Using Foreign Holding Companies to Manage French Patrimony: Rules, Risks and Anti-Avoidance

Why Foreign Holding Companies Are Used

For a French-resident individual, holding a domestic portfolio directly means income and gains taxed in France each year. A foreign holding company accumulates income offshore, with French tax only crystallising on distribution or disposal. The appeal is a deferral of French taxation and, potentially, a reduction if the holding jurisdiction offers participation exemptions or other favourable treatment on cross-border flows. A subsidiary strategy — transferring one’s domicile abroad — is discussed elsewhere. Here we focus on structures where the individual remains a French resident but interposes a foreign holding.

Two categories of foreign structures are worth distinguishing: purely tax-haven vehicles (now largely ineffective due to ETNC rules, automatic information exchange and CGI Art. 123 bis), and mainstream European holding structures in Luxembourg, Belgium and the Netherlands, which are legitimate but must be analysed carefully.

European Holding Structures

Netherlands

The Netherlands was the original model for participation exemptions. A Dutch holding company holding ≥5% of a subsidiary is exempt from Dutch corporate tax on dividends received and capital gains on those participations (with various anti-abuse conditions). Distributions by the Dutch holding to a French-resident individual carry 15% Dutch withholding, reducible to 15% under the France-Netherlands treaty, with no further reduction for natural persons. Interest income in the Dutch holding is taxed at ordinary IS rates (15% up to €395,000; 25.8% above).

The Withholding Tax Problem: Two Layers Instead of One

The fundamental economic disadvantage of any holding structure is that it multiplies withholding taxes. Take a French subsidiary paying a €100 dividend to a foreign holding, which then redistributes to a French-resident individual shareholder:

• Without the parent-subsidiary directive (holding less than 10% of French subsidiary): France levies 15% withholding on the dividend to the holding (net: €85). On redistribution, the country of the holding levies 15% withholding on the payment to the French individual (net: €72.25), who then owes French PFU at 30% on the gross received, with a credit for the 15% already suffered. The actual effective friction compared with direct holding is the irrecoverable foreign withholding tax at the holding level.
• With the parent-subsidiary directive (≥10% stake): French withholding on the dividend paid by the subsidiary to the holding is zero. The holding’s redistribution to the French individual shareholder still carries local withholding (e.g. 15% for Luxembourg Soparfi or Belgian holding to a French individual, reduced by treaty). The French individual then owes PFU on the distribution received. Net friction: the 15% withholding on the redistribution, which a French individual receiving a direct dividend would not incur.

The structure only makes economic sense where: (a) income accumulates in the holding without being distributed (deferral benefit); or (b) the holding is used for structuring exits at the holding level (capturing participation exemption on shares sold by the holding). But (a) runs into CGI Art. 123 bis and (b) runs into CGI Art. 244 bis B.

French Tax on Gains Realised by Foreign Holdings on French Company Shares

CGI Art. 244 bis B imposes French tax on gains from the disposal of shareholdings in French companies where the non-resident seller (company or individual) held more than 25% of the profits of the French company at any point in the preceding 5 years. For ETNC-based companies, there is no minimum threshold. The tax applies at the ordinary IS rate (currently 25%) for non-resident companies; at 12.8% for non-resident individuals (no social charges for non-immovable assets).

For disposals and distributions since 30 June 2021, EU and qualifying treaty-country parent companies can obtain a refund of the excess over the IS they would have owed as a French resident (essentially reducing the tax to IS on the 12% expense-and-charges fraction). This restitution applies to EU/EEA companies and companies in countries with a French anti-fraud information-exchange treaty, provided the cedant does not effectively manage or control the sold company.

In practice, the rule is often neutered by tax treaties, which typically reserve the right to tax gains on non-real-estate company shares to the country of the seller’s residence. Belgian, Luxembourg and Dutch parent companies holding French subsidiaries generally benefit from treaty protection. But treaty protection requires the holding to genuinely reside in the treaty country — which circles back to the effective management seat risk.

CGI Art. 123 bis: Taxing Undistributed Income in Privileged Structures

Article 123 bis is the most powerful French anti-avoidance rule for foreign holdings. It taxes a French-resident individual on their share of the accumulated income of any foreign structure holding mainly securities, deposits or receivables, where that structure benefits from a privileged tax regime — even if no income has been distributed.

Who Is Caught

Any French-resident individual who holds, directly or indirectly (including through family members: spouse, ascendants, descendants), at least 10% of the capital, financial rights or voting rights of the foreign structure. The Conseil d’État has interpreted this broadly: the condition is met where the individual exercises control (even shared) over the structure, with a 10% threshold only applying where the holding is quantifiable (CE 10-3-2020 n° 427104; CE 12-5-2022 n° 444994). In practice, any structure where the French resident is the economic beneficiary or sole controlling person is at risk, regardless of the formal ownership percentage.

What Constitutes a Privileged Tax Regime

The foreign structure’s tax regime is “privileged” if the tax it actually pays is less than 60% of the tax it would have paid if established in France on the same income (the threshold was 50% before 1 January 2020). The administration bears the burden of proving this concretely and precisely. Practical consequences:

• A Luxembourg SPF (fully exempt) is clearly privileged.
• A Luxembourg Soparfi or Belgian holding that benefits from a full participation exemption on dividends could be privileged depending on the French reference tax — the Conseil d’État held that the French régime des sociétés mères must be factored into the comparison (CE 14-2-2022 n° 442061). The question is not yet fully resolved but a holding receiving qualifying dividends exempt in both France and Luxembourg may not be in a privileged regime.
• A structure exclusively realising capital gains exempt abroad that would also be exempt under the French participation exemption (≥5% stake; held ≥2 years) is not treated as in a privileged regime by the administration. But a structure realising gains on short-term or sub-5% holdings that would be fully taxable in France remains at risk.

What Is Taxed

Where Art. 123 bis applies and the foreign structure is resident in a country with a French administrative-assistance convention: the income of the structure is recalculated as though it were a French IS taxpayer, and the French-resident individual’s share of that income is taxed at ordinary income tax rates (PFU or progressive scale). Where the structure is in a non-convention country: a minimum deemed income is computed at the rate applicable to current-account interest (2.27% for 2022 exercises) applied to the net asset value — subject to the taxpayer’s ability to prove actual income is lower (Cons. const. 1-3-2017).

The Clause de Sauvegarde

Art. 123 bis does not apply where the structure is in an EU/EEA country or in a country with both a French tax convention and mutual recovery assistance treaty, provided the holding does not constitute an artificial arrangement designed to circumvent French tax law (burden: administration). For structures outside these countries, the taxpayer can invoke the exception by demonstrating that the exploitation of the structure has a principally non-tax purpose and effect (burden: taxpayer, with quantitative evidence comparing the tax benefit against other economic advantages).

Three Structural Risks: Abuse of Law, Fictitious Structure, Effective Seat in France

Abuse of Law (LPF Art. L 64 and Art. L 64 A)

LPF Art. L 64 allows the administration to disregard acts that are either fictitious, or that seek to exploit tax rules literally against their legislative purpose and were motivated exclusively by tax avoidance. For acts since 1 January 2020, Art. L 64 A extends this to acts motivated principally (not only exclusively) by tax avoidance. The distinction matters: a structure with any genuine commercial rationale was previously insulated from Art. L 64. Under Art. L 64 A, tax avoidance as the principal (but not sole) motive is sufficient. Sanctions: 80% surcharge on additional tax assessed. The practical precaution is to ensure the structure has real non-fiscal substance and justification — financial, legal, or estate-planning rationale beyond mere tax deferral.

Fictitious Structure

A foreign holding that exists only on paper — no genuine corporate life, no decision-making at the foreign location, directors acting on instructions from France without any independent authority — is at risk of being treated as non-existent for French tax purposes. The administration can disregard the structure and tax the French-resident shareholder directly. Basic precautions: the company must genuinely exist under its local law; hold real assets; hold board meetings and maintain real minutes; have directors who exercise independent judgment at the registered location; maintain separate accounts.

Effective Management Seat in France (Siège de Direction Effective)

Even a genuine foreign company becomes a French IS taxpayer if its siège de direction effective — the place where the most senior persons make the strategic decisions determining the conduct of the enterprise as a whole (CE 16-4-2012 n° 323592) — is located in France. A French-resident individual who manages the foreign holding from their French home, takes all decisions in France and has no real decision-making presence in the country of incorporation creates this risk. The location of board meetings is one indicator but is not determinative on its own (CE 7-3-2016 n° 371435). A French resident working from home managing a Swiss company was found to have given the company an effective seat in France (CE 27-3-2020 n° 421627). The consequence: the company’s worldwide income becomes subject to French IS.

Correlated risk: even without a full effective seat in France, a foreign company that regularly conducts management activities in France may have a permanent establishment there (an installation fixe d’affaires from which business is conducted), attracting French IS on income attributable to that establishment. The safe approach is to ensure all material decision-making for the holding occurs in the country of incorporation, with local directors genuinely acting at the foreign location.

Legal Notice. This article is provided for general information and educational purposes only. It does not constitute legal or tax advice. French anti-avoidance rules in this area are complex, evolving and highly fact-dependent. Always consult a qualified French tax lawyer before making structuring decisions.