In a letter dated 3 August 1999 to Denis Kessler, president of the Federation of French Insurance Companies (Fédération Française des Sociétés d'Assurance), the then French Minister of Finance, Dominique Strauss-Kahn, announced his decision to abandon the tax reassessments notified to insurance companies established in France on the grounds of article 182 B of the French tax code in connection with reinsurance premiums paid to reinsurance companies established in non-treaty protected countries (for example, Bermuda).

Article 182 B of the French tax code provides that sums remunerating services of all kind provided or used in France and paid by a debtor exercising an activity in France to individuals or companies, liable to income or corporation tax, that do not have a permanent business installation in France, are liable to a 33.1/3% withholding tax.

The Finance Minister's letter is interesting because the explanations that substantiate his decision tend to demonstrate a change in the French tax authorities' guidelines, going beyond the uncertainties that stemmed from a previous ruling of the French Supreme Court, although the scope of the decision remains limited.

The Finance Minister's decision

Although reinsurance premiums are within the scope of article 182 B, tax is effectively due provided only that the reinsurer is liable to corporation tax, ie that the reinsurer undertakes in France a complete commercial cycle. The existence of a complete commercial cycle is deemed to exist if the operations undertaken in France by the reinsurer are detached from the activity undertaken outside of France. If it is not established that the complete commercial cycle undertaken in France is autonomous from the rest of the reinsurer's activity, all the conditions necessary for the taxation in France of the service provider are not met.

Therefore, subject to this reserve which could apply if the reinsurer exercises its activity exclusively or quasi-exclusively for the benefit of the French company (eg captive reinsurance company), the withholding tax provided for by article 182 B does not apply to the reinsurance premiums.

Tax authorities' guidelines

According to the official position of the French tax authorities1 on article 182 B of the French tax code, subject to the provisions of double tax treaties, sums remunerating services of all kind provided or used in France that are paid to companies subject to corporation tax are liable:

  • either only to French corporation tax if the beneficiary company has a permanent business installation in France;

  • or otherwise, to the withholding tax which may be set off against the French corporation tax due.

    However, the French tax authorities have not set forth as a condition for the withholding tax to apply the fact that the beneficiary must be subject to corporation tax in France in application of territorial rules governing liability to French corporation tax (ie existence of a French establishment, operations undertaken through a dependent agent, or realisation of a complete commercial cycle in France).

    In distinguishing between foreign reinsurers that do not undertake a complete commercial cycle in France autonomous from the rest of their activity and foreign reinsurers that exercise their activity exclusively or quasi-exclusively for the benefit of a French company, the Finance Minister's above mentioned decision seems to restrict the scope of the French tax authorities' guidelines.

    French Supreme Court's case law

    In a decision dated 30 June 1997, the French Supreme Court2 ruled that artistic work reproduction and marketing royalties paid by a French company to a foreign association which did not have a permanent business installation in France, remunerated services used in France in the meaning of article 182 B. As such, the benefit of such royalties rendered the foreign association liable to French corporation tax and, accordingly, the royalties were liable to the withholding tax provided by article 182 B.

    In this case, the reasoning held by the French government's commissar was ambiguous because, after stating the principle that it was necessary to research whether the beneficiary of the royalties was liable to French corporation tax in accordance, notably, with territorial rules governing French corporation tax, he concluded that the withholding tax was applicable without applying the traditional criteria of territoriality (ie existence of a French establishment, operations undertaken through a dependent agent, or realisation of a complete commercial cycle in France).

    In his letter, the French Minister of Finance goes beyond the uncertainty that had stemmed from this ruling by indicating that, if it is not established that a complete commercial cycle is realised in France which is autonomous from the rest of the reinsurer's activity, the conditions of liability to French corporation tax of the beneficiary - as provided by territorial rules - are not met.

    Scope of decision

    The French Finance Minister's letter was sent to a professional body and should, therefore, be considered as an official document. However, this decision only covers the case of reinsurance premiums paid by insurance companies.

  • Julien Ruderman is a senior associate, Clifford Chance Paris. Tel: (33) (0) 1 44 05 52 52; e-mail: julien.ruderman@cliffordchance.com.

    Footnotes

    1 Doc. Adm. 4 H 1413 n°55

    2 Conseil d'Etat n°169179

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