FRANCE: HOLDING COMPANY FISCAL REGIME

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

• Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.
  
• Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

• Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

• Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria France is a moderately attractive jurisdiction in which to locate a holding company:

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Withholding Taxes on Incoming Dividends

As a member of the EU France is governed by the provisions of the EU's Parent-Subsidiary directive, whose effect is that where a French holding company controls at least 105% (reduced from 15% on January 1, 2009) of the shares of an EU subsidiary for a minimum period of 12 months any dividends remitted by the EU subsidiary to the French holding company are free of withholding taxes.

Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place) French holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to France from the subsidiary jurisdiction.

France has over 110 double taxation treaties in place. The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

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Corporate Income Tax on Dividend Income Received

Because France applies the territorial principle no corporate income tax is levied on dividends received by a French corporation from a foreign subsidiary. However in its place a special tax distinct from corporate income tax and known as "precompte" is levied on dividend income remitted by foreign subsidiaries to French holding companies. "Precompte" is levied at the same rate as corporate income tax and is either refundable or not levied on dividend income in 2 situations: (N.B. the Precompte levy applied prior to Janaury 1, 2005)

• If the French holding company is owned by a foreign parent corporation located in a country with whom France has a double taxation treaty then the "precompte" tax is levied but can be re-claimed by the foreign parent corporation.
• Where the recipient of the dividends paid out by the foreign subsidiary is a "French holding company" covered by the French participation exemption rules no "precompte" is levied on dividend income received by the holding company from the foreign subsidiary. A French company is a holding company if it meets the following 4 criteria:
  
  • The holding company's sole activity is management of a share portfolio. Companies engaged in other activities (e.g. commercial, industrial, agricultural or craft activities) cannot be holding companies.
    
  • At least 67% of the French holding company's fixed assets are shares in companies registered in a country other than France.
    
  • At least 67% of the company's net income comes from its foreign shareholdings.
    
  • the shareholdings must have been held for a minimum period of 12 months.

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Capital Gains Tax on the Sale of Shares

In France capital gains made by a French holding company on the profitable sale of its shares in a foreign subsidiary are subject to a reduced capital gains tax rate. In 2006, gains on the sale of shares in subsidiaries held for at least two years were taxed at a reduced rate of 8%. From January 1, 2007, 95% of these capital gains are excluded from corporate income tax, the remaining 5% portion being taxed at the standard 33.33% rate. Capital gains realized by non-resident investors on the sale of shares in French companies that are subject to corporate income tax are taxed (from 2006) at the rate of 16%, provided the non-resident investor has held at least 25% of the share capital of the French company at any time over the past five years.

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Withholding Taxes on Outgoing Dividends

Dividends paid by French holding companies are subject to a standard rate of 25% withholding tax unless:

• The parent corporation is resident in the EU and has held 10% of the shares (15% prior to 2009) in the French holding company for at least 12 months in which case no withholding taxes are levied.
  
• The parent corporation is not an EU entity but the rate is reduced by the provisions of a double taxation treaty usually to 0-15% with lower rates often granted if the foreign parent corporation has a higher shareholding. France has over 100 double taxation treaties in place. (Denmark has over 80 and UK has about 110).

NB: Changes to the definition of 'dividend' in 2001 French legislation increased the tax-planning possibilities for French companies, which can now often avoid the taxation of dividends by treating them as other types of distribution.

Ruling in December 2006, the European Court of Justice announced that withholding taxes that result in a higher tax bill for the foreign subsidiary than would have been levied in the member state of the parent company are illegal because they restrict freedom of establishment - a fundamental tenet of EU law.

The case concerned Netherlands-based firm Denakvit Internationaal BV which between 1987 and 1989 received 14.5 million French Francs by way of dividends from its two French subsidiaries, Agro-Finances SARL and Denkavit France. In accordance with the Franco-Netherlands Convention and the French legislation, a withholding tax of 5% of the amount of those dividends was levied, corresponding to 725,000 French Francs.

Denkavit Internationaal and Denkavit France claimed repayment of that sum from the French government, which subsequently asked the ECJ to rule on the compatibility of the French withholding tax system with Community law.

Tax experts observed that the ECJ's ruling would have ramifications across the EU.

KPMG noted at the time of the case that member states had already begun to amend their tax legislation in anticipation of the ruling. The Netherlands, for example, has introduced exemptions from withholding tax for certain non-residents, such as, in this case, pension funds.

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