Eliminating double taxation: credit or exemption
Two States tax the same income: how a treaty removes double taxation, and what to do when it persists despite the treaty.
Contents
The situation
Income already taxed abroad and claimed a second time in France. A tax credit refused for want of a supporting document, or capped below the foreign tax actually paid. A salary split between two countries, each claiming all of it.
Double taxation is almost never an administrative mistake. It usually comes from a return that did not claim the treaty mechanism, or claimed it without evidence.
What the rules say
| Method | How it works | Effect |
|---|---|---|
| Tax credit | the income remains taxable in France, the foreign tax is set against the French tax | the credit is capped at the French tax on the same income |
| Exemption | the income is not taxed in France, but may be counted in determining the rate | the effective rate on other income increases |
Which method applies depends on the treaty and on the category of income. The France-Luxembourg treaty of 20 March 2018 changed method compared with the previous one, which altered the real burden for many cross-border workers.
What the firm does with those rules
The work is first a filing matter: identifying the correct category of income, pointing to the treaty article that allocates it, applying the elimination method it provides, and attaching proof of the foreign tax paid. Most cases are lost here, for lack of documents.
It is then a contentious matter: challenging a credit that has been refused, a cap wrongly computed, a category wrongly assigned. Claims of this kind are won with the treaty and its commentaries, not with domestic law alone.
Finally, it can become diplomatic in the technical sense: where two administrations hold irreconcilable positions, the mutual agreement procedure makes them talk to each other.
Frequently asked questions
How do you avoid double taxation?
By claiming, in the return, the mechanism provided by the applicable treaty, and by evidencing it. There is no automatic relief.
Does the tax credit cover all of the foreign tax?
No. It is in principle capped at the French tax on the same income. Anything above that is lost, absent a specific mechanism.
What if both States refuse to move?
Start the mutual agreement procedure provided by the treaty, with arbitration where the instrument allows it.
Must exempt income be declared?
Usually yes, because it is taken into account in determining the effective rate. Leaving it out is an omission, even though no tax is due on it.
This article sets out a general framework and is no substitute for a review of your file: every situation has its own dates, figures and documents.