“The French tax authorities set the objectives for the nation to achieve strong improvements towards European tax competition”
Creating a holding company fulfils requirements of various natures. A holding company may be a simple receptacle of dividends, a takeover instrument, or a way to structure and organize the financial flows, the trade relations or the decision-making power within a group.
Selecting a country where to set-up a holding company is a difficult exercise, as there is no ideal country. Nevertheless, France is becoming very attractive as regards groups’ taxation in Europe. In the recent years, the French government has deeply modernized the taxation system applicable to French holding companies in order to encourage foreign groups to centralize their stakes in France.
Indeed, the French taxation method applicable to capital gains on equity securities was based on a rate reduced to 19% for securities held for more than two years, and it was forbidden to disinvest the amount of capital gains before tax with a view to being liable to this reduced rate. This rate has progressively been reduced in order to have the capital gains on equity securities totally tax exempted starting from 2007, except for a 5% tax applied to a portion of costs and expenses.
These are additional provisions to the measures recently taken, which deeply modified the taxation method applied to dividend distribution by cancelling the tax credit and consequently the tax withholding. From now on, except for the withholding at source, there is no charge anymore against the dividends redistributed by a holding company. In addition, Article 145 of the General Tax Code still provides that, under certain conditions, dividends received by parent companies from their subsidiaries are tax exempted.
Furthermore, the tax consolidation system, more and more flexible since its creation in 1988, has become a most significant tool for French companies. Very appreciated when applied to a leverage buy-out, to reduce the tax expense resulting from a number of internal transactions (e.g. payment of dividends), the tax consolidation system reduces a group’s total tax expenses by allowing offset of the consolidated companies’ gains and losses.
In addition, the Finance Act for 2004 widens the right to unlimited carry forward to the total losses registered by companies liable to corporate income tax. There is no time limit anymore as regards deducting the loss carry-overs from the gains of the following financial years.
For the last decade, the French tax authorities’ orientations have led to a strong improvement in France’s positioning faced to the European tax competition.
Based on Primexis' long and significant experience in this area, we have noted that a number of group’s managers are still reserved when selecting a country for setting up their holding company. From a practical point of view, the French tax system is still complex. Nevertheless, the interesting tax opportunities currently available in France should be considered and included in the groups’ localization strategies.
France: a paradise for holding companies?