The use of a company abroad by a French tax resident to conduct business activities in France is strictly regulated, primarily to prevent tax and social security contribution fraud.
Any individual who is a tax resident in France is subject to French income tax on their worldwide income.
The use of international ‘umbrella’ companies to evade taxes is now attracting the attention of the French tax authority.
The strategy, which involves interposing a foreign company to invoice services performed in France, allows some taxpayers to avoid tax and social security contributions on their professional income while sometimes claiming undue tax credits.
Under the arrangement, an individual residing in France abandons their independent status to become an employee of a foreign company, often located in a low-tax jurisdiction.
Jurisdictions often used for such purposes include Ireland, Luxembourg, Switzerland, the Netherlands, or more aggressively, offshore tax havens like Panama, the British Virgin Islands, or Seychelles.
Instead of paying the owner directly, their clients sign a contract with this foreign company, which invoices the services and pays the owner a salary/fee, presented as foreign-sourced income.
Profits are accumulated abroad, and the French tax authorities may not directly tax the income unless it is repatriated or declared.
Alternatively, the owner then declares these earnings in France as foreign income, qualifying for a tax credit intended to prevent double taxation.
In many cases, the foreign company has no real economic activity and merely serves as a front. As a result, the consultant pays no tax abroad and wrongly claims a tax credit in France.
The French tax authority has recently stepped-up controls and added international umbrella employment schemes to their official list of abusive practices.
“This type of scheme creates a blatant imbalance in tax fairness and the funding of social protection,” warns the tax authority (DGFiP).
Attempting to reduce taxes through a foreign entity when not properly structured and compliant with both French and international tax rules can result in tax audits and reassessments for up to 10 years; fines and penalties, which can be up to 80% of the evaded tax; and criminal charges in cases of deliberate fraud.
In 2024, the DGFiP issued €16.7 billion in tax assessments and penalties following audits, a 10% increase over 2023. The government has also announced the recruitment of 1,500 additional agents by 2027 to bolster anti-fraud efforts.
Legitimate Uses
The guidance issued does not bar the use of foreign entities, but in such cases the structure must reflect real business purposes and comply with both countries’ tax regulations.
A more conventional method than attempting to operate through an unrelated or artificial foreign company is the use of a subsidiary of a French company. Dividends paid from the subsidiary to the French parent company are then subject to corporate income tax in France but may benefit from a 95% dividend exemption.
However, even with a subsidiary model, French tax authorities impose strict rules to prevent tax base erosion and profit shifting, e.g. arms length trading. A mere "brass plate" company with no operations would not withstand their tests.
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