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France: Professional services deductible from withholding tax base; possible refund opportunities

France: Professional services deductible

The French Supreme Tax Court (Conseil d’Etat) issued a decision that may provide refund opportunities with regard to withholding tax when there were expenses incurred for direct professional services.


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Specifically, the high tax court held that a statutory provision of French tax law that disallows a deduction from the withholding tax base for expenses related to direct professional services was an infringement on the EU freedom to provide services. The case identifying information is: n° 423698, B. (22 November 2019)


Under French tax law, a withholding tax is levied—at the standard corporate income tax rate—on all payments made by French tax residents during the course of their business operations in consideration of certain activities, services or rights when the supplier does not have a “fixed permanent establishment” in France. The statute lists a few categories of activities or services to demonstrate the broad reach of this withholding tax. Also the use of the concept “fixed permanent establishment” allows for a broader scope of application of the rule than would the typical permanent establishment definition.

In most instances, the withholding tax on services is not applicable (or the withholding tax rate is reduced) under a provision of an income tax treaty for the prevention of double taxation. However, there may be situations when there is no applicable income tax treaty provision (for example, when the service providers are located in Denmark) or the treaty provisions do not apply for certain reasons (for instance, in the present case, because of an apparent lack of evidence that the beneficiary companies were tax residents of the treaty-partner country pursuant to the definition of tax resident under that income tax treaty).

Court decision

When the French domestic withholding tax rule applies, it is levied on the gross amount of the payment because French tax law denies the ability to deduct from the withholding tax base any costs or expenses incurred in providing the service.

While this rule of French tax law concerning how to determine the tax base for withholding tax purposes was held to be compliant with the French Constitution by the French Constitutional Court (Conseil constitutionnel) in a May 2019 decision, in the present case, the French Supreme Tax Court (Conseil d’Etat) concluded that this rule was contrary to the principle for free provisions of services (protected by Article 56 and 57 of the EU Treaty).

The French Supreme Tax Court in reaching this determination looked to well-established case law of the Court of Justice of the European Union (CJEU)—but without mentioning specific cases.

KPMG observation

Tax professionals have observed that the decision of the Conseil d’Etat may relate to several well-known CJEU judgments:

  • Gerritse (C-234/01, 12 June 2003)
  • FKP Scorpio Konzertproduktionen (C-290/04, 3 October 2006)
  • Centro Equestre da Lezieia Grande (C-345/04, 15 February 2007)

As found in these judgments, regarding the withholding tax on income related to services, it was agreed that withholding tax is assessed on a net basis, but use of the term “ratio decidendi” in the Conseil d’Etat’s decision limits the scope of deductibility to professional costs directly incurred for the provision of the services. While the decision of the Conseil d’Etat was issued pursuant to one of the categories in the scope of the withholding tax, the outcome reached by the Conseil d’Etat’s decision seems to be more broadly applicable to all services that fall within the withholding tax scope, regardless of the particular categories. Thus, it appears that only service providers established in an EU Member State can claim the benefit of the freedom to provide services and, accordingly, to look to this decision in support of their tax treatment.

Possible refund opportunities—taxpayers that have been subject to withholding taxes on services in prior years need to consider filing a refund claim for the withholding taxes levied on payments made in 2017 (before the refund claim will be barred by the statute of limitations that ends 31 December 2019). To make a determination whether to file a refund claim, taxpayers need to:

  • First, identify what payments or flows were affected by the withholding tax
  • Second, gather all documentation available to support a deduction, from the withholding tax base, of expenses incurred to provide the services—a thorough review of this documentation will be necessary to determine what were direct expenses and what were indirect costs or expenses (keeping in mind that any refund claim would without doubt be scrutinized by the French tax administration)

For more information, contact a KPMG tax professional in France:

Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 |

Cédric Philibert | +33 (0) 1 55 68 49 40 |

Read a December 2019 report [PDF 107 KB] prepared by the KPMG member firm in France

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