For US tax purposes, it is often advisable to have foreign subsidiaries organized under the legal form of partnerships as opposed to corporations. However, partnerships have specific drawbacks such as unlimited liability of their partners and, under the provisions of certain tax treaties, application of a withholding tax on their net profit after tax.
A new type of French corporation, the societe anonyme simplifiee (SAS) permits to qualify, under US tax concepts, as a partnership and does not have such drawbacks. This is further explained below.
I. Main characteristics of the SAS under French corporate law
The SAS offers a wide latitude to its shareholders as regards its corporate organization.
Shareholders: only companies (as opposed to individuals) may be shareholders of an SAS, with a minimum of two. Each shareholder of the SAS must have fully paid-in capital of at least FRF. 1,500,000 or the foreign currency equivalent thereof. Public offering of SAS shares is prohibited. The minimum share capital of an SAS is FRF. 250,000.
Management: organization of management is freely determined in the by-laws of the SAS. The only management body of the SAS that is required by law is the President, the appointing and the renewal of whom are determined by the by-laws.
The by-laws also provide for the other management bodies of the SAS, which can be any type of boards or committees. Respective allocation of powers, veto, quorum requirements, voting majority, proxy rules is freely determined by the by-laws.
Transfer of shares: The by-laws may limit the transferability of shares of an SAS by providing, as an example, for an approval clause, and/or a squeeze-out clause.
Liability: an SAS is a corporation with the consequence that shareholders' liability is limited to their share capital contributions, with very specific exceptions.
II. Main characteristics of partnerships under US tax law
In order to qualify as a partnership under US tax law, no more than two of the four following criteria must be met:
1. continuity of life;
2. centralization of management;
3. limited liability;
4. free transferability of shares.
In the light of the main characteristics described in paragraph I above, and provided that proper steps are taken in the by-laws so as no more than two criteria are met, an SAS may qualify as a partnership for US tax purposes.
This has been formally accepted by the IRS to the benefit of one of our clients by means of a private ruling delivered under Section 6110 (j) (3) of the Federal Tax Code.
Therefore, the SAS has the following advantages:
1. it offers a wide latitude to its shareholders with respect to its corporate organization;
2. for French tax and legal purposes, the SAS is a corporation, with limited liability for its shareholders and no tax transparency. As a consequence, the 5% withholding tax provided for in the France/US Tax Treaty applies only if and when the SAS distributes dividends, whereas, in the case of a partnership which has not elected to be voluntarily subject to corporation tax, such 5% withholding tax is due on the net profit after tax, even if such profit is not effectively distributed to the US partner;
3. for US tax purposes, the SAS may qualify as a partnership.
In conclusion, the SAS may reveal a tax and legal efficient vehicle for US corporate investors willing to create a holding company or a joint venture in France.
Pierre E Petit, Paul, Weiss, Rifkind, Wharton & Garrison, Paris
For further information contact Pierre Petit +33 1 4549 3385 or enter text search 'Paul, Weiss, Rifkind, Wharton & Garrison' and 'Business Monitor'.
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