Decree 2006-1309 of 25 October 2006 on the application of the new CFC legislation set out in Art. 209B of the French Tax Code (CGI) was published in the Official Journal No. 250 of 27 October 2006. The Decree replaces Art. 102 SA to Art. 102 Z of Annex II of the CGI by Art. 102 SA to 102 ZB. Note that the tax administration released a draft Guideline commenting on the new provisions. The most important features of the new articles introduced by the application Decree are summarized below.
(a) Background. The new CFC legislation applies to resident companies that directly or indirectly hold a participation of more than 50% (previously 10%) in a foreign legal entity or permanent establishment which is established or constituted in a country the effective taxation of which is at least 50% lower than that of France. Companies subject to CFC legislation are assessed to tax in France on a pro rata amount of the income received, or deemed received, from such entity or permanent establishment. An anti-abuse provision reduces the participation threshold to 5% in situations where more than 50% of the shares in the foreign entity are owned by French companies or by foreign entities directly or indirectly controlled by a French company within the meaning of Art. 57 of the CGI.
(b) Content of the implementing Decree. The replacing articles (Art. 102 SA to Art. ZB) define more specifically the rules contained in Art. 209 B CGI, amongst others:
| - | with respect to the determination of the participation percentage in the subsidiary located in a low-tax jurisdiction, the percentage must be assessed at the end of the financial year of the subsidiary if any, or that of the French parent company. However, the percentage of participation held for a continuous or discontinuous period of at least 183 days during the year must be taken into account if it is higher than that of the end of the financial year; | |
| - | the foreign tax due on the profits falling under the CFC rules is credited against the corresponding French tax, provided that the foreign tax is comparable to French corporate tax. In addition, withholding taxes on passive income received by the foreign entity and levied by third countries that have concluded a treaty with France containing an administrative assistance clause may be credited against the French tax due on such income up to the amount provided for by the treaty; | |
| - | dividends or profits distributed by the legal entities subject to Art. 209B CGI are exempt from French corporate income tax in the hands of the French parent company. The French company must keep separate accounts for each legal entity falling under the CFC legislation, thereby recording the cumulative amounts of income subject to French CIT and the distribution received after the first application of Art. 209 B CGI; and | |
| - | information and documentation requirements that the French company must add to its annual tax assessment are set in Art. 102 Z, Annex II CGI (e.g. the balance sheet). |