General

French tax law does not contemplate the unilateral avoidance of double taxation, except indirectly under (i) the applicable territoriality system whereby income derived from a permanent establishment abroad is not taxable in France, (ii) the domestic participation exemption regime for qualifying dividends and capital gains, or (iii) the domestic law provisions allowing, under conditions, a foreign tax credit for CFC income attributed to French controlling shareholders. Otherwise, unless a tax treaty applies and provides for specific rules for the elimination of double taxation, foreign taxes are not creditable in France. Instead, the foreign tax may be deducted as an expense when assessing the foreign income to French tax.

Situations Covered by a Tax Treaty

Most French tax treaties provide for the elimination of double taxation by way of an exemption system for business profits (or exemption with progression with respect to natural persons) and a credit system for passive income. Where the credit system applies, it is generally limited to the tax that the other country is allowed to impose under the treaty (see below) and is capped at the amount of the French tax on the same income.

The foreign tax itself is treated as taxable income; thus, French tax is computed on the gross amount before the credit is given.

Unused FTCs

Unused credits cannot be carried forward and are forfeited. As confirmed by a 2016 Administrative Supreme Court ruling, the taxpayer cannot claim a refund from France for any unused excess foreign tax credit. However, pursuant to another 2017 Appeals Court decision, in situations where an item of foreign-source income is subject to a one-off withholding tax abroad; but, pursuant to French law is added to taxable income in France in fractions over more than one tax year, then the taxpayer should be able to fraction the foreign tax credit and use it in portions over the relevant number of years. In that case, however, any unused (part of the) fraction attributed to a given year is forfeited.

Where a treaty applies, a 2017 ruling of the Supreme Court allowed taxpayers who are unable to use a foreign tax credit otherwise available under the treaty (for example, because of a loss position for the relevant year) to deduct the foreign tax as a current expense unless the relevant treaty expressly disallows such deduction. This position has been reversed by a legislative provision effective for tax years ending on or after 31 December 2017. Pursuant to the new legal provision, unused foreign taxes available under a tax treaty may not be deducted as an expense in any circumstance. As a result of the new legislative provision, the deduction of a foreign tax as a current expense is now possible only in non-treaty situations (see below, however, for situations where the foreign tax is deemed to be contrary to the relevant treaty’s provisions).

Further, foreign tax credits that remain unused in a year because of the loss position of the taxpayer may not be carried forward unless the relevant treaty expressly provides for such carry forward. Such credits are, consequently, forfeited since, as mentioned above, they cannot be deducted as a cost either. This position has been confirmed by the Supreme Court in its 8 March 2023 Natixis case, wherein it rejected all counterarguments advanced by the taxpayer on the grounds of domestic and EU law and the ECHR and refused to refer the case to the Court of Justice of the European Union. The case involved France’s tax treaties with Argentina, Australia, Brazil, Cameroon, Canada, China, South Korea, Italy, Japan, Morocco, New Zealand, Poland, Portugal, Turkey, and the United Kingdom.

Note that various French tax treaties (generally with developing countries) grant a matching credit, whereby the credit available in France is higher than the tax actually levied by the source state. France has unilaterally repealed many of those matching credits by way of guidance issued on 8 June 1993 (notably concerning Cyprus, Egypt, Greece, Portugal, Spain, and Singapore) Other available matching credits were abolished on the occasion of signing protocols to existing treaties. In a decision issued in 2015, the Supreme Court ruled that the determination of whether or not a matching credit is available in France must be based on the language used in the specific treaty. Hence, where the treaty provides for the matching credit on the condition that the foreign income must have been assessed to tax in the source State or must have benefitted from tax relief pursuant to an incentive regime in the foreign state, then the payer must prove that the condition required is actually satisfied.

FTC where Foreign Tax is Contrary to Treaty Provisions

French law stipulates that FTCs are available only with respect to foreign taxes that are levied in a manner compatible with the provisions of the relevant tax treaty. This was long largely interpreted to mean that in situations where a foreign tax is deemed to be contrary to the relevant tax treaty’s provision, the foreign tax could be bifurcated into a “compatible” portion for which an FTC is available and an “incompatible” excess portion for which no FTC is available but which can be deducted as an expense. In a Ruling of 18 December 2024, however, the French tax authorities took a position against the bifurcation approach. According to the Ruling, where a foreign tax is levied in a manner that is contrary to the relevant tax treaty’s provisions, there is no option to bifurcate the foreign tax into a compatible portion for which an FTC can be claimed and an incompatible portion which can only be deducted as an expense. Instead, the foreign tax credit is denied in its entirety, and the foreign tax, in its entirety, can only be deducted as an expense.

FTC Priority Setoff Rules

On 1 March 2023, the French tax authority issued an update to the guidance on the payment of the social contribution surcharge (see Sec.8.1.). Previously, the tax authorities took the position that foreign tax credits available under a tax treaty must first be set off against the regular corporate tax liability, and only the unabsorbed portion of the credit can then be set off against the social contribution surcharge. The updated guidance removed this hierarchy, and taxpayers are henceforth permitted to set off available foreign tax credits against the corporate tax or the social contribution surcharge as they see fit.

Foreign Participations

Under the domestic participation exemption regime, 95% of the gross dividends received from foreign participations (i.e., dividends received from foreign subsidiaries) are exempt from tax. The remaining 5% is added back to taxable income and is subject to corporate tax at the normal rates. In its guidance issued on 11 March 2021, the French tax authorities stated that the add-back (5% of dividends as mentioned above or 1% in the case of consolidated groups, as the case may be) cannot be considered as leading to the partial taxation of dividends. Therefore, any foreign tax credits attached to such dividends are entirely forfeited and cannot be set off against French tax, including that on the 5% (or 1%) add-up. Following multiple judicial developments, however, the Supreme Court on 7 April 2023 closed the debate by concluding that where a foreign-source item of income carrying a foreign tax credit in the application of a tax treaty benefits from the participation exemption, then the recipient must be entitled to offset that tax credit against its French tax liability. However, the credit cannot exceed the amount of French tax due on the difference between the flat-rate add-up and the actual costs incurred by the recipient.

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