the partner is a legal entity.  

French Tax Authorities Guideline introduced, under certain conditions, the recognition of the transparency approach for French-source passive income (dividends, interest and royalties) derived by foreign and French-resident partners of a foreign partnership. For the purposes of the Guideline, foreign partnerships are defined as foreign entities treated as transparent for tax purposes in the country where they are established. Subject to specific tax treaty provisions, the definition excludes UCITSs, pension funds and legal structures similar to family foundations or trusts.

The transparency approach applies in situations where a French-resident or foreign-resident partner derives income through a foreign partnership. If all the requirements mentioned below are met, French-source passive income derived by a foreign partner will be subject to the reduced withholding tax rate provided in the treaty between France and the country of residence of the foreign partner. In contrast, French-source passive income received by a French-resident through a foreign partnership will not be subject to French withholding tax.

The following four cumulative conditions must be met for the application of the tax transparency of a foreign partnership in its country of constitution:

  • the foreign partnership must be constituted in a country with which France has concluded a tax treaty that contains an administrative assistance clause for the prevention of tax fraud and evasion;
  • the partners must be residents of France or of a country with which France has concluded a tax treaty that contains an administrative assistance clause for the prevention of tax fraud and evasion. The partners need not be resident in the country where the partnership is constituted; thus, triangular situations may occur;
  • the country of constitution of the partnership and the residence country of the partners must treat the French-source (passive) income as income of the partners (transparency approach). The partners must be subject to tax in that country as residents (without being exempt and without the option of being exempt); and
  • the partners in a foreign transparent partnership may not be transparent partnerships. If these conditions are not met, the French tax administration will apply the translucency approach, thereby denying the application of tax treaties to the foreign partnership and to the partners.

  

2CE April 4th 1997, n° 144211, Sté Kingroup.

3Administrative doctrine : BOI-IS-CHAMP-60-10-30 n° 475.