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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Permanent establishment
Dividend
Headquarters and logistic centers
Interest
Partnerships with a foreign company as member
Anti avoidance regulations
Transfer pricing
 Permanent establishment
A foreign entity is considered to have a permanent establishment in France when this foreign entity carries on a business activity in France.
Generally, the criteria characterizing a permanent establishment are defined by the applicable tax treaties. These criteria help to determine whether or not the business activity is taxable in France. If the profits derived from the permanent establishment's activity are taxable in France, the tax treaties provide rules to eliminate double taxation.
Except when the foreign entity is located in another Member State (in such case no withholding tax is due should certain conditions be met), all profits derived from permanent establishments are deemed distributed to the foreign entity.
They are subject to a 25% withholding tax which may be reduced by the applicable tax treaty. In our opinion, room exists for solving this tax discrepancy.
A permanent establishment is not a legal entity (different from a subsidiary).
Dividend
Dividend distributions to legal entities resident in another Member State benefit from a withholding tax exemption should certain conditions be met.
Dividend distributions to legal entities located outside the EU are subject to a 25% withholding tax which can be reduced by the relevant applicable tax treaties. This withholding tax can be imputed on local corporate tax paid by the foreign entity, subject to the provisions of the domestic tax law and the relevant tax treaties.
When dividend distribution to non resident individuals are subject to a 25% withholding tax which can be reduced by the applicable tax treaties.
NEWS: The tax credit carried by French source dividends called "Avoir fiscal" and as a consequence the equalization tax called "Precompte" are abolished as of January 1st, 2005.
When entitled Foreign individual shareholders may benefit of the reimbursement of the "Avoir fiscal" and of the "Precompte" related to French dividends paid until December 31, 2004. (Reimbursement in 2005). French dividends paid as of January 1st, 2005 will no longer benefit of the reimbursement of the "Avoir fiscal" as of January 1st, 2006. From this date, individual shareholders, tax resident in a country having a tax treaty in force providing for the transfer of the "Avoir fiscal", should benefit of the reimbursement of a tax credit up to 115 euros (230 euros for jointly assess couples).
Companies holding French shares and which tax year starts on January 1st, will no longer benefit of the reimbursement of the "Avoir fiscal" carried by dividend received as of January 1st, 2004.
Advice: Dividend distributions should be analyzed in depth to anticipate all the tax consequences. Generally, for the application of tax treaties, formal filing obligations are necessary.
Headquarters and logistic centers
Headquarters and logistics centers benefit from a specific tax regime. Headquarters provide management & administration services to other group companies. Logistics centers provide storage, packaging and distribution services.
The tax basis to compute corporate tax is a fixed margin equal to a percentage of the operating expenses. The % is previously negotiated with the French tax authorities. Usually a percentage between 6% and 10% is granted for the headquarters and a percentage between 4% and 7% is granted for the logistics centers.
By a decision dated May 16, 2003, the European Commission considered that the exclusion of subcontracting costs from the tax basis and the exemption from advance payment of the minimum alternative tax called “IFA” constitute prohibited state aids. However, the enterprises benefiting of the aid will not be obliged to reimburse the tax advantage they received.
In order to comply with the EU state aids rules, the French tax authorities published guideline 4-C-6-03 dated August 14, 2003 introducing the following modifications regarding the international headquarters and logistic centers:
- Subcontracting costs are no longer deductible from the tax base. However a specific margin rate may be applied in order to reflect the sole intermediary activity of the headquarter or logistic center.
- The minimum alternative tax will now apply according to the general rules.
Despite the decision of the Commission, the favorable tax regime granted to foreign employees seconded to the HQ or the LC, which is the main advantage of the regime, is not invalidated and will continue to apply. Therefore the HQ and LC regimes remain very attractive.
Interest
See Taxable result.
Partnerships with a foreign company as member
Foreign companies members of a French partnership are not any more subject to a 25% withholding tax on their pro rata share of the partnership's profit (Administrative guideline dated February 26, 2002).
Anti avoidance regulations
French legislation provides anti avoidance regulations. This mechanism allows the taxation of profits derived from foreign subsidiaries and/or branches of French companies, located in tax heavens (this is an exception to the territorial rule).
This mechanism does not apply when the French company justifies that its foreign subsidiaries has a real economic activity in these locations.
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