The tax considerations of going global

In a high level article using the example of expanding operations into France, our Head of Tax, Marty Murphy examines the reasons an Irish company might fall within French tax jurisdiction and compares the differences between establishing a branch versus a subsidiary.

Why You Would Fall Within French Tax Jurisdiction

When expanding into France, it is essential to understand the circumstances under which your Irish company might fall within French tax jurisdiction. This primarily involves the concept of a permanent establishment (PE) or a branch as defined by the French-Irish double tax treaty.

Permanent Establishment (PE) and Residency Rules

The concept of a permanent establishment is central to determining whether a branch exists in France for tax purposes. According to the treaty, a PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes:

• A place of management

• A branch

• An office

• A factory

• A workshop

• A mine, oil or gas well, quarry, or other place of extraction of natural resources

Criteria for Establishing a Branch as a PE

A branch will exist in France if the following criteria are met:

Fixed Place of Business

• The business must have a physical location in France that is fixed and through which business activities are conducted. This could be an office, a warehouse, or even a sales outlet.

Duration of Presence

• The fixed place of business must exist for a significant period. Temporary or short-term activities usually do not constitute a PE unless they are part of a repetitive business cycle.

Activities Conducted

• The activities conducted through the fixed place of business must be significant enough to qualify as carrying on business. Merely preparatory or auxiliary activities do not typically result in a PE.

Sales and Residency Rules

The residency rules in the context of sales are particularly important. The treaty specifies that a company may be considered to have a PE in France if it has:

A Dependent Agent

• If a person, other than an independent agent, is acting on behalf of the Irish company in France and has the authority to conclude contracts in the name of the company, this constitutes a PE. This could be a sales representative or a distributor with the power to finalise sales agreements.

A Place Where Sales Occur

• If the Irish company has a fixed place of business in France where sales activities are conducted regularly, this place can be deemed a PE. For example, if an Irish company maintains a showroom or a retail shop in France where sales are made, it would likely create a PE.

Implications of Having a Branch (PE) in France

Once a PE is established, the branch is subject to French corporate income tax on the profits attributable to its activities in France. The main implications include:

Corporate Tax Obligations

• The branch must pay French corporate income tax on its French-source income.

VAT Registration and Compliance

• The branch must comply with French VAT regulations, including registration, invoicing, and periodic reporting.

Transfer Pricing Rules

• Transactions between the French branch and the Irish head office must adhere to transfer pricing rules to ensure they are conducted at arm’s length.

Social Security Contributions

• The branch must also adhere to French social security obligations for employees working in France.

Double Taxation Relief

The French-Irish double tax treaty helps mitigate the risk of double taxation. Key provisions include:

Tax Credits and Exemptions

• The Irish parent company can claim tax credits or exemptions in Ireland for the taxes paid in France on the branch’s profits, ensuring that the same income is not taxed twice.

Mutual Agreement Procedure

• If there are disputes regarding the taxation of the branch, the treaty provides for a mutual agreement procedure where the tax authorities of both countries can resolve the issue.

Branch vs. Subsidiary: Key Differences

Deciding between establishing a branch or a subsidiary in France involves understanding the differences in tax treatment, legal implications, and administrative requirements.

Corporate Income Tax

Corporate income tax refers to the tax imposed on the net income of the company. Understanding the tax rates and rules in France is essential for determining the overall tax burden.

• French Subsidiary: A French subsidiary will be subject to the French corporate income tax rate of 25% (as of 2022) on its worldwide income.

• Branch: A branch will be subject to French corporate income tax on the profits attributable to its activities in France. The profits of the branch will also be taxable in Ireland, but double taxation relief can be claimed under the Ireland-France tax treaty.

Legal Structure and Liability

The legal structure determines the company's form and the liability it holds. This impacts the legal obligations and protections available to the parent company.

• French Subsidiary: As a separate legal entity, the subsidiary will have limited liability, protecting the Irish parent company’s assets.

• Branch: A branch is not a separate legal entity; the Irish parent company is directly liable for the branch’s obligations and debts in France.

Value-Added Tax (VAT)

VAT is a consumption tax levied on the value added to goods and services. Companies must comply with VAT registration and reporting requirements.

• French Subsidiary: The subsidiary will need to register for VAT in France. The standard VAT rate is 20%, with reduced rates for certain goods and services.

• Branch: The branch must also register for VAT in France and comply with the same VAT regulations as a subsidiary.

Transfer Pricing

Transfer pricing rules govern the pricing of transactions between related entities to ensure that they are conducted at arm's length and reflect market conditions.

• French Subsidiary: Must comply with French transfer pricing rules, documenting the arm’s length nature of intra-group transactions with the Irish parent company.

• Branch: Transfer pricing rules apply to transactions between the branch and the Irish head office, ensuring that profits are appropriately allocated.

Withholding Taxes

Withholding taxes are taxes withheld at the source on payments such as dividends, interest, and royalties to non-residents. These taxes can impact cross-border transactions.

• French Subsidiary: Subject to withholding taxes on dividends, interest, and royalties paid to the Irish parent company. The Ireland-France tax treaty may reduce these rates.

• Branch: No withholding taxes on profit remittances to the Irish head office, as it is considered part of the same legal entity.

Social Security Contributions

Social security contributions are payments made to fund social insurance programmes, covering aspects like healthcare, pensions, and unemployment benefits which are equivalent to PRSI.

• French Subsidiary: Responsible for French social security contributions for its employees, which are significantly higher than in Ireland.

• Branch: Also responsible for French social security contributions for employees working in the branch.

Local Taxes

Local taxes include various taxes imposed by local authorities, such as business property tax and value-added contributions.

• French Subsidiary: Subject to local taxes such as the business property tax (CFE) and the business value-added contribution (CVAE).

• Branch: Similarly subject to local French taxes based on its activities and presence.

Tax Incentives and Credits

Tax incentives and credits are benefits offered by the government to encourage certain business activities, such as research and development.

• French Subsidiary: Eligible for French tax incentives, such as R&D tax credits and regional or sector-specific incentives.

• Branch: Also eligible for French tax incentives, though claiming them may be more complex due to its status as an extension of the Irish company.

Compliance and Reporting

Compliance and reporting refer to the obligations to file various tax returns and maintain records in accordance with local regulations.

• French Subsidiary: Must file all required French tax returns independently, including corporate tax, VAT, and social security returns.

• Branch: The branch must also file French tax returns, but its profits are reported as part of the Irish company’s tax filings in Ireland, with appropriate double taxation relief.

Loss Relief

Loss relief refers to the ability to offset losses against profits to reduce taxable income.

• French Subsidiary: A subsidiary can only return losses to the Irish parent company upon liquidation.

• Branch: A branch can surrender losses back to the Irish head office each year, allowing the parent company to offset these losses against its profits.

Key Differences Between a French Subsidiary and a Branch

• Legal Status: A subsidiary is a separate legal entity, whereas a branch is an extension of the Irish company.

• Liability: A subsidiary has limited liability, protecting the parent company’s assets, while a branch does not.

• Taxation: A subsidiary is taxed on its worldwide income in France, while a branch is taxed only on its French-source income.

• Withholding Taxes: A subsidiary’s profit remittances to the parent company are subject to withholding taxes, while a branch’s remittances are not.

• Loss Relief: A branch can surrender losses to the Irish head office annually, whereas a subsidiary can only return losses to the parent company upon liquidation.

Conclusion

By carefully considering these factors, an Irish company can make an informed decision about the most advantageous structure for its operations in France, ensuring compliance and optimising its tax position. Whether choosing to establish a branch or a subsidiary, understanding the implications of each option is crucial for successful international expansion.