The question of the deductibility of land deficits from foreign sources in France!

The issue of the deductibility of foreign property deficits in the calculation of income tax in France remains a subject subject to the interpretation of international tax treaties. A decision of the Council of State dated December 19, 2019 (no. 415147) marked an important turning point in this area, specifying the application of tax rules in the presence of foreign property deficits.

The Council of State overturned the decision of the Administrative Court of Appeal based on a strict interpretation of the provisions of the Franco-German tax treaty , in force before the amendment of March 31, 2015.

According to the High Court, the terms of Article 20 of this convention specify that only positive income from German sources is taken into account in taxable income in France. Consequently, property deficits from German sources cannot be imputed to property or global income in France. This analysis is based on a literal reading of the terms " profits and other positive income ", explicitly excluding deficits. By ruling that these terms could include net, therefore negative, income, the Administrative Court of Appeal had, according to the Council of State, committed an error of law.

In light of this decision, the possibility of deducting foreign property deficits in France depends strictly on the wording of the relevant international tax treaties . Three cases can be distinguished:

1. Tax treaty mentioning only “positive income”:

   • As in the Franco-German convention, foreign deficits are not taken into account in France.

   • Example: German property income is retained at a zero amount, without the possibility of imputing the deficit. The tax credit then corresponds to zero.

2. Tax treaty mentioning “income” without specifying it:

   • If the provisions do not specify “positive” or “negative”, deficits can be taken into account in France.

   • Example: The Franco-Spanish tax treaty generally authorizes the imputation of foreign property deficits.

3. Tax treaty excluding the taxation of foreign rental income in France:

   • In this case, foreign losses cannot be offset against French income, but they can influence the calculation of the effective rate to avoid double taxation.

The interpretation of international tax treaties remains a point of vigilance. For taxpayers with assets abroad, a detailed analysis of the terms of the treaties and recent judgments is therefore essential.

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