Economic Substance Requirements

France does not have any specific economic substance rules. However, the general anti-avoidance rules apply to transactions that lack economic substance.

Anti-Hybrid Rules

France implemented the anti-hybrid rules under the EU anti-tax avoidance directives (ATAD 1 and 2) with effect for the tax year commencing on or after 1 January 2020 (with the exception of the reverse hybrid mismatches component, which applies for tax years commencing on or after 1 January 2022). The rules target all income flows between associated parties, whereby a mismatch in either qualification, attribution, or recognition of tax status leads to either a deduction without inclusion or a double deduction. Where such a situation arises, France will deny the deduction of the payment if it is the source country (a primary mechanism) or will include it in the taxable income of the resident recipient (a defensive mechanism) if it is the country of residence and the source country fails to apply a correction (i.e., deny a deduction) under its primary mechanism.

The rules apply to cross-border payments between associated persons, defined as follows (subject to specified exclusions and inclusions):

Associated enterprises meeting one of the following tests:

direct or indirect interest of 50% or more in the capital, voting rights, or entitlement to profits (25% or more in the case of hybrid instruments or payments between the permanent establishments);
members of a consolidated group; or
exercise of notable influence on the other party; and

A head office and its permanent establishment or permanent establishments of the same head office.

The rules are triggered where divergence between 2 countries arises and leads to either a deduction in one country without inclusion in the other or a double deduction. The divergence must relate to either an instrument or an entity and must be caused by either:

A mismatch in qualification;
A mismatch in attribution; or
A difference in the assessment of a tax situation.

The Finance Law lists 12 different situations (7 general cases and 5 specific cases) where such mismatches can occur, as follows:

General Cases:

Payment on account of a financial instrument;
Payment to a hybrid entity;
Payment to an entity with one or more establishments;
Payment to a permanent establishment;
Payment by a hybrid entity;
Deemed payment between a permanent establishment and head office or between two or more permanent establishments; and
Double deduction in general.

Specific Cases:

Imported hybrids;
Non-recognition of a permanent establishment due to a hybrid arrangement;
Hybrid transfers including structured arrangements;
Reverse hybrids; and
Double residence.

Tax adjustments are required if the mismatch in the tax treatment of legal entities or financial instruments leads to:

Double deduction – when the deduction of the same expense is claimed by both a French entity and a foreign associated enterprise; or
Deduction without inclusion – when a deduction of the expense is claimed by the payer without a corresponding inclusion of the income in the hands of the recipient.

Broadly, cross-border hybrid mismatches are neutralized by any one of two ways:

Disallowance of deduction of expenditure under the hybrid arrangement to the extent that the corresponding income is not included in the tax base or is deducted twice; and
Inclusion of the income arising from hybrid arrangement as taxable income to the extent that it is deductible for the payer.

Reverse Hybrid

Effective 1 January 2022, France has introduced reverse hybrid mismatch rules in compliance with the EU Anti-Tax Avoidance Directive as amended (ATAD1 and ATAD2) as part of the Finance Law for 2020. The law provides that where 50% of the voting rights or the capital of a tax transparent entity is owned by a legal entity partner together with related partners, then the share of income from the transparent entity will be taxed in France.

A reverse hybrid mismatch arrangement occurs when an entity is considered for tax purposes as a transparent entity in its jurisdiction of incorporation or establishment, but non-transparent in the jurisdiction of the partner/investor, which results in such entity not being taxed in its jurisdiction or in the jurisdiction of the partners, causing double non-taxation.

Royalty Deduction Limitation

See Sec. 6.5.

Passive Foreign Investment Companies (PFICs)

France introduced rules similar to the US Passive Foreign Investment Companies (PFICs) rules effective from 1999. These rules are modeled on the French CFC legislation but, in contrast to the latter, apply to individual shareholders only (and not to corporate shareholders).

Under these rules (Art. 123 bis of the French General Tax Code (CGI)), a French resident who owns 10% or more (in terms of financial or voting rights) in a legal person, entity, trust, or similar organization mainly engaged in passive investments and established in a country where it benefits from a privileged tax regime or in a listed non-cooperative jurisdiction, is taxed currently on a pro-rata share of the income derived by the foreign entity. For this purpose, the privileged tax regime test is determined in the same way as for the CFC legislation. The foreign entity is deemed to be engaged mainly in passive investments if its assets consist principally (i.e., for more than 50%) of securities, debt claims, deposits, or current accounts. The income of the foreign entity is determined under French corporate income tax rules. Foreign taxes, if any, are deductible from the tax base so determined.

The income attributed to the resident shareholder is taxed as "passive investment income" at the ordinary graduated income tax rates (and social surcharges) without any of the deductions or abatements ordinarily available to French taxpayers. Upon the distribution of income to the shareholders, only the excess of the distribution over earlier PFICs attribution is assessed to income tax. If the foreign entity is established in a country that has not concluded a tax treaty with a mutual assistance clause with France or in a listed non-cooperative jurisdiction, the income to be attributed to the French controlling shareholder is determined under a minimum yield method. For this purpose, the income may not be lower than the net assets of the entity as multiplied by the yield on medium-term variable rate loans to enterprises (see Sec. 13.2.2. for average effective rates). Further, the taxable base is increased by 25% in specified situations. The French Constitutional Council in 2017 struck down this minimum yield requirement as contrary to the French constitution.

The application of the PFICs rules to entities within the EU has been successfully challenged on the grounds of incompatibility with EU law. As a result, the law was amended and now prescribes that the PFIC rules do not apply in an EU context, save with respect to purely artificial arrangements.

Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters and France has concluded TIEAs with several countries, including Andorra, Anguilla, Antigua and Barbuda, Aruba, Belize, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Curaçao, Costa Rica, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia, Liechtenstein, St. Vincent and Grenadines, St. Kitts and Nevis, Saint Lucia, San Marino, Sint Maarten, Turks and Caicos, Vanuatu, Uruguay.

Exchange of Cross-Border Tax Rulings and Advance Pricing Agreements

In line with BEPS Action 5 and the EU directive on mutual administrative assistance, France has adopted various measures in its domestic laws to enable the exchange of information on cross-border tax rulings and advance pricing agreements (APAs) beginning from 1 January 2017, including for information on rulings and APAs issued prior to that date as follows:

Rulings and APAs issued, amended, or renewed between 1 January 2012 and 31 December 2013 must be exchanged if still valid on 1 January 2014; and
Rulings and APAs issued, amended, or renewed between 1 January 2014 and 31 December 2016 must be exchanged whether still valid or not.

Financial Account Information Reporting and Exchange

France has adopted measures to implement the automatic exchange of financial account information with the EU Member States pursuant to Council Directive 2014/107/EU of 9 December 2014, which synchronized EU rules with the global standard for the exchange of information developed by the OECD under the Common Reporting Standard (CRS). France is also a party to the OECD Mutual Assistance Convention and the related Multilateral Competent Authority Agreement and, as such, exchanges financial account information under CRS with qualifying non-EU countries. France has also concluded an Intergovernmental Agreement (IGA) with the US for the implementation of the US Foreign Account Tax Compliance Act (FATCA).

Mandatory Reporting of Cross-Border Tax Arrangements (DAC6/ MDR)

France published a law implementing the EU Council Directive (DAC6/MDR) on the mandatory disclosure of cross-border tax planning arrangements and exchange of information with the other EU Member States. The reporting requirement primarily applies to intermediaries (service providers) that design, market, organize, or manage the implementation of a reportable arrangement. However, the reporting requirements may also be shifted to the taxpayers in certain cases, including where an intermediary is subject to confidentiality obligations or has no EU nexus or where a taxpayer has designed an arrangement without external intermediaries.

The Court of Justice of the European Union (CJEU), in its judgment on 8 December 2022, dealt with the issue of whether mandatory periodic reporting of cross-border arrangements infringes on the legal privilege of the intermediaries, being lawyers, to maintain professional secrecy. The CJEU held that the obligation for a lawyer invoking the professional privilege to inform other intermediaries is not necessary to attain the objectives of the EU Council Directive (DAC6) and infringes the right to respect for communications with their client. The CJEU observed that the reporting obligation under DAC6 can be met by other intermediaries who are not subject to legal professional privilege, and if there are no such intermediaries, the obligation can be met by the relevant taxpayer, thus ensuring that the tax authorities are informed. Accordingly, the CJEU concluded that the obligation provision contained in DAC6 is invalid in so far as the Member States’ application of that provision has the effect of requiring a lawyer acting as an intermediary to notify any other intermediary, who is not their client, of that other intermediary’s reporting obligations.

Considering the CJEU judgment, the French Supreme Court issued a decision on 14 April 2023, wherein it held that the obligation for lawyers claiming legal professional privilege to notify the next intermediary in the chain is invalid as it contradicts the principles established in the European Convention on Human Rights and the European Charter of Fundamental Rights. However, if there is no other intermediary or the lawyer is unable to notify the intermediary, the lawyer must inform the taxpayer about their obligation to report. Additionally, the reporting requirement for lawyers remains valid and enforceable if the taxpayer releases the lawyer from his professional secrecy obligation.

Further, CJEU, in its judgment dated 29 July 2024, explained that the relief provided by the 8 December 2022 judgment extends only to persons pursuing professional activities under the professional titles referred to in Article 1(2)(a) of EU Directive 98/5/EC. Any other legal representative not covered under the specified professional titles is not entitled to a waiver from the reporting obligation as a result of the legal professional privilege.

Compliance Deadline and Penalties

The reporting requirements apply from 1 July 2020, and reportable transactions must be disclosed within a period of 30 days from the date the arrangement was first put in place. However, under a transitional regime, reportable transactions first put in place in the period 25 June 2018 to 30 June 2020 had to be disclosed by 31 August 2020.

Failure to comply with reporting requirements is subject to a penalty of EUR 10,000 per unreported or unnotified arrangement. A maximum penalty threshold of EUR 100,000 is applicable to the same taxpayer or intermediary for each applicable calendar year. A penalty of EUR 5,000 is imposed in case of the first infringement for the relevant year and three preceding years.

In this regard, the French Tax Authority has published a webpage that provides information on the legal framework for DAC6 reporting, sources including relevant EU Directives, ordinances, technical specifications for the submission of declarations for DAC6, and other guidance.

COVID-19 Emergency Measures

Due to the COVID-19 pandemic, the EU Council adopted an amendment to the directive whereby the Member States may opt to defer the reporting under DAC6 by up to 6 months.

France adopted the deferral option and postponed the reporting requirements as follows:

The deadline under the transitional regime for reporting cross-border arrangements first put in place between 25 June 2018 and 30 June 2020 was deferred from 31 August 2020 to 28 February 2021; and
The standard 30-day reporting deadline began on 1 January 2021, instead of 1 July 2020. This included reporting on cross-border arrangements put in place between 1 July 2020 and 31 December 2020.

Mandatory Reporting of Information by Digital Platform Operators (DAC7)

Effective 1 January 2023, France implemented the EU Council Directive (DAC7), which requires digital platform operators located both inside and outside the EU to report information about income earned by sellers of goods and services through their digital platforms. On 11 January 2023, the French tax authority published a guidance (BOI-INT-AEA-30) on the obligations of digital platform operators, including the scope of the requirements, the due diligence obligations, the reporting obligations, and the reporting procedures.

Digital collaborative platforms generally consist of any software, including a website or a part thereof, and applications, including mobile applications, accessible by users and allowing sellers to be connected to other users for the purpose of carrying out a relevant activity, directly or indirectly, to such users.

The reporting obligations apply to reporting platform operators. A reporting platform operator is an entity that provides a digital platform for facilitating a connection between buyers and sellers for carrying out a relevant activity and that meets any one of the following conditions:

Is a resident for tax purposes in France;
Has a registered office, place of management, or permanent establishment in France; and
Is not a qualified platform operator outside the EU.

A platform operator is considered a qualified platform operator outside the EU if:

All of its activities qualify as relevant activities; and
It is a tax resident, registered under the laws, or has its headquarters (including actual management) in a qualified jurisdiction outside the EU.

A relevant activity is an activity carried out for consideration including the following:

Renting and leasing of immovable property, including residential and commercial property and parking lots;
Provision of personal services;
Sale of goods; and
Renting of any mode of transport.

The report is required to be submitted annually by 31 January of the following calendar year. The information reported is automatically exchanged with the tax authorities of the concerned EU Member State for enforcing tax rules and ensuring tax compliance. The first reporting was due on 2 February 2024 (extended from 31 January 2024) for the year 2023.

Failure to comply with the registration or reporting requirements may attract a levy of penalty.

Exit Tax

From 8 September 1998 to 31 December 2004, a holder of substantial participation in a French or foreign company was deemed to have realized the latent capital gain on the participation upon emigration from France (Art. 167 bis of the French General Tax Code (CGI)). The rules applied if the shareholder was a resident of France for at least 6 years during the preceding 10 years. A deferral of taxation could be obtained subject to the provision of adequate guarantees.

The European Court of Justice, in a decision of 11 March 2004 (C-9/02), held that the taxation of unrealized capital gains levied on persons who move their tax residence out of France infringes the EC Treaty.

Despite this case law, a new exit tax regime has been reintroduced in French legislation. Indeed, since 3 March 2011, the transfer of tax residence out of France triggers the assessment of income tax and social contributions on unrealized capital gains. The taxpayer may, nevertheless, benefit from a deferral of payment of the tax if the new country of establishment is an EU or EEA Member State. This deferral ends, and payment of the deferred tax becomes due if the taxpayer disposes of the shares benefiting from the deferral within a 5-year conservation period. Effective 1 January 2020, in order to comply with the ATAD Directive, the exit tax rules are amended to provide that the exit tax deferral on unrealized capital gains also applies to the transfer of individual assets, regardless of transfer of tax residence out of France.

In situations where the taxpayer paid the exit tax upon emigration, a refund is possible in the following situations:

The taxpayer moves his residence back to France within 8 years from emigration (but the refund does not apply to social contributions);
The shares on which exit taxes were paid are not disposed of at the expiry of the 5-year conservation period; or
The shares were transferred mortis causa (under conditions).

Brexit Impact

With the expiry of the Brexit transitional arrangement on 1 January 2021, the United Kingdom formally ceased to be part of the EU. As from the same date, therefore, the deferral option is not available if the new country of establishment is the UK. However, the French tax authorities clarified that for registered office or establishment transferred from France to the UK by 31 December 2020, exit tax instalments continued to apply if the taxpayer had availed the option of deferral, provided no other event triggered immediate payment. In contrast, transfers made after 31 December 2020 are no longer eligible for the deferral option. On 11 March 2021, the French tax authorities published guidance (BOI-INT-DG-15-20) regarding the withdrawal of the UK from the EU, which included guidance on the transitional provisions relating to the deferral option for exit tax.

Non-Cooperative Jurisdictions

The French list of non-cooperative jurisdictions consists of the jurisdictions listed by France individually and those listed by the EU, even if not listed by France (consolidated list). Jurisdictions may be listed in the French list under any of the following criteria:

Absence of exchange of information;
Facilitating the creation of offshore structures or arrangements; and
Non-compliance with other EU criteria.

The consolidated list was updated by way of a Decree dated 17 February 2024. It includes the following jurisdictions:

American Samoa	Anguilla	Antigua and Barbuda (see Note 3 below)
The Bahamas (see Note 2 below)	Belize (see Note 2 below)	The British Virgin Islands (removed effective 17 February 2024)
Dominica (removed effective 16 March 2022)	Fiji	Guam
Oman (removed effective 4 March 2021)	Palau (effective 1 June 2021)	Panama (see Note 1 below)
Russia	Samoa	Seychelles (see Note 2 below)
Trinidad and Tobago	The Turks and Caicos Islands (effective 1 May 2023) (see Note 2 below)	U.S. Virgin Islands
Vanuatu

Note 1: Effective 17 February 2024, Panama is removed from the listing under 2a of Article 238-0 A of the French tax code (jurisdictions that concluded an administrative assistance agreement with France allowing the exchange of any information). However, Panama continues to be listed under 2^o of 2 bis of Article 238-0 A of the French tax code as it did not meet one of the criteria of Annex V of the EU.

Note 2: The EU list of non-cooperative jurisdictions is updated to remove the Bahamas, Belize, Seychelles, and Turks and Caicos Islands from the EU list, effective 26 February 2024. Seychelles is not expected to be removed from the French blacklist since it is listed therein under different criteria. The French blacklist is expected to be updated to remove the Bahamas, Belize, and Turks and Caicos Islands.

Note 3: The EU list of non-cooperative jurisdictions is updated to remove Antigua and Barbuda effective 18 October 2024. The French blacklist is expected to be updated to remove Antigua and Barbuda.

Blacklisting entails various “defensive” measures which are triggered 3 months following the official publication of the inclusion of the relevant jurisdiction in the blacklist. Where a jurisdiction is delisted, however, the adverse listing consequences cease to apply from the day of official publication. The applicable defensive measures include:

Increased withholding tax at the rate of 75% on dividends, interest, royalties, service fees, and capital gains arising to entities located in non-cooperative jurisdictions (see Sec. 8.2.2.);
Dividends and capital gains derived from/on entities located in non-cooperative jurisdictions are not eligible for the French participation exemption regime (see Sec. 10.1.);
Payments made to recipients in non-cooperative jurisdictions are not deductible (see Sec. 6.5.);
Enhanced CFC and thin-capitalization / limitations to interest deduction rules (see Sec. 13.3. and 13.2.); and
Enhanced transfer pricing requirements apply to transactions with entities located in non-cooperative jurisdiction (see Sec. 13.4.).

Which defensive measure applies to which listed jurisdiction depends on whether the relevant jurisdiction (a) is listed by France or added to the French list because of its inclusion in the EU list under EU listing criterion 2.2. (facilitation of offshore structures), or (b) was added to the list because of its inclusion in the EU list under all EU listing criteria other than criterion 2.2.

All French “defensive” measures apply indiscriminately to all jurisdictions listed under (a) above, that is all jurisdictions listed by France or added to the French list because of their inclusion in the EU list under EU criterion 2.2 (see Note 1 below). In contrast, only specified “defensive” measures apply to jurisdictions added to the French list because of their inclusion in the EU list under EU listing criteria other than criterion 2.2 (see Note 2 below). The following Table depicts the various French “defensive” measures and indicates to which blacklisted jurisdictions they apply:

Defensive Measure	Jurisdictions Included in French List or in EU List under Criterion 2.2. (facilitation of offshore structures) (see Note 1 below)	Jurisdictions Included in EU List under EU Listing Criteria other than Criterion 2.2. (see Note 2 below)
Enhanced transfer pricing measures (see Sec.13.4.)	✓	✓
Enhanced CFC measures (see Sec. 13.3.)	✓	✓
Limitations to the deduction of specified expenses (see Sec. 13.2.)	✓	✓
Enhanced measures with respect to the taxation of capital gains on business assets	✓	✓
Exclusion from the participation exemption regime (see Sec. 10.1.)	✓	X
Increased withholding tax rate on dividends, interest, royalties, service fees, and other French-source payments (see Sec. 8.2.2.)	✓	X
Application of withholding tax on constructive distributions	✓	x

Note 1: As on 17 February 2024, the jurisdictions to which all defensive measures apply are: Anguilla, Seychelles, Bahamas, Turks and Caicos Islands and Vanuatu.

The EU list of non-cooperative jurisdictions is updated to remove the Seychelles from the EU list, effective 26 February 2024. Seychelles is not expected to be removed from the French blacklist since it is listed therein under different criteria.

As per the EU Council’s determination on 4 October 2022, The Bahamas, and The Turks and Caicos Islands were additionally listed as non-cooperative jurisdictions under the EU listing criterion 2.2. These jurisdictions were included in the French consolidated list effective 1 May 2023. As per the EU Council’s determination on 26 February 2024, the Bahamas, and the Turks and Caicos Islands are removed from the EU list. The French consolidated list is expected to be updated to reflect these changes.

Note 2: As on 17 February 2024, the jurisdictions subject to only selective defensive measures are: American Samoa, Antigua and Barbuda, Belize, Fiji, Guam, Palau, Panama, Samoa, Russia, Trinidad and Tobago, and the US Virgin Islands.

As per the EU Council’s determination on 26 February 2024, Belize (earlier listed under EU Listing Criteria other than Criterion 2.2.) is removed from the EU list and the French consolidated list is expected to be updated to reflect this change.

Further, as per the EU Council’s determination on 18 October 2024, Antigua and Barbuda (earlier listed under EU Listing Criteria other than Criterion 2.2.) is removed from the EU list, and the French consolidated list is expected to be updated to reflect this change.

Ultimate Beneficial Ownership Disclosure

In 2016, France adopted the EU Directive on anti-money laundering measures. Under the Directive, all EU Member States are required to maintain a central register of information on beneficial ownership. This central register must be accessible to competent authorities, financial intelligence units, obliged entities such as banks, and any other person or organization that can demonstrate a legitimate interest.

A beneficial owner is defined as a person who holds, directly or indirectly, more than 25% of the share capital or voting rights of the company or exercises by any means, power of control over the management, administrative or executive bodies, or over the shareholders' meetings of the company.

For these purposes, registered entities (including entities listed in the trade register, commercial companies, economic interest groups, and branches of non-resident entities) in France are required to maintain and submit information on beneficial owners such as the name and address of the ultimate beneficial owner, date of birth, country of residence, and nature and extent of interest.

Failure to comply with the requirements attracts penalties of EUR 7,500 or six months of imprisonment.

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