INTERNATIONAL TAXATION OF ROYALTIES, A DOUBLE TAXATION CLUSTER
Differences of interpretation between France and certain African countries on the scope of royalties (as defined by tax treaties, authorizing the source country to levy a withholding tax) give rise to the risk of double taxation for French companies, which may consequently see their right to offset in France withholdings levied abroad challenged.
KEY POINTS
The notion of royalties (which may be subject to withholding tax in the customer's country, even if the service provider is not established there) is often the subject of divergent interpretations between France and certain African countries.
The resulting risk of double taxation can affect the competitiveness of French companies, particularly when bidding on international tenders.
This risk can be mitigated by a precise breakdown of services rendered and careful attention to the wording used in contracts.
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While tax treaties give the provider's country the sole right to tax services that fall into the category of business profits, those that may fall into the category of royalties as defined in the tax treaty may be subject to withholding tax locally in the customer's country.
Differences in qualification between countries regarding the notion of royalties can give rise to double taxation, with France contesting the right to recover as a tax credit deduction made abroad when it considers (sometimes wrongly) that they do not comply with the provisions of tax treaties.
ON THE FRENCH SIDE, A STRICT INTERPRETATION OF THE NOTION OF ROYALTIES : THE EXAMPLE OF SOFTWARE MAINTENANCE
In a recent case, a French software publishing company had invoiced its Moroccan customers for software maintenance services, which were treated in Morocco as royalties for which the tax treaty authorized the levying of a withholding tax.
On the contrary, the French tax judge ruled that these remunerations should be qualified as simple business profits within the meaning of the treaty, not subject to withholding tax in Morocco and therefore not eligible for a tax credit in France (CAA Versailles, June 4, 2019, no. 17VE01685, SA Sopra Steria Group).
In rejecting the characterization of royalties, the Court noted that the purpose of the maintenance service "is not to grant or extend a copyright", nor to provide "technical studies" (treated as royalties under the Franco-Moroccan convention), but simply to provide, separately from the software license and on an optional basis, a technical assistance service that can be dissociated from the software.
The Court's reasoning has the disadvantage of failing to draw any conclusions from the sub-distinction that can be made between corrective and evolutionary maintenance services.
Even if the breakdown of services and the terms used in the contract play a decisive role in this respect, the French judge's approach may seem strict, or even restrictive, in that he does not draw the consequences of any sub-distinction that might be made between corrective and evolutive maintenance services. As an appeal has been lodged with the Conseil d'Etat, this issue deserves to be followed up.
IN AFRICA, THE NOTION OF ROYALTIES IS OFTEN INTERPRETED BROADLY
Some African countries take a broad view of the scope of royalties, sometimes resulting in virtually systematic withholding tax policies. Companies are all the more inclined to pay withholding taxes in the presence of strict foreign exchange regulations requiring them to provide proof of tax payment before being able to repatriate the sums received.
This problem is a source of legal uncertainty for French companies, who run the risk of having their withholdings declared to be in breach of treaty provisions and therefore not chargeable in France.
In a recent case decided by the French Conseil d'Etat, withholding taxes levied in respect of drilling equipment trading and rental services provided by a French company in Algeria, Cameroon and Congo were rejected as a tax credit in France, on the grounds that the remuneration did not constitute royalties, but rather business profits taxable exclusively in France. The tax judge finally accepted the deduction of these wrongly applied deductions (Conseil d'État, 9th - 10th ch., October 12, 2018, 407903, Smith International France).
THE SPECIAL CASE OF TECHNICAL STUDIES
Several tax treaties concluded with African countries include remuneration for technical studies within the scope of royalties, which also gives rise to differences of assessment between countries.
In the absence of an express definition, some tax authorities consider that studies or analyses "internal" to the service provider, necessitated by the work he has undertaken to carry out (but for which he prepares reports for the customer), constitute technical studies that may be subject to withholding tax. In France, however, remuneration for these "studies" not provided for the customer's operating needs will be treated as mere business profits, not giving entitlement to a tax credit for the withholding tax improperly borne.
In order to limit conflicts of qualification, an exchange of letters concluded on January 21, 2019 between France and Morocco has clarified the notion of technical studies, defining them as "any specific analysis or research of a technical nature" during which the service provider "uses his particular knowledge in connection with a project and enables the other party to dispose of it autonomously. Technical studies are distinct from technical assistance, the remuneration of which falls within the scope of article 10 of the agreement. The lessee, if he chooses to carry out the project on the basis of this study, may carry it out alone [...]"
AMICABLE PROCEDURE OR SIMPLE DEDUCTIBLE CHARGE: INSUFFICIENT REMEDIES
Tax treaties allow the taxpayer to request an amicable settlement between the administrations concerned, who must then endeavor to find a solution to any conflict of qualifications. The outcome of such a procedure, which is very lengthy, remains highly uncertain.
As for the possibility of deducting the withholding tax from the taxable base for French corporation tax, which has now been accepted in France, even though the French tax authorities disputed the principle (see above), this may appear to be little consolation for the company (even though a deductible expense may sometimes prove more attractive than a tax credit that cannot be charged in the absence of profits and cannot be carried forward).
CAREFUL DRAFTING OF SERVICE CONTRACTS
These difficulties call for great vigilance when drafting contracts. Even if the legal reality of operations must in principle take precedence, an unambiguous wording of services can sometimes help avoid a delicate debate.
