The absence in principle of tangible economic activity of a holding company
The absence in principle of tangible economic activity of a holding company, must encourage its founder to the utmost vigilance, if it wishes to implement it in a State”told privileged taxation’. This article follows the previous column entitled “A holding company in Luxembourg, not always”.
To answer this question, should define the concept of holding and its purpose.
A holding company is a tool for managing a portfolio of holdings in other companies listed or not. It is therefore an investment to variable geometry tool.
It is called “passive” when it only manages its holdings.
It is said ‘active’ exercising an economic activity that can be translated by a role of governance (1) or a full-fledged operational activity (2).
(1) the holding is in the first case, a tool of management of the Group made up of all of its subsidiaries. It has more “economic thickness” that a single holding companywhich manages his titles but few staff is assigned to this activity (social agent, DAF,Director of development or Director of research…).
(2) it is in this second case, an economic actor full carrying on an industrial or commercial activity (activity of production, material supply industrial etc) and holds equitysecurities that will consolidate its core business (branch with a complementary economic activity to that of the holding company). It has in this case a real “economic thickness” in reason, not only his tangible business, but also staff who is more consistent.
There is no legal status of the holding in France. Only one of the tax rules govern these companies in respect of their results or tax on capital. Thus according to the States, their results will be exempt totally tax or partly through tax provisions specific to each State or by the international tax conventions.
The France created a tax specific status to holdings which is headquartered in France:
-mother-daughter, for the related companies by linking capital and voting rights of at least 5%, subjecting the distribution of dividends to the corporation tax at the rate of 33.33% on a plate of 5% of the distribution plan and capital gains on long-termassignment of shares in CT at the same rate on a plate of 12% of the added value;
-tax integration regime, for the related companies by linking capital and voting rights of at least 95% for a fiscal neutrality of the internal distributions within the Groupintegrated, and taxed to IS on a share of 1% of the amount distributed since 1 January 2016 and neutralization of capital gains from disposal of fixed assets carried outwithin the integrated group;
-benefit of the Covenant Dutreil ISF and rights of transfer for free allowing an exemption from these taxes in the amount of 75% of the value of the securities of the Covenant, subject to a dual collective and individual conservation commitment of a respective duration of 2 and 4 years.
If the same holding company has its seat abroad, income from subsidiaries French and distributed to the foreign holding will be taxed in France in the form of a withholding tax of 30% (dividend) unless otherwise provided by the relevant tax convention.
In principle, no tax is due on the interest on bonds issued by French companies andsubscribed by non-residents (according to the internal criteria of french tax law). The capital gain on disposals of non-substantial participations realized by a non-resident is exempt from taxes in France except derogation provided by the correspondinginternational tax convention. On the other hand, the disposal of substantial shareholdings (more than 25% of the social benefits allocated to a non-resident shareholderincluding his family circle in the last 5 years) is subject to a levy of 45%, except derogation of the international tax convention. It should be noted that the benefit of theexemption provided by the tax convention is conditional statements and evidence to verify the correct application thereof.
We understand in the light of the foregoing, the attempt is great to have paid into aholding company in a condition to fully exempt dividends or capital gains on disposals of securities by the play of the tax provisions of domestic law or of international tax treaties.
There is no criteria on the tax domicile of a company under french law, unlike international tax conventions which apply the test of “effective management of the seat ofa legal person” to impose it in the corresponding State. The place of effective management is in reality, the place where social agents take strategic decisions fixing theconduct of Social Affairs. Jurisprudence has clarified that with regard to their light administrative structures, their effective management is located at the place where the nerve centre where to organize the preparation and holding of strategic meetings for the life of society, to which is added the domicile in the State concerned of the main leaders.
In addition, it is important to remember that international tax agreements have alsointended to combat evasion and international tax fraud which results in the exchange of information which the automatic character took effect at 1 January 2016 to be fully effective in September 2017 within EU Member States. Many tax conventions were thus due be revised to introduce an administrative assistance clause to allow some States to be eligible for the white list of countries fighting against tax fraud andtax evasion. This mechanism is important to verify the truthfulness of the beneficialowner of the distribution which is situated in the other State. Thus certain tax conventions contain special provisions denying the reductions or exemptions to source when payments are made to the other State companies that are controlled by residents of third countries.
In the light of these explanations, we understand the limits of a domicile abroad of a holding company. It will be impossible to justify the seat of a passive holding in one State other than that of its major shareholder. On the other hand, an operationalholding (2) may have its seat in a different state that one of its majority shareholdertherefore it has a full-fledged economic activity in that State and a subsequent staff.It will nevertheless in this case, justify the strategic choice of implementation in thatState and make the main leader who leads Social Affairs either domiciled in this State even if the shareholder is not.
Holding tool of direction (1) in one State other than that of the majority shareholderis more delicate because there must be able to justify the choice of this State. In practice, the majority shareholder shall lose its majority control in favour of local investors shareholders to justify the presence by demonstrating that they could not be found in the State of residence of the majority shareholder. Thus, the holding company will be well its effective seat of management in the State of the seat because it will be more controlled by a non-resident.