CMS Expert Guide on substance issues across Europe in France

Pending the implementation of ATAD 3, French domestic law does not currently contain formal rules governing substance. In practice, however, concept of substance is considered indirectly for the assessment of the tax residence of a company or the qualification of a permanent establishment (“PE”). Additionally, it is relevant for the framework of general anti-avoidance rules (“GAAR”), to assess the economic reality of controlled foreign companies and the validity of certain withholding tax exemptions or treaty benefits.

French domestic law does not use the concept of ‘residence’ for corporate income tax purposes (the scope of which is defined with sole reference to the ‘place of business’ of a company).

However, the ‘place of (effective) management’ is generally used as criterion to determine the tax residence of a company and/or the existence of a PE under tax treaty law, and for the application of withholding tax exemption regimes. In practice, the ‘place of effective management’ means the place where the management, administrative and executive functions are primarily located. It can be different from the registered seat of the company.

The term ‘substance’ is not defined by French law or administrative guidelines. It is a concept specified by French case law and used in practice within the context of GAAR to combat artificial arrangements. Such arrangements might consist, for example, of setting up a company without ‘economic substance’ in a country with the principal or sole purpose of benefiting from the advantageous provisions of a tax treaty (i.e., "treaty shopping"), from withholding tax exemptions or to exit the scope of French tax. Minimum substance is assessed on a case-by-case basis, depending on the factual situation.

In the light of French case law in the context of GAAR, minimum ‘substance’ of a company requires essentially:

• Material and human resources (in accordance with the nature of the activity) and a certain level of autonomy in the decision-making process
• Justification of the economic rationale and the business purpose of the company; and
• Demonstration of the effective and real involvement of the company in economic operations

It is not necessary for a company to have an operating activity (e.g., mere asset management activities do not necessarily imply the existence of an artificial arrangement devoid of economic reality).

The requirement to have employees depends on the activity of the company. In the case of holding companies, the lack of human resources is not decisive.

In principle, a company is not required to have its own premises.

Having its own bank account is an indicator for the company’s autonomy and should be a minimum requirement.

At present, none.

Please see above under ‘General requirements’.

The transposition of ATAD 3 will establish a formal substance framework in French domestic law, which is larger than the existing GAAR framework. This will make it necessary to audit and monitor existing cross-border structures which include EU entities with essentially passive income, and which outsource their day-to-day management, to ensure that these entities could rebut a possible presumption of lack of minimal substance resulting from a strict application of the legal substance indicators.