One option for reducing the tax burden is to set up a subsidiary in a foreign country. A foreign subsidiary of a French parent company is considered a separate tax entity and is therefore not taxed in France, but rather subject to the tax laws of the country where it is located.
By setting up a subsidiary in a foreign country, it is possible to benefit from more favorable tax treatment than in France.
Once the subsidiary has been subject to the tax rules of the foreign country and has made a profit, it can pay dividends to its parent company. To avoid double taxation when the holding company receives these dividends, it is possible to opt for the parent company regime, provided that the holding company detains at least 5% of the subsidiary’s capital. Under this system, dividends are fully exempted from taxation in France, with the exception of a portion intended to cover costs and expenses, which must be added back to the parent company’s taxable income (generally set at a flat rate of 5% of the amount of the dividends).
In addition, many tax treaties signed by France with various countries help to minimize cases of double taxation by promoting the principle of territoriality. This means that, in most cases, the profits made by the foreign subsidiary will be taxed in the country where it is based, while dividends and other income will be split between that country and France (the country of residence of the parent company). Although the foreign state may levy a withholding tax, this gives rise to a tax credit in France. In this way, cases of double taxation are generally avoided and the subsidiary can benefit from a privileged tax regime for its profits.
However, in order to prevent the tax authorities from considering the subsidiary’s profits or positive income as income distributed to the parent company, it is essential not setting up a subsidiary in a country considered a « tax haven » under Article 238 A of the General Tax Code. This means that the tax regime in the foreign country must not allow profits or income to be taxed at a rate that is more than 50% lower than the rate that would have applied in France for corporation tax and additional contributions. If such a country is chosen and no international treaty applies, it is necessary to set up a company not subject to corporation tax or an equivalent form, such as a partnership.
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MFL registered lawyers remain at your disposal should you have any queries regarding the possibility to set up a subsidiary abroad. MFL will provide you with the best lawyers to handle your situation and secure your interest.