Article 29 of the amending 2015 finance law (loi de finances rectificative pour 2015 "LFR 2015"), which was relatively unnoticed, substantially modifies articles 119 ter and 145 of the French Tax Code, restricting the withholding tax exemption on distributions to foreign parents and the parent-subsidiary corporate income tax ("CIT") exemption on dividend for French holding companies. This measure entered into force for fiscal years beginning on or after January 1st, 2016.

1°) Restriction of withholding tax exemption on distribution to shareholders established in The European Economic Area

Article 119 ter of the French Tax Code provides that a French subsidiary is exempt of withholding tax on dividends distributed to a parent company resident in another state member of the European Economic Area1 , if in particular, it is holding at least 5% of its shares and is subject to CIT in its home country. LFR 2015, which transposes the anti-abuse clause of European directive 2015/121 of January 27th, 2015, clearly provides now that the exemption is not anymore available for "a planning or a series of plannings which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage in contradiction with the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances". The genuine nature of such a tax planning or such series of tax planning shall be assessed "in concreto" and in light of "valid commercial reasons which reflect economic reality".

 2°) Restriction of the 95% dividend CIT exemption under parent-subsidiary regime

Article 145 of the French Tax Code provides an exemption from CIT for 95% of dividends received by French parent companies from French or foreign subsidiaries in particular if they own a shareholding of at least 5% in such subsidiaries.

LFR 2015 introduces again an anti-abuse clause. The exemption from CIT for 95% of dividends received by parent companies is not available anymore for "distributed proceeds arising from a planning or a series of planning defined in article 119 ter 3rd of the French Tax Code". Once again, the 95% exemption from CIT for dividends received by a holding may be challenged because of the same anti-abuse provisions since the facts would reveal that the holding structure would not have "in concreto" "valid commercial reasons which reflect economic reality" or that the holding arrangement would have been set up with one of the main objective to benefit from the parent-subsidiary regime (for example to differ individual income tax dividend taxation by interposing a holding between shareholder and distributing entity) and as such would not be "genuine having regard to all relevant facts and circumstances".

3°) From a practical point of view

These new anti-abuse provisions can impact (i) all French holding companies with French or foreign subsidiaries, especially French family holdings of French groups or professional (100% of dividends subject to CIT), but also (ii) all multinational companies and even families and French entrepreneurs, which intend to relocate their French after tax profits by dividends flowing to foreign holdings for instance in Luxembourg (in domestic law, withholding tax may range from 30% to 75%, except provisions of tax treaties).

4°) It is imperative to fight back

It is therefore necessary to assess whether the French Tax Administration ("FTA") may challenge withholding tax exemption or CIT 95% exemption on received/distributed dividends for people who receive dividends through their French or foreign holdings. Yet, FTA usually makes the distinction between: "companies which assets are predominantly composed by shares in other companies", i.e. "the ones which only use their shareholders rights (voting and financial rights)" and the ones "which lead their group, participate actively to the determination of the commercial activity of the group, control their subsidiaries and provide administrative, legal, accounting and financial services to the companies of the group", only those last ones being deemed performing a commercial or economic activity.

The doctrine of the FTA states that group's holding companies " shall use their participating interests under the scope of an industrial or commercial activity which requires specific capacities". Thus, to give a valid commercial or economic aspect, the holding company is supposed to lead the global policy of the group, specifically by having a tangible influence on its subsidiaries. It should thus be useful to implement various measures to strengthen the lead position of your holding.

5°) By creating firstly a Strategic Planning Committee inside the holding

The Strategic committee may have as main mission, as the case maybe, to define with the management of each subsidiaries the commercial strategy, the organization of administrative services, the coordination of management and/or to advise the subsidiaries with their financial services, to assist them with the human resources, to contribute and issue corporate guidelines, documentation and to provide the subsidiaries with commercial/financial/management support in the frame of intercompany agreements for instance.

6°) By strengthening contractual framework between the holding and its subsidiaries

The use of an intragroup agreement of "group services" or "strategic consulting" agreement which shall bind subsidiaries to require holding's permission concerning main investments, purchases of shares, commercial policy and international development may build up these contractual relationships. Internal memoranda, contractual minutes and instructions will give evidence of the execution of the holding's duties and internal reports will show that subsidiaries abide with policies defined by the holding. The bylaws of the holding will formalize the economic activity of the holding (Cass. com., 23 nov. 2010, no 09-70.465, Gratzmuller) and their management role with subsidiaries. For foreign holdings, it shall be detrimental to ensure evidence of sufficient substance in the country of establishment (office space, employees), to hold general meetings there and to ensure that commercial agreements between the holding and French subsidiaries are indeed well documented and conform to transfer pricing standards. Performing consultancy activities to third parties may even more strengthen the economic and commercial nature of the holding.

7°) With a text that subjective...

...our roman ancestors were teaching that upon interpretation of the tax law, the doubt shall always benefit to the taxpayer (« In dubio contra fiscum »). We shall nevertheless fear the interpretation of the French judges which, upon review of the likelihood of the taxpayer's position, confronted to the likelihood of the FTA's position, shall have to settle the more likely of such likelihoods. My grandmother used to say, "better be safe than sorry" and Charles de Bovelles, French philosopher (1479-1566): "Always have two strings to your bow".


 1 EEE (European Economic Area) includes 31 European states: the 28 member states of The European Union, and Iceland, Norway and Liechtenstein.

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