TLDR: French corporate entities subject to corporate income tax (CIT) must declare the profits or positive income of entities established in countries with a privileged tax regime (tax rate 40% or more lower than the one applicable in France). This income is taxable in France under the income reconstruction rules, unless it is proven that the operations have a primarily non-tax purpose. The application of these rules is coordinated with international tax treaties.
Scope of application
French corporate entities subject to corporate income tax (CIT) are concerned if they:
- Operate a business abroad;
- Directly or indirectly hold more than 50% of the shares, units, financial rights, or voting rights in a legal entity established or incorporated outside France.
Definition of a privileged tax regime
An entity is subject to a privileged tax regime if:
- It is not taxable in the state or territory in question;
- It is subject to taxes on profits or income where the amount is 40% or more lower than the tax on profits or income it would have had to pay in France under ordinary law.
Income reconstruction and taxation
The profits or positive income generated by the foreign entity are taxable in France under the income reconstruction rules. This income is deemed to constitute taxable investment income in proportion to the shares, units, or financial rights held.
Income reconstruction is carried out according to French tax rules, including:
- Preparation of an opening balance sheet for each entity or subsidiary;
- Conversion of profits or positive income into euros at the exchange rate in effect at the close of the financial year.
Exceptions and limitations
Taxation does not apply if the French corporate entity demonstrates that the foreign entity's operations have a primarily non-tax purpose, in accordance with Section III of Article 209 B of the French General Tax Code (CGI).
Coordination with international tax treaties
The application of income reconstruction rules must be coordinated with the provisions of international tax treaties, which may limit or exclude the application of domestic rules.
Special cases
Income deemed to be distributed by an entity subject to a privileged tax regime is taxable for the French corporate entity, even if it is not actually paid out.