UK law firms in France set to lose tax exemption loophole

Partners at UK law firms in France are expected to suffer under the burden of rigorous new tax laws designed to close loopholes for international firms.

The UK-France Tax Treaty, signed by both countries in January 2004, sews up a range of tax loopholes that can see French resident partners of international firms pay little or even no tax.

It is understood that independent French firms, led by Gide Loyrette Nouel, were key in lobbying for the changes amid growing frustration at the lack of a level taxation playing field. A number of major UK firms are believed to have opposed the changes. Gide declined to comment.

According to one tax expert, the new treaty effectively removes a series of tax benefits which are “well known and heavily used by people in law”.

David Anderson, a partner at tax consultancy Sykes Anderson, said: “The current treaty affords people considerable tax advantages, which often amount to total exemption from tax both in England and France. There are numerous tax advantages under the current regime which are simple to use and are widely exploited by people in the know.”

Chief among these advantages is the exemption from French tax of certain types of income and capital gains. These allow French resident partners of UK firms to take advantage of low or nil rates of tax under UK domestic law by claiming UK tax, or no tax, on worldwide income.

The new treaty, which has yet to be ratified and incorporated into domestic law by the UK and France, replaces the 1968 UK-France Double Tax Treaty and will come into force by 2006. The status of UK limited-liability partnerships is unclear under the proposed regulations.

One French tax expert said: “The new treaty will substantially reduce the competitive advantage of UK firms in the French market.”