In addition to the question of the application of the withholding tax on the remuneration of non-resident directors, the Axa Group Opérations ruling raises the issue of the allocation of the right to tax the remuneration concerned and the use of the physical presence criterion, without, however, providing a clear answer.
In the AXA ruling, the Conseil d’Etat ruled only on the question of the application of the withholding tax. Unlike the Paris Administrative Court of Appeal, which had ruled that a corporate officer’s physical presence in Switzerland did not mean that part of his remuneration was taxable in Switzerland, the French administrative supreme court did not take a position on the allocation of the right to tax remuneration paid as a corporate officer and on the application of the physical presence criterion.
However, the public rapporteur developed severral arguments in his conclusions:
- it is very difficult to accept the company’s contention that it was obliged to withhold tax on the salaries in proportion to the time worked by the person concerned on French territory ;
- since it was not disputed that the foreign trips made abroad or the teleworking carried out from Switzerland were connected with the professional activity of general management of a French company, the court was able to rule that all of the remuneration came from French sources;
- ‘There are grounds for presuming – it is a simple presumption, but in our opinion a very strong one – that all the sums paid by a company established in France to its executive director in respect of his corporate office constitute remuneration for a professional activity carried out in France’.
In a decision made on 15 May 2024, the Versailles Administrative Court of Appeal once again challenged the physical presence criterion, which had long been used in case law to determine where remuneration should be taxed, including in the case of corporate officers (see CAA Paris 19 April 2004, no. 00-2288, final ruling):
The Court seems to endorse the arguments of the public rapporteur in the AXA ruling:
- The company has its registered office and principal place of business in France and carries on its business in France.
- Mrs B held the position of Chairman and Chief Executive Officer.
- It is not disputed that the remuneration paid by the company to Mrs B is the consideration for actual management duties that she performed on a daily basis, even though she did not work permanently on French territory.
- This remuneration must therefore be considered in its entirety as French-source income within the meaning and for the purposes of the aforementioned provisions, and was taxable as salary and wages.
- Although Mrs B argues that her remuneration should have been subject to income tax after apportionment of the power to tax between the two States in proportion to the time she spent in office in one or other of those States, she provides no evidence to establish that the place where she carried out her duties as chairman and chief executive of the company, which was a French company with its registered office and place of business in France, was in another State. The fact that she was not permanently physically present on French territory is irrelevant in this respect.
The physical presence criterion is once again called into question, creating a high risk of double taxation for the taxpayer concerned.
Should this be seen as a strong move to challenge the physical presence criterion? This trend should be seen in the light of the position taken by the Paris Administrative Court, in a decision dated 12 April 2023, on the situation of François-Henri Pinault, a French tax resident, and the taxation of his remuneration for exercising his corporate office as CEO of Kering SA.
In refusing to apply the tax credit provided for in the Franco-British tax treaty, the Court held that the remuneration in question was taxable exclusively in France, insofar as Mr Pinault did not establish that his presence in the United Kingdom was due to proven professional operational requirements, making his presence in that country indispensable for the purposes of his corporate office. Consequently, he did not establish that he had performed his duties as Chief Executive Officer of Kering SA in the United Kingdom, even though he had been physically present in that country for a substantial part of the year in question.
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At this stage, a number of important questions remain unresolved:
- What evidence could be admitted to rebut the presumption that the business is carried on in France if physical presence is not taken into account?
- Is this position limited to corporate officers?
The conclusions of the public rapporteur might suggest as much:
‘(…) We are talking about the remuneration of the corporate office, not the separate remuneration that the executive may receive, under an employment contract with the company of which he is the executive, in respect of the performance of technical functions distinct from the duties of the corporate office (…)’.
Pending the position of the French administrative supreme court, the situation remains uncertain for the corporate officers concerned.