Article 209 B of the French Tax Code makes income taxable that is made in low-tax jurisdictions by companies operated or controlled by legal entities which are established in France and subject to the corporate income tax. Implementation of Article 209 B varies depending on the foreign entity’s situation.
In the European Union, Article 209 B is applicable only to a purely artificial set up aimed at getting round the French tax law.
For other establishments (outside the European Union), until now the rules were different depending on whether the entity was located in a Uncooperative state and territory (UST) or not.
Hence, in the first case (in a UST), taxation was automatic unless the entity established in France proved that the profits from its operations or from its subsidiary did indeed come from an effective industrial or commercial activity and that it did not exceed certain specific income ratios (income deriving from management of profit sharing, receivables and assets, operating of intangibles rights, insurance and re-insurance, intra-group services…) in the structure, or if the entity provided all information required to assess these thresholds and it proved that the main purpose and effect of the activities carried out were something other than to locate its profits in an UST.
In the second case (not in a UST), Article 209 B was not applicable when the structure’s income came from an effective industrial or commercial activity. This was not the case when certain specific income ratios were exceeded (the French company then had to provide proof of reasons other than tax reasons).
This act simplifies and unifies these latter rules. Henceforth, for fiscals years ending as of December 31, 2012, whether for the States outside the EU or for USTs, the company established in France has the burden of proof and it must prove that the main purpose and effect of operations abroad, are not only for tax reasons; the rule on specific income ratios is eliminated. This proof is notably provided when the company or the subsidiary mainly has an effective industrial or commercial activity carried out abroad.