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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
Commissionaire
Dividend
Headquarters
Interest
Anti-avoidance regulations
Transfer pricing
Royalties
 Permanent establishment
A foreign entity is considered having a permanent establishment in France when this foreign entity carries on a business activity in France.
Generally, the criteria to characterize a permanent establishment "PE" are defined by the international tax treaties. When according to such rules, the profits derived from the PE activity are taxable in France, the tax treaties provide also the applicable rules necessary to share the income tax between France and the country of residence of the company operating the PE.
Except if the foreign entity is located in another Member State (in such case no withholding tax is due should certain conditions be met), profits derived from permanent establishments are deemed distributed to the foreign entity.
They are subject to a 25% withholding tax whose rate can be reduced by the relevant applicable tax treaties. In our opinion, room exists for solving this tax discrepancy.
French Supreme Court stated that a French company which maintains or develops its domestic activity through a business relationship with a foreign branch is allowed to deduct from its taxable result the losses or the reserve regularly booked generated by the related subsidies provided to this branch (CE May 16, 2003 Société Télécoise # 222956). (see Tax losses)
A permanent establishment is not a legal entity (different from a subsidiary).
Commissionaire
Multinational companies most often distribute their goods by using a distributor (buy & sell structure), a commission agent (Disclosed agent), or a "commissionaire". (Undisclosed agent). A commissionaire incurs much less business risks than a normal buy & sells structure and is therefore entitled to a much lower profit margin. Assuming that the main issues (Transfer pricing, Permanent establishment, transfer of goodwill, VAT, carryover of tax attributes like losses, customs duties and accounting) are properly managed at the time of the reorganization the reorganization of a buy & sell structure in a commissionaire structure is very efficient.
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 withholding tax whose rate can be reduced by the relevant applicable tax treaties. This withholding tax can offset the corporate tax paid by the foreign entity in the country where it is tax resident, subject to the provisions of the domestic tax law.
When a dividend is distributed to non resident individuals, they are subject to a French 25% withholding tax whose rate may be reduced by the applicable tax treaties. As of January 1st, 2005 dividend paid by French companies no longer carry any "Avoir fiscal". Non tax resident individuals will no longer benefit from the transfer of the French tax credit "avoir fiscal" when provided.
French tax authorities issued guidelines on the tax treatment applicable to French sourced dividends, distributed to US Pension trusts and not-for-profit organization under article 4(2)(b)(ii) of the French – US income tax treaty since the abolition of the "Avoir Fiscal" and the related equalization tax "Precompte" on January 1st, 2005.
Assuming the beneficiaries fulfil all the conditions of the US law, they will immediately benefit from the reduced 15% withholding tax, if they provide the entire required document to the French paying agent before the payment of the dividends. If not a 25% withholding tax will be applied. In this latter case a refund claim must be mailed to the Tax centre for non residents 9, rue d'Uzes 75094 PARIS Cedex 2 France.
FLASH: In December 2006, ECJ rendered several decisions related to the tax treatment of dividends paid within EU. Two main principles are established:
- An EU State Member cannot tax dividends paid to a non-resident parent company when dividends paid to a local parent company would be tax exempted;
- An EU State Member must tax EU inbound dividends the same way than local dividends. Both categories of dividends must benefit of provisions for double tax relief.
WARNING: When withholding tax is not spontaneously levied by a distributing company on dividend, including constructive dividend, to non-resident shareholders, this dividend is deemed to be net income i.e. the 25%* withholding tax applies on the gross amount of the income distributed (25/75 of the net amount = 33,1/3%). The previous administrative doctrine is repealed.
Dividend paid to an EU parent company
As of January 1st, 2005 dividends paid by all French subsidiaries, what ever their legal form, are exempt of withholding tax when they are both taxable at the normal CIT rate and their EU parent company hold at least 20% of the shares (15% for the dividends paid as of January 1st, 2007 and 10% as of January 1st, 2009) Similarly the dividends paid to permanent establishments located in the EU are tax exempt when the company they belong to fulfils the same conditions.
In guideline 4 C-7-07 French tax authorities indicates that withholding tax on dividend no longer apply when the statutory head office of the parent company is located in EU, Iceland or Norway, the parent company holds more than 5% in the French distributing company, the parent company benefits of the dividend receive exemption in its home country and the structure is not a sham.
When the conditions above are not met, the withholding tax applies except when it will not be deductible against the corporate income tax of the parent company (Losses, liquidation, etc...). In such case a reimbursement may be claimed.
According to Directive 90/435/CEE on the exemption of withholding tax on dividends, this situation is limited to EU parent companies holding between 5% and 15% in French subsidiaries. This percentage will be reduced to 10% as of January 2009.
Belgium reduced from 25% to 20% the minimum holding share required to benefit from the parent-subsidiary directive with retroactive effect on 1/1/2005.
(15% as of 1/1/2007; 10% as of 1/1/2009). The minimum holding period of one year remains unchanged.
Gibraltar enacted the EC Parent - Subsidiary Directive on March 9, 2006 with effect from April 7, 2006. Qualifying participations are a direct or indirect voting share of at least 20% until December 2006, 15% until December 2008 and 10% beyond.
ADVICE: Dividend distributions should be analyzed in depth to anticipate all the tax consequences. Generally, for the benefit of tax treaties, formal filing obligations are required.
Headquarters
see Headquarters
Interest
Interest paid by French subsidiaries to foreign parent companies is tax deductible subject to certain limitation applicable to interest paid to shareholders.
Since January 1st, 2003 the limitation regarding the maximum interest rate deduction applies also to interest paid by treasury pooling centres.
Interest paid by a French company to a foreign company located in a tax heaven, is tax deductible when the French company proves that the transaction is well-grounded and is arm's length.
Interest paid by a French company to a foreign party suffers no withholding tax, should certain condition be met. This exemption applies even if the applicable tax treaty provides otherwise.
As of January 1st, 2004 and within EU, royalties and interest paid between a mother company and its 25% owned subsidiary are exempt of withholding tax (Conditions apply). Greece, Portugal and Spain may continue to withhold taxes during a transition period.
On December 7, 2004 EU signed an agreement on taxation of savings “Savings Directive” with Liechtenstein, Monaco and San Marino. These 3 agreements are similar to the agreement signed with Switzerland on October 26, 2004 and Andorra on November 15, 2004.
As a consequence the paying agents of each of these countries will have to withhold tax on interest payments at a rate of 15%* during the first 3 years, 20%* the following 3 years, and 35% after that, when paid to EU resident who do not authorize the disclosure of information on this interest payment to his tax authorities.
All of these agreements are due to be applied simultaneously as from July 1st, 2005 (Switzerland, if ratified by the Swill parliament).
* Same rate applies to Belgium, Luxembourg, and Austria according to the savings directive.
Thin capitalization rules
Implementation measures of the EU Interest and Royalties Directive
Anti-avoidance regulations
This mechanism allows the taxation of profits derived from Controlled Foreign Companies "CFC" and/or branches located in tax heavens (This is an exception to the territorial rule).
As of January 1st, 2006 the legal entities established in France and liable to Corporate Income Tax “CIT” running a business or controlling a subsidiary “CFC” located in a tax haven (CIT 50% less than the French CIT), will be taxed, subject to applicable double tax treaties, on the profit or dividends of the CFC when the French parent company will own directly or indirectly (e.g. through a subsidiary, a sister company, employees, directors, spouse, parents, children, commercial partners economically dependent…) more than 50% (5% in some cases) of the shares or voting rights of the CFC.
The CIT paid locally in the tax haven by the CFC is deductible from the French CIT owed by the French parent company in the same proportion as its percentage of participation in the CFC.
3 safe harbours apply:
- CFC incorporated in a member state of the European Union.
- French parent company is able to demonstrate that purpose of the location of the CFC was not for sheltering the profit from French tax rules.
- The profits of the CFC derive from an industrial or commercial activity effectively conducted from the country where the CFC is established.
A decree published on October 25, 2006 (French official gazette date October 27, 2006 p. 15917) details the legal scope of the new rules, how the taxation of the French entity is computed and the filing requirements. These rules are codified articles 102 SA to 102 ZB of the annex II of the French tax code.
French tax authorities published a guideline dated August 2nd, 2007 to soften the tax treatment of long term capital gain made by entities located in jurisdiction considered as tax haven and then taxable according to provision of article 209B CGI.
The taxation of the gain at the regular Corporate Income Tax "CIT" rate, as initially provided, would have created a distortion with respect of the tax treatment applicable to the same capital gain made in France.
According to the new guideline the net capital gain made by an entity located in a tax have will be taxable in applying to the net gain the ratio between the reduced CIT rate and the regular CIT rate. Only this fraction of the gain will be taxable at the regular CIT rate.
This rule de facto aligns the taxation of this capital gains with the taxation of a similar gain made in France.
Case law:
On 12 September 2006 (Cadbury Schweppes - case C-196/04), the European Court of Justice held that a Controlled Foreign Company "CFC" legislation (UK for the case at stake) under which a parent company is taxed on the profits made by its CFC is contrary to the fundamental freedoms provided by the EC Treaty (art. 43 and art. 48 CE) excepted when the CFC does not carry on a genuine economic activity in the host Member State (Wholly artificial arrangements aimed at circumventing the application of the (UK) tax rules).
Transfer pricing
See Transfer pricing methods.
Royalties
As of January 1st, 2004 and within EU, royalties and interest paid between a mother company and its 25% owned subsidiary are exempt of withholding tax (Conditions apply). Greece, Portugal and Spain may continue to withhold taxes during a transition period.
Implementation measures of the EU Interest and Royalties Directive
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