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1.1.1.1.6. International Tax Planning and Conduit Structures

For Individuals (French tax residents)

Holding Companies which Distribute their Profits

The use of a holding company, whether French or foreign, does not enable any tax optimization in respect of redistributed dividends. Dividends received by resident individuals from French or EU sources as well from countries with which France has a treaty providing for mutual assistance are subject to tax at the ordinary graduated rates but for 60% of their gross amount only. In addition, social taxes are also due at a total rate of 7.5%. When the dividends are distributed from French sources, a withholding tax of 21% of their gross amount must, in most cases, be operated by the payer, which, in this instance, is creditable against the final tax due by the recipient.

Holding Companies which Capitalize their Profits

The use of a foreign holding company by a French resident individual may present a tax advantage if the holding company benefits from a privileged tax regime and capitalizes its profits. Hence, the shareholder can, for instance, realize, through the holding company, a capital gain that is exempt at the level of the holding company owing to its privileged tax regime. Nevertheless, the tax advantages of this scheme have been curtailed with the introduction, effective as from 1 January 1999, of rules similar to the US passive foreign investment companies (PFIC) regime. Under these rules, a French resident shareholder who directly or indirectly owns a participation exceeding 10% (in terms of income rights or voting rights) in a foreign entity established in a low-tax jurisdiction and conducting principally passive investment activities, is taxed in France on a pro rata basis on the income realized by the foreign entity, whether or not actually distributed (Art. 123 bis of the French tax code).

However, for foreign entities located within the European Union, the compatibility of these anti-abuse provisions with EU law has been challenged, as their application was not limited to purely artificial arrangements. Under the Finance Amendment Law 2009 (entered into force on 1 January 2010), the provisions of Art. 123 bis no longer apply within the European Union, except regarding artificial arrangements.

Alternatively, if the relevant holding company has a single shareholder, there may be a risk of an abuse of law qualification that would trigger taxation in France and an 80% penalty if:

  • the holding company is deemed to be fictitious, in particular, if it is a mere "letter-box" company; or
  • it cannot be demonstrated that its creation was motivated by non-tax purposes.

Even if abuse of law is not invoked by the French tax authorities, the profits of the holding company could be taxed in France if it is actually managed in France. In this case, it could be considered that the holding company is a resident of France or that it has a French permanent establishment.

In order to mitigate such exposure, it will be important to give substance to the foreign holding. This requires that there be local employees and local directors. The board meetings will also have to be held locally.

If the shareholder is a non-resident individual, it should be ensured that, in case the shares sold relate to a French resident company, the gain is not taxable in France under article 244 bis of the French tax code.  Under this article and unless otherwise provided for by a tax treaty, only capital gains derived by non-residents on the disposal of shares forming part of a substantial participation (i.e. 25% or more) in a French company, are taxable in France.

For Companies

French Holding Companies

France has a large tax treaty network (more than 100 tax treaties presently in force), and the use of a French holding company may, in certain cases, reduce the French withholding taxes applicable to dividends, interest or royalties. If, however, the holding company is interposed only for tax purposes (the company being merely a "letter-box" company which redistributes income), the application of the relevant tax treaty could be challenged by the French tax authorities on the basis of the abuse of law concept or on the basis of the tax treaty itself if the latter specifies that it only applies to effective beneficiaries of the income in question.

In respect of the taxation of dividends, one of the advantages of a French holding company is the possibility to offset the foreign withholding tax on the dividends received against the French withholding tax due on the redistribution of dividends to a non-resident.

Capital gains arising from the disposal of participating shares are tax exempt up to 88% of their amount.

Dividends received are exempt up to 95% (99% subject to conditions) of their amount.

Foreign Holding Companies

Foreign European holding companies set up in countries such as Belgium, Germany, Luxembourg, the Netherlands or Spain benefit from a broader participation exemption regime than in France, insofar as the exemption fully extends to capital gains and covers 100% of the dividends received. There might, however, be a risk that the capital gains be taxed in France under the French CFC legislation if the foreign holding company is held by a French corporate shareholder. In addition, if the shareholders are resident French individuals, income and gains derived by the foreign holding company may be caught by the French anti-avoidance rules similar to the US PFIC regime.