Tax alert 17 February 2020

Clarification of the tax treatment of distributions made by a German limited partnership to its French limited partner

In a decision of 8 November 2019 (Supreme administrative Court, 8th and 3rd ch., 8 November 2019, n°430543, min. c/ Sté Masterfoods Holding SAS), the French Supreme administrative Court (“Conseil d’Etat”) ruled that income distributed by a company incorporated under German law in the form of a “GmbH & Co KG”, to its French limited partner, falls within the scope of Article 4(3) of the French-German tax treaty. Hence, such income is taxable only in Germany, as the “KG” company has no activity in France.


French company SAS Royal Canin was audited in 2009. This company received in 2006 and 2007 a 19 million distribution, corresponding to its share in the profits of the German company Royal Canin Tiernahrung GmbH & Co KG, of which it was a limited partner. This income, which was deducted by the French company regarding its accounting books, was not subject to any tax in France.

The French tax administration (“FTA”) regarded this flow as a distributed income of the German subsidiary, taxable on the basis of French domestic law (Article 120 of the French tax code). The FTA then considered that the French-German tax treaty did not exclude the taxation of such income in France: while such income could not be treated as dividends within the meaning of article 9 of the tax treaty, article 18 gave France the right to tax any other income not mentioned elsewhere.

The FTA had nevertheless found that the French company met the conditions for benefiting from the parent company scheme. Consequently, the income received by SAS Royal Canin could be exempted, except the imposition of a 5% share for costs and expenses.

Challenging this analysis, the French company’s position (i.e., no taxation in France of the income distributed) was followed by the Montreuil Administrative Court. The Administrative Court of Appeal of Versailles then dismissed the appeal lodged by the FTA and confirmed the judgment. 

Decision of the French Supreme administrative Court

When the FTA appealed before the French Supreme administrative Court (“Conseil d’Etat”), the judges first analyzed the type of French company to which the foreign company could be assimilated. They held that, regarding all its characteristics, the “GmbH & Co KG” form under German law is comparable to a French limited partnership.

The taxation of an income received in France from a German limited partnership is not explicitly ruled by the Conseil d’Etat. However, the judgment implicitly suggests that this right to tax is granted article 205 of the French tax code.

The judges confirm nonetheless that the taxation of this kind of income in France is barred by article 4 (3) of the French-German tax treaty.

These provisions expressly refer to a partner’s share in the profits of a company incorporated as a limited partnership. However, article 4 (3) provides that income derived from the participation in the profits of a limited partnership shall be taxable only in the State in which this limited partnership has a permanent establishment, in proportion only to that partner’s share in the profits of that establishment. It should be noted, moreover, that the tax treaty does not distinct whether the beneficiary of the income is a limited or general partner.

The Conseil d’Etat concludes that the income received by the French company corresponding to its share in the profits of the German company Royal Canin Tiernahrung GmbH & Co KG is exclusively taxable in Germany. As a result, it rules out the application of Articles 9 (Dividends) and 18 (Other income).