| 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.
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 25% 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:
-
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 (19.4% at the time of writing)
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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 25% of the shares 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 78 and UK has 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 could have
ramifications across the EU.
KPMG
noted that member states have 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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