France: Revocation of tax treaty between France and Denmark: practical implications

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The French tax administration recently proposed several solutions to reduce the negative consequences of the cancellation of the tax treaty between France and Denmark.

Denmark notified the French authorities in June 2008 of its decision to revoke the treaty, signed in February 1957, and it ceased to be applicable from 1 January 2009, meaning all income received or accrued starting on this date ceased to be ‘treaty-protected’.

In its recent statement of practice, the French tax administration proposed solutions covering the possibility of both refunds of French tax to Danish tax residents, and credit in France of Danish tax.

Possible refund of French tax to Danish residents

French tax is now, as a matter of general principle, withheld from any French source income paid to Danish tax residents, with tax rates dependent on the category of income (financial income, activity income, pensions, capital gains, etc.).  Any double taxation suffered by a Danish tax resident should normally be avoided through the grant of a tax credit subject to local rules.  Where the French tax cannot be fully credited in Denmark, the French tax administration offers the possibility to the Danish resident under certain conditions to claim a refund of the tax paid in France.

The tax refund is subject to the resident providing evidence of the impossibility of obtaining credit for the full French tax in Denmark, and there must also be proof that the French tax is higher than the tax that would have been paid if the beneficiary had been tax resident of France and subject to an unlimited tax liability.  The tax instruction provides clear guidance on the calculation of the refund.

Possible credit in France of Danish tax

Double taxation of Danish source income paid to French tax residents would, in most cases, be avoided by way of an exemption in Denmark or France.  For instance, Danish source pensions paid to French tax residents are exempt in Denmark.  On the other hand, Danish source professional income would generally be exempt in France when the income derives from a business carried out in Denmark.

In cases where the French and Danish tax authorities take diverging positions, any double taxation suffered by a French tax resident should be submitted to the French tax administration.

To avoid double taxation following the revocation of the Treaty, the French authorities have introduced an exceptional tax credit method.  The tax withheld in Denmark on income paid to French tax residents will give entitlement to a tax credit in France under certain conditions.  The creditable Danish tax must be comparable to the tax owed in France in respect of the Danish income.  The tax credit is equal to the tax effectively paid in Denmark in accordance with domestic tax legislation.  The tax credit is used against the tax due in France in respect of income including the Danish tax.  The tax credit cannot exceed the French tax due in respect of the Danish source income, and any excess tax cannot be refunded.

The creditable Danish tax is determined separately for each category of income.  Any excess tax credit related to a category of income may not be used against the income tax due in respect of other categories of income.  The tax credit is not an obligation, and the tax payer may choose to treat the Danish tax as a deductible expense and reduce his tax base accordingly.

Despite the revocation of the tax treaty between Denmark and France, Denmark is now, in practice, not treated as a non tax treaty country.

Journal Officiel de la République Française No. 0012 page 793.  Tax instruction 14-b-2-10 dated 29 July 2010 Bulletin Officiel des Impôts No. 71 date 2 August 2010

For further information or to discuss any of the issues raised, please contact Pascal Ngatsing (pngatsing@soffal.fr) on +33 15 393 9400.