French CFC Rules and
Its Exemptions
There are different rules
in every country’s Controlled Foreign Corporations (CFCs).
Controlled Foreign
Corporation (CFC) is a lawful structure created by the tax experts
around the globe. A CFC is a permissible body that is present in one
place but is being owned or under the control of taxpayers from another
jurisdiction.
CFC laws were formulated to
prevent tax evasion by using offshore companies in countries with
low-tax or no-tax nations.
CFC laws in many countries
are somewhat wide in range and make it unrealistic to have an offshore
business. Sometimes it is beneficial to have a CFC in spite of the need
to settle tax in the parent country. This is due to the fact that the
financial need in putting up an overseas company is much cheaper than
having it started locally. An offshore business would also seem to have
a global operation and most of the time is being patronized by the
consumers in that place.
In France, there is a
totally new set of CFC rules which took effect on January 1,2006. This
is based on the Finance Act of 2005.
In the amended provisions,
the earnings realized by an overseas branch or a foreign lawful
business, directly or in some way, 50%-owned by a mother company in
France may be taxed in the latter if the overseas structure gains from a
“privileged tax” system. For this rationale, a business unit will be
treated as beneficiary to an advantaged tax regime if it is legally
responsible in its jurisdiction to a fee of prevailing commercial income
tax. That is half or fifty percent (50%) lower than the present charge
for corporate revenue tax that would, in theory, have effected in France
on the same operations.
There are certain
exemptions on the French CFC rules. For one it is not applied to income
derived from an entity that was established in an EU member state,
except off course if the French tax authorities found out that the use
of the foreign entity is a fake ploy that is made for the purpose of
avoiding tax.
It also does not apply if
the income of the foreign entity came from an activity successfully done
in the country where it is established. However, there are two
conditions in which the exception does not apply. The first condition is
if there is more than 20% of the profits came from portfolio managed
activities such as securities, shares and claims as well as intangible
rights management.
The second condition is if
the total profits that came from the above mentioned activities from
inter-company services correspond to more than 50% of the income of the
foreign entity. One thing though, even if the conditions exist, the CFC
rule does not follow if the taxpayer can prove that the principal result
of using the foreign entity is not to gain from a special tax regime.
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