Tax optimization is at the heart of all concerns for company executives with international operations. But what tax strategies and structures should be adopted to limit the tax burden?
First, if a legal entity is tax-resident in France and receives profits in the Emirates, it will have to complete certain formalities to optimize its income. Also note that any legal entity tax-resident in France is required to declare all of its worldwide income in France, with the legal entity's tax residence determined by its registered office.
Let us take the example of a company whose registered office is located in France: you will have to declare income from all sources, including income from the United Arab Emirates, for example.
A company's profit corresponds to the amount of taxable income exceeding its deductible expenses. This means that the activity is sustainable and that the company will be taxed on its results.
The prerequisite: establishing economic substance for your subsidiary in Dubai
In tax law, economic substance refers to the presence of real and significant economic activities in a country where a company is registered. This may include employees, assets, income, and business-related expenses.
To create economic substance, a company can establish genuine commercial activities in a country, such as selling products or services, hiring local staff, acquiring assets, and investing in local projects.
In addition, under the international tax treaty signed between France and the United Arab Emirates, although the concept of economic substance is not expressly addressed by the treaty, it requires the establishment of an independent permanent establishment (see the article on a fixed place of business).
Subsequently, two methods are possible for tax-optimizing the company's profits.
1- Parent-subsidiary optimization
In France, each company is subject to corporate income tax. However, one way to tax-optimize a company's assets is to establish a financial structure. Indeed, the “Parent-Subsidiary” regime appears to be a good option for companies that are tax-resident in France but operate in the United Arab Emirates, for example. In tax law, the “parent-subsidiary” regime is a tax regime that allows a company (the “parent”) not to be taxed on dividends it receives from its subsidiary (a company in which it holds at least 5%). This allows companies to avoid paying tax twice on profits (corporate income tax). Several conditions must be met:
- The subsidiary must be at least 5% owned by the parent company;
- Corporate income tax must apply to the subsidiary;
- The subsidiary must be established in the European Union or in a state that has entered into a tax treaty with France (which is the case for the United Arab Emirates);
- There must be no cross-shareholding between the companies (that is, the companies must not mutually hold shares in each other);
Thus, if a parent company is in France, it can own a subsidiary abroad, such as in the United Arab Emirates. This process allows the parent company that is tax-resident in France not to pay tax on the dividends it receives from the subsidiary. The profits generated by the subsidiary (which are generally subject to corporate income tax in the foreign country, except in the Emirates, where there is not yet any corporate income tax) will then be distributed as dividends to the parent company. These dividends will be taxed at only 5% in respect of the share of costs and expenses (Articles 145 and 216 of the French General Tax Code).
This exemption is claimed on the parent company's tax return 2058-A.
2- The tax consolidation regime
The tax consolidation regime is a tax system that allows two or more companies to file a joint tax return for the companies belonging to their group. This means that they are not considered separate entities by the tax authorities, but are considered a single taxpayer.
The profits and losses of each company are consolidated (through precise accounting entries) to determine the total amount of corporate income tax due. This regime is often used to reduce companies' tax costs by minimizing double taxation and optimizing tax deductions. The capital of the consolidated company must be held at a minimum, directly (by the same shareholders) or indirectly (or by a company belonging to the same shareholders), at 95% by the parent company.
In addition, transfers of fixed assets (transfers of assets owned by the company) within the group are exempt from corporate income tax (the taxation of transfers of equity interests remains at 12% in respect of the share of costs and expenses).
Like parent and subsidiary companies, dividend distributions by companies consolidated within the group are exempt from corporate income tax, although a 1% share of costs and expenses is levied.
Consider your tax benefits
It is possible for a company to establish a tax optimization system using these two approaches. Nevertheless, to implement such a system, genuine and effective economic substance must exist. Otherwise, an abuse of rights may be established.
