Tax residence and fiscal domicile
Since French corporation tax is assessed on a territorial basis (i.e., on the net income generated by businesses carried out in France), and since there is no French net wealth tax on corporate bodies, corporate residence as such is of little relevance for French tax purposes, and there is little guidance and limited case law on the point. Corporate residence could be relevant for dividend withholding tax purposes.
Corporate residence was – and to some extent still is – relevant for certain stamp duties, distribution taxes or miscellaneous discriminatory tax provisions. These are fairly limited, since the French tax judges tend to interpret legislative provisions targeting the head office of an entity as concerning not the actual corporate head office but instead any permanent establishment in France. As a result, the French tax authorities traditionally have not argued that a corporation organised outside France is resident in France as a permanent establishment in France is sufficient to trigger corporation tax in this country. Recently, the French authorities have undertaken to challenge the residence of foreign letter box companies and claim that they have an effective place of management in France. Corporate residence is relevant mainly for double taxation treaty purposes. Corporate residence is essential for determining the law applicable to a corporate entity, as French law applies to entities with a corporate head office in France. The migration of corporate entities out of or into France may be organised under certain conditions (see Section IV).
Despite a mid-19th century statute apparently still in force but now of no practical effect, foreign corporate entities and certain foreign partnerships are entitled to enter into contracts and acquire assets in France, and also to appear and act before French courts. Subject to certain direct investment restrictions, they may also open and maintain branches or other forms of permanent establishment in France (see Section IV).i Corporate residence
French corporate laws apply to corporate bodies with a head office in France. As a matter of law, the corporate seat is presumed to be located at the place indicated in the articles of association or, if proven different, at the place where the senior person or group of persons (shareholders' meeting, board of directors) effectively make strategic and other major decisions for the company, including wherever the operations of the company and its current management are carried out in any other location or jurisdiction.
In substance, the test is similar to the place of effective management referred to in the OECD model for double taxation treaties and the commentaries thereof (at least before the 2008 revision), and to the centre of main interests under the EU regulation on insolvency proceedings.
Although there is no law, court precedent or administrative guidance on the issue, a single (or few) board meetings in France should not characterise a corporate head office in France, provided most other meetings are held and decisions made outside France. However, decisive board meetings in France could result in a permanent establishment in France. Similarly, a few board meetings held outside France should not be sufficient to characterise a corporate head office outside of France when most meetings are held and decisions made in France.
Inbound transfers of the corporate head office of a foreign entity into France are recognised under French civil, corporate and tax laws, and do not amount to the formation of a new entity provided the continuation of the migrating entity is also recognised under the corporate law of the jurisdiction of origin.
Outbound transfers of corporate head offices are less common and, except for companies organised as European companies, such transfers require the unanimous consent of all shareholders. As a domestic tax rule, the transfer of the corporate seat outside France generally triggers the consequences of a cessation of business, including the immediate taxation of profits and potential gains, and the deemed distribution of all profits. However, a transfer to another Member State of the European Union does not trigger such consequences: gains are recognised upon the assets effectively transferred outside France only and corporate tax may be spread over five years. No gains are recognised or taxed on assets that remain part of a French permanent establishment.
There are just a few examples of French listed companies that converted into a European company and moved their corporate seat to another EU Member State (e.g., Eurofins Scientific). A few other corporate migrations or inversions have resulted from cross-border statutory mergers (where the French target company disappeared) within the European Union, with the benefit of a conditional rollover relief of the actual or potential gains on the transferred assets (e.g., Stallergenes/Greer in 2015, Technip/FMC in January 2017).ii Branch or permanent establishment
Under French domestic tax laws, French corporation tax is assessed on the earnings from any enterprises operated in France, and on the income and gains arising from properties located in France or from investment in real estate companies or entities.
There is no statutory definition of an enterprise operated in France, and the tax courts hold that this implies a business activity:
- either conducted by an establishment, which includes the equivalent of a permanent establishment under the OECD model double taxation treaty and could extend to some fixed business installations that are excluded under the OECD model (see Section II for the exclusion of liaison offices);
- carried out by a dependent agent, also in terms similar to those of the OECD model (see Section II for the situation of independent intermediaries); or
- which consists of a full commercial cycle of operations, such as the purchase and sale of merchandise in France, even in the absence of any physical presence in France. The reverse could not be verified where the decisions are made and the financial movements originate in France. In such cases, the tax authorities and courts consider the decision centre in France to be a place of management in France and, accordingly, a permanent establishment to which the operations of the company must be allocated.
Where a foreign entity realises earnings in France, these are deemed distributed abroad at the end of each fiscal year, and (unless the foreign entity is effectively managed from an EU Member State) they trigger a 30 per cent withholding tax, unless excluded or reduced by a double taxation treaty.
Where corporation tax does not apply under the above terms, withholding taxes apply in France to payments for services by French debtors to foreign residents (see Section VI).
If a double taxation treaty applies, protection from French taxation may be obtained where the presence in France either does not fall within the definition of, or benefits from an exception to, the relevant treaty provisions on permanent establishment and branch profits tax.
A subsidiary is not supposed to be a permanent establishment of its parent, but in some cases, it can be considered as a dependent agent and then triggers the issue of whether it has the legal authority to conclude contracts in the name of its parent. The Paris lower tax court ruled in favour of the taxpayer, namely Google, in a July 2017 ruling on the grounds that although a Google French subsidiary was a dependent agent of Google Ireland Limited, it lacked the legal authority to conclude contracts and, therefore, could not be characterised as a permanent establishment. The Paris Court of Appeal decided similarly in other cases.Taxable base
Under both domestic law and the relevant treaty provisions, profits taxable in France are limited to the earnings attributable to the French operations or permanent establishment. There are few court precedents and little administrative guidance on the allocation of income between the French and the foreign establishment. It is commonly assumed that the OECD guidelines on the allocation of profits to a permanent establishment should apply. A legislative provision to include a 'diverted profit' taxation was quashed by the Constitutional Court a couple of years ago.