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Because of the territoriality principle (see Determination of taxable income territory), corporate income tax is not levied on income of foreign subsidiaries of French parent companies.
Expenses charged to the French parent are not deductible in France if they are related to expenses incurred for the benefit of the foreign subsidiary. Moreover, losses of the foreign subsidiary are not deductible against the French income of the parent. Nevertheless, if the company has received authorisation to consolidate the accounts of its foreign subsidiaries and other overseas entities, the principle of territoriality does not apply. This authorisation is rarely granted, however.
A French resident company that establishes a branch or a permanent establishment abroad is not liable in France for corporate tax on the profits from this establishment.
Tax Havens and Anti-Avoidance Regulations
A French company having a permanent establishment or that directly or indirectly owns more than 10% of an entity located in a tax haven is taxed under French rules on the parent company's proportionate share of the entity's income if French tax authorities determine that the entity's operations have no economic substance. Tax losses generated by such an entity are not deductible by the parent.
Interest, royalties and fees for services paid by a company or individual resident in France to companies or individuals resident in a tax haven are not deductible from the French entity's taxable profit, unless the taxpayer proves that the amounts paid were for benefits actually received and the prices were reasonable.
French companies controlled by or under the control of foreign companies, regardless of their country of residence, must add back to taxable income the amount of profit transferred out of France because of transactions entered into with the foreign company above or below arm's length prices. The amount to be added back is the difference between the arm's length price and the transaction price.
Foreign-source dividends received by a French parent benefit from the participation exemption if applicable requirements are met (see Resident Corporations).
If the dividend income is then distributed by the French parent, the parent is liable for the precompte mobilier (see Resident Corporations). The taxes levied in the source country are creditable against the precompte mobilier. If dividends paid by the French parent are received by non-residents that are residing in countries that have tax treaties with France, the precompte mobilier is generally reimbursed, less the withholding tax at the same rate as that imposed on the dividend.
French holding companies, under certain conditions, are not subject to the precompte mobilier and avoir fiscal rules (see Section Resident Corporations) if they redistribute earnings of their foreign subsidiaries. This special treatment applies to companies with all of the following:
- activities limited exclusively to portfolio management;
- assets consisting of two-thirds or more foreign holdings that qualify for the participation exemption; and
- two-thirds or more of their net income excluding capital gains generated by such foreign holdings.
However, the withholding tax on dividends paid by a holding company qualifying for this treatment is doubled when paid to a person domiciled in a country that does not have a tax treaty with France.
Interest income received by a French company might be subject to double taxation if tax is withheld in the country of source and the interest is taxable in France as income of the receiving company. Absent a tax treaty, the double taxation is mitigated somewhat because only the net interest received in France is taxable. If a tax treaty exists, however, the French recipient of the interest receives a tax credit for any tax withheld. The tax credit may be used in payment of corporation tax liability if certain conditions are met. A French company in a loss position, however, loses the tax credit because it may not be carried forward.
Generally, capital gains are taxable in the recipient's state of residence with a credit for tax paid abroad if a tax treaty provides for it. Real estate profits are usually taxable by the state in which the property is situated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Pierre Knoepfler on +33 (1) 46 93 70 00.
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