The scope of application of the French corporate income tax is determined on a territorial basis. Thus, a French or foreign company is subject to corporate income tax only on its income derived from business operations carried on in France.
A distinction is made between a French or foreign company conducting business operations in France (referred to as a “French Operations Company” or “FOC”) and a company conducting no business operations in France (referred to as a “No-French Operations Company” or “NFOC”) in order to determine the extent of tax liability and the applicability of certain special tax provisions.
A French or foreign company is deemed to be a French Operations Company if it fulfills one of the following criteria:
1. it has a permanent establishment in France, or
2. it has a qualified agent in France, or
3. it performs a complete commercial cycle in France.
If a company does not fulfill one of the foregoing criteria, it is deemed to be a No-French Operations Company. Often double taxation treaties exclude foreign source revenue from French corporate income tax only if such revenue is realized by a permanent establishment abroad.
* TAXATION OF FRENCH OPERATIONS COMPANIES.
French Operations Companies are subject to corporate income tax in France on all income derived from French operations, i.e., income derived from a permanent establishment, a qualified agent, a full commercial cycle carried on in France, or derived from real property situated in France – as well as passive foreign source income, e.g., royalties, dividends and interest. However passive French source income earned by a foreign FOC is not subject to French corporate income tax if it can be shown that such income is not effectively connected to the French operations of the foreign FOC.
If the criterion which causes a foreign company to qualify as an FOC is the existence of an establishment in France which is arguably a permanent establishment, one must carefully analyze the French activities of such establishment because there exist certain establishments in France which do not constitute permanent establishments and consequently do not give rise to French corporate income tax liability.
– First, where an establishment engages in normal profit-making commercial operations with third parties, it is deemed to be a permanent establishment and all of its earned income is subject to French corporate income tax.
– Second, where an establishment is deemed to be a headquarters office, it does not, by definition, directly engage in profit-making operations. But, because it does indirectly assist in the generation of profits for its corporate group by performing certain administrative tasks, the French tax authorities consider it to be taxable on income which is deemed to arise from its administrative activity. The amount of such income is determined on a case-by-case basis, often in function of its annual operating costs.
– Finally, where an establishment is deemed to be a bona fide liaison office, it does not, by definition, engage in direct or indirect profit-making activities and consequently is not subject to French corporate income tax.
As a general rule, income generated abroad by a French FOC through a foreign branch or a foreign subsidiary is not subject to French tax upon its realization; it is also free of French tax upon its repatriation. Notwithstanding the foregoing general rule, unless a French FOC qualifies as a “parent company” or has elected to use a tax consolidation method, the dividends it receives from its foreign subsidiaries are subject to French corporate income tax.
As a general rule, the tax administration is entitled to verify during a tax audit that any transaction which involves a deductible expense or depreciable expenditure is indeed a bona fide act of management and in the interest of the business operations of the taxpayer. If the tax administration is able to affirmatively establish the abnormal character of a transaction, the expenses are deemed to be constructive income and are reintegrated in the taxpayer’s ordinary taxable income.
In the international context, additional powers to deny deductions and impute constructive income have been given to the tax administration in order to prevent taxpayers from evading taxes by the use of foreign subsidiaries or companies domiciled in tax havens. Specific rules permitting the imputation of constructive income have been developed in four areas:
– transfer pricing,
– interest, fees and royalties,
– tax haven operations.
– transfers of assets abroad.
TAXATION OF NON-FRENCH OPERATIONS COMPANIES.
Subject to contrary provision in an applicable double taxation treaty, a No-French Operations Company is subject to French taxes on its French source income, be it in the form of:
– dividends,
– interest income,
– royalties or fees paid for services rendered in France,
– income from real property, or
– capital gains.
Such income is subject to French withholding tax. As an exception to the foregoing rule, income earned by an NFOC from real property situated in France is subject to French corporate income tax.
- Dividends.
Subject to contrary provision in an applicable double taxation treaty, all dividends paid by a French company to an NFOC are subject to withholding tax at the rate of 25 percent (often less in double tax treaty context). Such withholding tax is due when the dividends are effectively paid and must be remitted by the French payor company simultaneously with the filing of a special tax return (Form No. 2750) no later than the fifteenth day of the second month following the quarter during which the dividend was paid; once paid, such tax is not refundable. Where the payment of such withholding tax is late or not made at all, the French payor company is subject to a late payment penalty. Finally, the French payor company may not bear the burden of the withholding tax in lieu of the NFOC..
Dividends paid by a French company subject to corporate income at the normal rate to a parent company located in a Member State of the European Community are exempt from withholding tax where the parent company:
– has its effective seat of management in a Member State of the EC,
– takes the form of one of the specific types of companies listed in a ministerial order (arrêté),
– directly has held or agrees to hold, for an uninterrupted period of two years or more, no less than 15% of the share capital of the French payor company, and
– is subject to corporate income tax in the Member State in which it has its effective seat of management.
All of the after-tax income of a French permanent establishment of a foreign FOC is deemed to constitute constructive dividends presumptively distributed at the end of each fiscal year to shareholders of the FOC, which shareholders are presumptively deemed to be either individuals domiciled outside of France or NFOCs. Thus, the general rule which requires that dividends distributed to NFOCs or individuals who are not French tax domiciliaries be subject to a 25 percent withholding tax is applicable. The foreign FOC may, however, overcome these presumptions by proving that the profits made in France by its permanent establishment are in fact either not distributed outside of France or are distributed to shareholders having their tax domicile in France.
Pursuant to the provisions of most double taxation treaties, the rate of withholding tax imposed on ordinary dividends or the constructive dividends presumptively declared by a permanent establishment of a foreign FOC is often reduced or eliminated. Moreover, a foreign FOC whose effective seat of management is in a member-state of the EU and which is subject to corporate income tax in said member state is exempt from the 25 percent withholding tax.
- Interest Income.
Subject to contrary provision in an applicable double taxation treaty, interest paid by an FOC to an NFOC is normally subject to withholding tax at the rate of 16 percent. The withholding tax is eliminated if the interest is paid on negotiable debentures issued to payees that have their tax domicile outside of France, Monaco and the member-countries of the zone franc.
The withholding tax imposed on interest is due when the interest giving rise thereto is effectively paid; it must be paid by the FOC simultaneously with the filing of an appropriate tax return (Form No. 2768) no later than the last day of the month following the month during which such interest was paid. Where the payment of such withholding tax is late, the FOC is subject to late payment interest. The FOC may not bear the burden of the withholding tax in lieu of the NFOC.
From a practical point of view, however, withholding tax on interest does not apply in many cases, e.g., where the following requirements are met:
– the loan is concluded outside of France,
– a loan agreement is executed before the funds are made available to the borrower,
– the borrower is either a French legal entity or a French permanent establishment of a foreign entity located in an EU member-state or in a country which has concluded a double taxation treaty with France containing a non-discrimination clause relating to permanent establishments, and
– the loan is authorized by the Ministry of Finance.
Moreover, interest paid by a French payor company to an associated company situated in a Member State of the European Community is exempt from withholding tax. A company is deemed an associated company of a second company if
– the first company has held, or agrees to hold for an uninterrupted period of two years or more, no less than 25 percent of the capital of the second company,
– the second company has held or agrees to hold for such same period no less than 25 percent of the capital of the first company,
– or a third company has held or agrees to hold for such same duration, no less than 25 percent both in the capital of the first company and in the capital of the second company (sister companies).
The beneficiary company must have its effective seat of management in a Member State of the European Community, take the form of one of the specific types of companies listed in a ministerial order (arrêté), and be subject to corporate income tax in the Member State in which it has its effective seat of management.
Pursuant to the provisions of most double taxation treaties, the rate of withholding tax imposed on interest income realized from French sources by an NFOC is often reduced.
> Royalties and Fees Paid for Services Rendered in France.
Subject to contrary provision in a double taxation treaty, royalties paid in connection with the licensing of intellectual property rights or fees paid for services rendered in France by NFOCs to FOCs are subject to a withholding tax at the rate of 33.33 percent. The services on which such withholding tax is imposed include, inter alia, the maintenance of equipment, the furnishing of technical assistance, doing research or supplying information of a commercial, industrial or scientific nature and the lease of equipment for use in France. However fees paid in connection with services rendered abroad by an NFOC to an FOC are not subject to withholding tax.
The withholding tax on royalties and fees is assessed on the gross amount of the remuneration paid net of any French VAT or other indirect taxes imposed. The FOC must pay such tax simultaneously with the filing of a special tax return (Form No. 2494) no later than the fifteenth day of the month following the month during which payment is made. If the FOC fails to pay the withholding tax, late payment interest and penalties will be imposed.
Although the withholding tax on royalties and fees is remitted by the FOC, it is actually borne by the NFOC that rendered the services. Such tax is, in effect, an advance payment of the total French income tax payable by the NFOC on its French source passive income. If the FOC elects to assume the burden of the withholding tax on fees and royalties, the rate of tax applicable to the remuneration received is increased from 33.33 percent to 50 percent.
Royalties paid by a French company to an associated company located in a Member State of the European Community are exempt from withholding tax. The conditions applicable to this exemption are the same as those governing interest income
Pursuant to the provisions of most double taxation treaties, the rate of withholding tax imposed on royalties and fees paid for services rendered in France is often reduced.
All sums paid to a foreign individual or legal entity as consideration for services rendered in France are imputed to and taxable in the hands of the individuals or legal entities that actually performed such services if one of the following three conditions is fulfilled:
– the person performing such services directly or indirectly controls the payee,
– the person performing such services cannot prove that the principal business activity of the payee is other than the rendering of services, or
– the payee is a domiciliary of a tax haven.
This provision is meant to impose tax on those persons or companies performing services in France that, in order to avoid French Tax, have created a foreign personal service company to which consideration for such services is paid. Where such an imputation of constructive income is made, the person performing the services is jointly and severally liable with the payee for the payment of normal French taxes on the entire amount of the remuneration paid. Finally, where the person performing the services is not a domiciliary of France, such person is subject to French income tax on the amount of the constructive income imputed as a result of the services rendered in France pursuant to the rules governing the taxation of No-French Operations Companies or individuals having their tax domicile abroad.
- Income from Real Property.
Income realized from real property situated in France by an NFOC which has such a judicial form as would render it subject to French corporate income tax if it carried out business operations in France is subject to corporate income tax pursuant to the same rules and rates applicable to FOCs.
In addition, an asset tax of 3 percent is, as a general rule, imposed each year on the market value of the real property located in France held by an NFOC (CGI, art. 990 D). Such asset tax is not imposed, however, on NFOCs
– which are not Real Property Companies,
– which are domiciliaries of a country that has concluded a double taxation treaty with France containing a provision providing for the exchange of information and mutual assistance in the recovery of taxes and which disclose to the French tax administration not only the names and addresses of their shareholders but also the latter’s respective equity interests in the NFOC and the market value of the real property located in France,
– which are domiciliaries of a country which has concluded a double taxation treaty with France containing a provision guaranteeing the equal treatment of nationals of one country vis-à-vis nationals of the other country, and which disclose to the French tax administration, or undertake to disclose to the French tax administration at the latter’s request, the names and addresses of their shareholders, the equity interests of said shareholders in the NFOC, proof of said shareholders’ tax domicile, and the market value of the real property located in France,
– or whose shares are listed on the French official stock exchange or second market or on a foreign stock exchange governed by rules which are analagous to the applicable French rules. The asset tax paid by the NFOC does not constitute an advance payment of, nor may it be used to offset the corporate tax payable by the NFOC.
Pursuant to most double taxation treaties, the right to tax the income generated by real property is reserved to the country in which the real property is located even where the owner thereof does not have a permanent establishment in France. Such income is subject to ordinary French corporate income tax.