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In a recent case, a company domiciled and taxable in France owned the entire share capital of a company domiciled in Geneva. The Swiss subsidiary was solely set up to hold and administer securities and as such benefited from the so-called holding company privilege, a favourable tax status accorded by both the Federal and Cantonal tax laws. However, under the French Tax Code, section 209B (Controlled Foreign Company Rules or CFC rules), a French company's share in the income of a company domiciled abroad, in which the former holds a participation either of 10% or more or with a value of at least €22.8 million ($24.3 million), is added, for tax purposes, to its domestic (French) income, provided that the foreign company enjoys a privileged tax treatment at its domicile.

The French tax authorities made use of the CFC rules, though the Double Taxation Treaty between France and Switzerland (of September 9 1966) did not provide or even leave room for their application. In adding the Swiss income to French domestic income for tax purposes, the French tax authorities argued that the parent and its subsidiary were two different entities and hence two different tax subjects; and the tax paid by the Swiss subsidiary in Switzerland was being deducted from the French tax levy, so that there was in any case no double taxation giving rise to treaty relief.

Not so, said the Appeal Court in Paris in 2001, whose findings were confirmed by a decision of the Conseil d'Etat, the country's highest authority in fiscal matters in June 2002. The clear language of the treaty did not leave any room for claiming taxes on Swiss income in France. The treaty has in the meantime been replaced by a new French/Swiss Double Taxation Treaty, but the verdict retains its significance for the French Double Taxation Treaty system, as it is based on a treaty wording largely incorporating the model treaty formulas developed by the OECD. In a wider sense, the Conseil d'Etat also held that an international treaty, to the extent it is applicable to the issues at hand, takes precedence over internal regulations such as the CFC rules when they are not explicitly recognized and validated by the treaty itself.

Daniel Urech

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