THE FRENCH-ISRAELI DOUBLE TAX TREATY
| FLASH ACTUALITE – NOVEMBRE 2022 |
APPLICATION OF THE FRENCH-ISRAELI DOUBLE TAX TREATY TO NEW ISRAELI RESIDENTS BENEFITING FROM THE ALYAH EXEMPTION REGIME !
SUMMARY
A recent decision of the Court of Appeal specified that taxpayers newly settled in Israel and benefiting from the favourable regime of the Alyah exemption can enjoy the Franco-Israeli tax treaty.
- FACTS
Two taxpayers living in Israel and benefiting from the exemption of their foreign income for the 10 years following their arrival (Alyah exemption) contested the decision of the French tax authorities to tax their French source retirement pensions. They grounded their action based on the article 18 of Franco-Israeli double tax treaty (“The DTT”) which provides that these pensions were only taxable in Israel.
However, Article 4 of the DTT restricts the term “resident of a Contracting State” to exclude persons “who are subject to tax in that State only on income from sources in that State”. This raised the question – identified by practitioners for a long time – of its application to residents benefiting from this temporary favourable regime.
- SOLUTION OF THE COURT OF APPEAL
The Court of Appeal specified (13.10.2022, n°20TL22832) that the above-mentioned treaty provision: “is only intended to exclude from the status of resident of a State, persons who are locally subject to tax only on income from sources situated in that State for reasons other than the existence of a personal link with that State”.
Consequently, there was no obstacle for the Court to grant them the status of resident as defined in The DTT even though the taxpayers had no taxable income in Israel for the years concerned.
- A REASSURING AND NOW LOGICAL DECISION, WHICH MUST BE CONFIRMED
For the first time to our knowledge, the judges of the Court ruled on the consequences of benefiting from this specific exemption regime with regard to the application of the DTT. In our opinion, this decision is in line with the trend in case law initiated by the French Supreme Court (in particular its decision of 9 June 2020 with regard to the Franco-Chinese Double Tax Treaty), in which it specified that the status of resident of a contracting State was subject only to the condition that the taxpayer was liable to tax in that State by virtue of his domicile, his residence or a similar personal link.
Assuming that this decision is indeed confirmed by the French Supreme Court, we believe that this confirmation can be transposed to other temporary favourable regimes, such as the Portuguese “NHR” regime.
The follow-up to this decision will have to be carefully monitored.
THE ARKWOOD TEAM
