"When a foreign company is looking to establish itself in France, the choice of a subsidiary can be judicious in terms of autonomy and tax advantages.
What is a subsidiary?
Foreign companies wishing to market their products or services in France can open a subsidiary.
A subsidiary is characterized either by the holding of more than 50% of its capital by the foreign parent company (C. com., art. L.233-1), or when the latter exercises control over the subsidiary within the meaning of Article L.233-3 of the Commercial Code.
The holding of exactly 50% of the capital of a company is sufficient to rule out the notion of subsidiary; it is then a simple participation (C. com., art. L.233-2).
The subsidiary has legal personality. It is therefore legally independent from the parent company.
The fact of having legal personality allows a company to have its own share capital, corporate and commercial name as well as to have assets separate from that of the parent company.
On the other hand, the parent company exercises a decisive influence on the determination of the objectives to be achieved, while leaving a certain freedom to the subsidiary to choose the appropriate means to achieve them.
What are the advantages of creating a subsidiary in France?
The creation of a subsidiary offers various advantages:
The parent company is not responsible for the consequences of litigation and disputes, loss, or liquidation of the subsidiary.
The subsidiary is therefore a reliable solution when the risk is high;
The parent company is not liable for the debts of the subsidiary;
As the subsidiary is established in France, it benefits from the same tax advantages as national companies;
Market penetration is also facilitated.
However, the creation of a subsidiary requires a significant initial investment cost. This structure is therefore reserved to SMEs/SMIs that already have a good financial and organizational base in their home country.
How to create a subsidiary?
To create a subsidiary in France, the parent company must constitute a company under French law.
The parent company has the choice between several legal forms for the subsidiary :
The public limited company (SA);
The simplified joint-stock company (SAS);
The limited liability company (SARL);
The sole proprietorship with limited liability (EURL);
Civil society ;
The general partnership.
The choice will be dictated by the adaptation of the corporate form to the activities of the subsidiaries.
The SA is mainly used for subsidiaries deploying a significant activity, employing many employees and whose capital endowment must be significant.
The choice of this form of company is generally ruled out because it responds to a cumbersome formalism: choice between a board of directors or a management board with a supervisory board. In addition, the share capital is at least 37,000 euros.
The SAS offers great flexibility in its creation since there is no minimum capital as well as flexibility in its operation and advantageous taxation with various tax options.
The SARL and the EURL are to be preferred for lighter corporate structures.
The civil society or the general partnership will be used for the management of the real estate heritage.
The general partnership, whose rules of constitution and operation are simple and inexpensive, has the main disadvantage of joint and indefinite liability of the partners.
In practice, most French subsidiaries are created in the form of an SA or an SAS, for more flexibility in management.
All the rules and formalities specific to the chosen legal form are to be respected.
The company thus created must be registered in the trade and companies register of the place of the registered office.
When the company wishes to create several branches or several subsidiaries, we speak of a group of companies. The group of companies has its own legal regime governed by the Commercial Code.
What is the tax regime applicable to the subsidiary?
A subsidiary established in France is subject to the provisions of the French General Tax Code. It is taxed on its own results, according to the tax rules in force.
However, certain tax regimes may apply to it because of its links with the parent company.
The corporate group tax regime
The corporate group tax system ensures tax neutrality of the economic structure. More specifically, under the said system, the parent company becomes solely liable for corporation tax due on all of the results of the group formed by itself and its subsidiaries. It also allows the deficit of a subsidiary to be allocated to the entire group in order to reduce the taxable base.
To benefit from the tax system, several conditions must be met:
The parent company must be subject to corporate tax at the common law rate on all French results;
It must not be directly owned for more than 95% by another company subject to corporate tax ;
Daughter companies must also be subject to corporate tax ;
The parent company must hold at least 95% of the capital of its subsidiaries continuously during the financial year, directly or through group companies.
The option for integration must be chosen no later than the expiry of the deadline for filing the declaration of results for the financial year preceding that in respect of which the regime applies. It is notified on plain paper according to the model established by the administration and accompanied by the following documents:
of the list of subsidiaries that will be members of the group. This list indicates for each company its designation, the address of its registered office and, if different, of the principal establishment as well as the breakdown of capital
certificates by which the subsidiaries make known their agreement for the parent company to use their own results for the determination of the overall result.
This option is valid for five years and renewable by tacit agreement.
PLEASE NOTE: this scheme is not open to foreign parent companies. Only subsidiaries giving consent can be members of the group.
The "mother-daughter" tax system
The parent-daughter regime allows the parent company to benefit from an exemption from corporate tax on investment income received from its subsidiaries, with the exception of a share of costs and charges fixed at a flat rate of 5 % of the total income of the holdings, including foreign tax credits, regardless of the amount of the costs and charges incurred by the parent company. The rate of 5% may be brought to 1% under the conditions set by law.
This scheme is also possible within the framework of a group of companies.
The parent company must meet the following conditions:
Hold at least 5% of the securities of the subsidiary on the date of payment of the proceeds of the participation;
And keep thesecurities for at least 2 years.
The benefit of this special regime is available on option which can be exercised for each financial year or tax period. The option is not subject to any particular formalism, it stems from the statements made on the tax return and applies to all products received from the same subsidiary. The option may vary from branch to branch."
Document written by the lawyers of the EEN network (Enterprise Europe Network) - Updated on 06/21/2022