The case pitted a couple against the French tax authority, following the rejection of their requests for discharge from additional income tax assessments and a fine for failing to declare a foreign bank account.
Background
The couple were subject to additional income tax assessments for the years 2014, 2015, and 2016, as well as a fine for not declaring a bank account in Spain.
They challenged these assessments before a local administrative court which dismissed their claims in two judgments in 2023.
The couple then appeal the ruling, arguing, among other things, the incorrect application of the 1995 Franco-Spanish tax treaty.
The core of the dispute revolves around determining the tax residency of the couple and the French tax code, which aims to combat tax evasion through international schemes. The tax authorities accused the husband of receiving remuneration via shell companies for IT services provided to his French company.
The husband was both a salaried employee and a 30% shareholder of a company based in Lyon, France. He also owned real estate in Lyon and Paris, which generated rental income.
The tax authorities found that his French company had outsourced IT services to a UK company, which acted as an intermediary for a company registered in the British Virgin Islands and in which he was a partner.
The UK company invoiced the French company for IT services but declared only a fraction of these amounts as revenue (€5,197 in 2014 and €6,839 in 2015). The remaining sums (95%) were transferred to the company registered in the British Virgin Islands, via bank transfers to the Spanish account. The transfers amounted to €151,800 in 2014, €113,488 in 2015, and €168,880 in 2016.
The appeal court recalled that, according to the French tax code, a person is considered tax resident in France if they have their home, principal place of abode, or center of economic interests there.
For 2014, the Court found that the couple spent 183 days in France, despite their claimed move to Spain. For 2015, although their son attended school in Barcelona and they had established a daily life in Spain, the husband carried out his main professional activity in France. The Court concluded that their tax domicile was in France for 2014 and 2015.
However, the 1995 Franco-Spanish tax treaty provides that, in cases of dual residency, the taxpayer is deemed a resident of the state where their vital interests lie. The Court noted that, for 2015, the husband habitually resided in Spain with his family and was only in France two days a month for work. The Court ruled that the tax authority had breached the treaty by taxing the 2015 income in France.
For 2014, however, the Court held that the couple, as French nationals, should be considered tax residents in France, and the treaty did not prevent taxation in France.
This French tax code allows France to tax remuneration received by a person domiciled abroad for services rendered in France, if the invoicing by a foreign entity lacks real substance. The Court upheld the application of the code for 2014 but not for 2016, due to lack of evidence that the services were performed in France
The Court granted a discharge of the assessments for 2015 and 2016 but maintained those for 2014 and the fine for non-declaration of the Spanish bank account.
The couple were charged nearly €100,000 in unpaid taxes and penalties.
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