Moving to Dubai: the unknown risks of the Franco-Emirati tax treaty

‍

The international mobility of managers, entrepreneurs and investors has accelerated sharply in recent years. The internationalization of activities, the development of teleworking and the evolution of national fiscal frameworks are leading more and more taxpayers to consider expatriation, in a logic that is at once financial, professional and personal.

In this context, Dubai, and more generally the United Arab Emirates, occupy a unique place. The attractiveness of the living environment, political stability and the image of very favorable local taxation make it a destination regularly mentioned by French taxpayers with high incomes or structured assets.

However, this reasoning deserves to be seriously qualified. In international taxation, the decisive issue is not so much the country of establishment as the legal qualification of tax residence. It is precisely on this point that the majority of errors of assessment are concentrated. The Franco-Emirati tax treaty, often perceived as protective, actually includes major particularities that may lead to the maintenance of taxation in France, including after an effective establishment in Dubai.

Tax residency under French law

Even before examining the effects of the tax treaty, the first step is to analyze the criteria of tax residence under French domestic law.. The meeting of only one of these criteria is sufficient to characterize a French tax residence and to subject the taxpayer to taxation in France on all of his income, from French and foreign sources.

The home or the center of personal life

Home is the place where a person usually resides and organizes the center of his personal life. It is not limited to owning a home, but encompasses all personal relationships: living environment, family and social relationships, daily habits and leisure activities.

For one person unmarried, the tax administration frequently refers to the concept of center of personal life. When most of daily life remains in France, this criterion can be considered fulfilled, even in the presence of regular or extended stays abroad.

The main living room

This criterion is only examined when the focus is not clearly located. It consists in determining the state in which the person passes the most of his time over the year.

In practice, a presence in France greater than six months per year constitutes an important clue, without being automatic.

Professional activity carried out in France

A person is a French tax resident when they exercise in France a non-ancillary professional activity.

This criterion is central for business leaders. The administration considers, in principle, that the activity of a manager is carried out in France when the company has its head office or its effective management in France. Case law goes further by ruling that the remuneration paid by a French company to its manager is the consideration for an activity carried out in France, even if the latter works physically from abroad.

The simple fact of teleworking from Dubai on behalf of a French company does not therefore make it possible, in itself, to rule out this criterion.

The center of economic interests

The center of economic interests corresponds to the place where a person shoots. most of his income and manages his affairs. The analysis focuses mainly on the origin of income: salaries, executive compensation, real estate income, dividends and financial products.

The sole possession of assets in France is not sufficient to characterize a tax residence. On the other hand, the existence of assets generating significant income is a determining factor.

The role of international tax treaties

Where a person is likely to be regarded as a tax resident of two states under their respective domestic laws, an international tax treaty may, in principle, resolve the residency conflict.

The analysis is carried out in two stages. First, each state applies its own internal rules. It is only in the presence of a real conflict that conventional stipulations are intended to intervene.

The determination of fiscal residence in the Franco-Emirati agreement

The tax treaty concluded between France and the United Arab Emirates provides for a series of successive criteria intended to resolve situations of dual residence.

The first criterion is based on existence of a permanent home, that is to say, stable housing, effectively furnished and reserved for the sustainable use of the taxpayer.

When this home exists in both states, the analysis continues with the search for the center of vital interests, identifying the state with which personal and economic ties are the closest.

In the absence of a clear connection, The usual place of stay is examined, based on the frequency and duration of stays. As a last resort, Nationality allows you to determine fiscal residence.

The uniqueness of the Franco-Emirati agreement

However, the Franco-Emirati agreement contains a very specific clause, provided for in Article 19, paragraph 2. This stipulation allows France to tax all the income of a taxpayer who is a fiscal resident of the United Arab Emirates as long as the taxpayer still meets one of the criteria of tax residence provided for by French domestic law.

In other words, Be a tax resident of the United Arab Emirates within the meaning of the Convention is not enough, by itself, to end taxation in France.

As long as significant fiscal ties remain with France, whether it is the exercise of a professional activity, the location of income or the center of economic interests, France retains the right to tax all income, including income from foreign sources.

The convention provides a mechanism for the elimination of double taxation by offsetting the tax paid in the United Arab Emirates against the tax due in France. In the absence of personal income tax in the United Arab Emirates, this mechanism remains largely theoretical.

Common situations in which taxation is maintained in France

A manager who settles in Dubai while continuing to receive significant remuneration from a company established in France, of which he retains the management, remains attached to France for tax purposes through his professional activity. This element is sufficient to justify the taxation of all of his income in France.

Likewise, a taxpayer with a significant real estate asset in France, generating most of his rental income, maintains his center of economic interests in France, even in the absence of French professional activity.

The effectiveness of the transfer of tax residence

For the transfer of tax residence outside France to be fully recognized, it must be based on a coherent set of elements. The main professional activity must be carried out outside France, with income mainly from abroad. The center of economic interests must be moved outside France. A real break with French ties, both personal and economic, must be able to be demonstrated

Points to pay attention before departure

The transfer of tax residence may trigger the application Of the exit tax when the taxpayer owns social participations or shares. This mechanism aims to apprehend the latent capital gains existing at the time of departure.

In the majority of situations, the corresponding taxation is not immediately due but suspended, subject to compliance with certain formalities and the absence of rapid transfer of shares after departure. Anticipating this device is essential.

A departure abroad also requires the completion of specific procedures: declaration of change of tax residence, information for banking institutions and insurers, registration with consular authorities, as well as overall consistency of administrative situations.

A project to settle in Dubai can be of real interest, both in terms of living environment and asset and fiscal organization. However, it requires a rigorous analysis of the applicable rules.

The Franco-Emirati tax treaty, which is often perceived as favorable, actually imposes a clear break with French tax residency criteria. Otherwise, the risk is that of maintaining taxation in France, sometimes on all incomes.

A transfer of tax residence cannot be improvised. It must be prepared and secured, both fiscally and declaratively.

We offer to assist you in all your procedures in order to structure and secure your asset transmission strategy.