In recent years, the number of Lebanese nationals who have acquired French nationality has increased significantly.
This development is, in many cases, accompanied by the maintenance of close ties with Lebanon: ownership of real estate, shareholdings in companies, the conduct of professional activities, receipt of income or inheritance rights, as well as the maintenance of family and patrimonial interests.
This situation of dual personal, economic and patrimonial anchoring between France and Lebanon inevitably raises questions as to the determination of the tax residence of such taxpayers.
The issue may therefore be framed as follows:
How should the State of tax residence of a taxpayer who may be regarded as resident in both States under their respective domestic laws be determined under the France–Lebanon tax convention of 24 July 1962?
The answer to this question is decisive, both in order to prevent situations of double taxation and to secure the tax position of the taxpayers concerned.
The France–Lebanon tax convention signed on 24 July 1962 (hereinafter the “Convention”) raises interpretative difficulties concerning the determination of tax residence, whether for individuals or legal entities, and also presents certain particular features.
Effective Liability to Tax
Article 2(1) of the Convention provides:
“For the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who, under the legislation of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other similar criterion.”
In other words, the Convention requires that a person be liable to tax in a State in order to be regarded as a tax resident.
Effective Liability to Tax of Individuals
The French courts have interpreted this concept strictly: a person must be liable to tax on their worldwide income and not solely on income from local sources.
This gives rise to difficulties for many taxpayers who:
- physically reside in Lebanon,
- pay tax there, but only on Lebanese-source income,
- derive the majority of their income from France.
It follows from a judgment of the Paris Administrative Court of Appeal dated 25 March 2011¹ that a taxpayer having a domicile in both countries was not allowed to rely on Lebanese tax residence status because he paid tax in Lebanon only on income from Lebanese sources:
“Considering that although the applicants have produced a certificate from the Lebanese tax authorities, dated 20 June 1997, according to which Mr A was subject to income tax in Lebanon for the years 1994, 1995 and 1996, this document alone is insufficient to demonstrate that the persons concerned were liable to tax in that State by reason of their domicile, their residence or a similar personal connection and not by reason of the sole existence of income having its source in that State; that, in these circumstances, they cannot be regarded as residents of Lebanon within the meaning of paragraph 1 of Article 2 of the France–Lebanon Convention; that it follows that they cannot, in any event, rely on the provisions of paragraph 2 of the same Article.”
This interpretation creates a complex situation in which:
- many Franco-Lebanese individuals believe themselves to be Lebanese tax residents whereas they are not within the meaning of the Convention (which renders the Convention inapplicable to resolve the conflict of dual residence),
- they risk being taxed in France on their worldwide income with the application of penalties,
- in order to escape French tax residence status, it is necessary to declare worldwide income in Lebanon and to demonstrate liability to tax in Lebanon not by reason solely of the existence of taxable Lebanese-source income.
To secure non-resident status in France in the Franco-Lebanese context, several coordinated solutions must be implemented.
It is first necessary to declare worldwide income in Lebanon in order to ensure the applicability of the Convention. It is then necessary to compile probative documentation evidencing actual residence in Lebanon, particularly in light of the criteria laid down by Lebanese Law No. 60 of 27 October 2016 (certificate from the Lebanese tax authorities mentioning liability to tax by reason of domicile or residence, proof of presence, evidence of the centre of vital interests). Finally, it is recommended to ensure consistency in all tax filings in both countries in order to anticipate any challenge from the French tax authorities.
Determination of Tax Residence under Domestic Law and Treaty Criteria
France applies four alternative criteria to determine tax residence:
– the household (foyer),
– the principal place of stay,
– the principal professional activity,
– the centre of economic interests.
Furthermore, since Lebanese Law No. 60 of 27 October 2016 amending Article 1 of the Tax Procedures Code, the tax residence of an individual is determined according to the following alternative criteria:
– having in Lebanon a place for the exercise of his professional activity,
– or a permanent home in Lebanon constituting a habitual place of stay for the individual or his family,
– presence in Lebanon for more than 183 days in total over a period of twelve consecutive months.
If these domestic criteria are met both in France and in Lebanon, residence must be determined under the Convention (provided that it is regarded as applicable), which provides subsidiary criteria to resolve the conflict of residence:
“Where an individual is considered to be a resident of each of the Contracting States, that person shall be deemed to be a resident of the State in which his centre of vital interests is situated, that is to say, the place with which his personal and professional relations are closer.
If the Contracting State in which the individual has his centre of vital interests cannot be determined, that individual shall be deemed to be a resident of the State in which he stays the longest.”
A judgment rendered by the Bordeaux Administrative Court of Appeal on 30 December 2005² illustrates the determination of tax residence in light of these criteria:
“Considering that it results from the certificate, sufficiently precise and probative even though no address appears in the French translation, issued by the income tax department of the Ministry of Finance of the Lebanese Republic and produced by Mr Z…, that he is regarded as a tax resident in Lebanon within the meaning of the tax convention of 24 July 1962 and that he has been registered as such since 1991; that, in the present case, the fact that this certificate was produced by the applicant after the recovery of the disputed assessments is not such as to deprive it of its probative character;
Considering that it results from the investigation that Mr Z… is a shareholder in three companies subject to income tax in that State, a member of the board of directors of one of them, the company ‘des sources du Liban Y… Sal’, and receives remuneration from it, in particular for his intermediation activities on the local market; that it also results from the investigation that the person concerned owns three vehicles registered in that country; that it further results from certificates, which are not contradictory contrary to what the MINISTER argues, drawn up by the mayor of the municipality in which he owns private properties, that Mr Z… has lived there habitually for fifteen years in a well-known cohabiting relationship; that, finally, although Mr Z…’s two young children live in France with his spouse, from whom the MINISTER does not dispute that he had been de facto separated for several years, and that he frequently travels there, it does not result from the investigation that the movements affecting the bank accounts held by Mr Z… in France relate to a professional activity carried on in France; that, accordingly, in these circumstances, Mr Z… must be regarded as having in Lebanon the ‘centre of his vital interests’ within the meaning of the aforementioned provisions of the France–Lebanon Convention of 24 July 1962; that pursuant to the provisions of the said Convention, only French-source income remains taxable in France.”
Effective Liability to Tax of Legal Entities
If the question of effective liability to tax arises acutely for individuals (as it enables them to benefit from the application of the Convention in resolving dual residence conflicts), it is also of particular importance for legal entities, although the issues and assessment criteria differ significantly.
For legal entities, tax residence under the Convention is closely linked to liability to the taxes expressly covered. Structural exemption regimes (such as offshore company regimes) may prevent access to the benefits of the Convention.
This follows from a decision of the Conseil d’État dated 20 May 2016³, in which it was held that a Lebanese offshore company could not be regarded as resident within the meaning of the France–Lebanon tax convention insofar as it was exempt from ordinary taxation of its profits in Lebanon, being subject only to a modest annual lump-sum tax.
Following this decision of the Conseil d’État, the case was referred to the Versailles Administrative Court of Appeal, which ruled on 29 November 2016⁴ that the annual lump-sum taxation paid by a Lebanese “offshore” company does not appear in the exhaustive list of taxes covered by the Convention. Since the company was structurally exempt from the conventional taxes, it could not be regarded as resident within the meaning of the Convention, even if it paid a lump-sum tax otherwise.
Thus, for a company to be regarded as tax resident in Lebanon within the meaning of the Convention, it must be effectively liable to the ordinary taxes covered by the Convention.
Determination of a Permanent Establishment under the Convention
The France–Lebanon tax convention differs from other tax treaties signed by France with respect to the taxation of French-source real estate income.
As a matter of principle, real estate located in France and held by a company subject to corporate income tax (or assimilated thereto) generates income taxable in France, even if such income is not actually received. Accordingly, the majority of tax treaties signed by France allow France to tax French-source real estate income of a foreign company.
However, the France–Lebanon Convention has the following particularity: it limits taxation to profits realized through a permanent establishment. In a case before the Nice Administrative Court on 2 May 2024⁵, it was held that a villa located in France and owned by a Lebanese capital company, made available free of charge, could not be regarded as a permanent establishment.
The French tax authorities had challenged the application of the Convention by disputing the company’s tax residence in Lebanon, considering that it had never effectively paid tax in Lebanon due to losses. The Nice Administrative Court recalled that what matters is not having paid tax, but being liable to tax. Despite the fact that the company was loss-making, it was indeed subject to corporate income tax in Lebanon.
The Convention was therefore applicable and it was held that France could not tax this real estate income (not being regarded as French-source income), thereby cancelling the French assessments imposed on the company.
This case illustrates the importance of analysing tax conventions and their specific features, such as those of the France–Lebanon tax convention.
Conclusion
The France–Lebanon tax convention of 24 July 1962, although old, remains a central instrument in determining the tax residence of taxpayers and companies having connections with both countries. However, case law shows that its application is far from automatic:
For individuals, despite the definition of tax residence introduced by Lebanese Law of 2016, it follows from pre-2016 case law that liability to tax in Lebanon solely on local-source income is, in principle, insufficient to claim Lebanese tax resident status within the meaning of the Convention.
For legal entities, structural exemption regimes — such as offshore company status — may deprive an entity of the benefit of its provisions.
Added to these difficulties is the singularity of the Convention regarding the taxation of French-source real estate income, which is subject to the existence of a permanent establishment, thereby clearly distinguishing it from most bilateral tax conventions signed by France.
In this context, Franco-Lebanese taxpayers — whether individuals or legal entities — who wish to establish their tax residence in Lebanon must ensure that they rigorously document their worldwide tax liability in Lebanon and analyse their situation in light of both domestic law criteria and treaty criteria.
By Marine Grivel-Dubois, Tax Attorney | Partner, SRDB Law Firm
¹ Paris Administrative Court of Appeal, 25 March 2011.
² Bordeaux Administrative Court of Appeal, 30 December 2005.
³ Conseil d’État, 20 May 2016.
⁴ Versailles Administrative Court of Appeal, 29 November 2016.
⁵ Nice Administrative Court, 2 May 2024.