Tax optimisation is essential for business leaders operating internationally.
What tax strategies and arrangements are recommended to minimise the tax burden? To begin with, a company domiciled for tax purposes in France and generating profits in Dubai must take certain steps to optimise its revenues. It is important to note that any company domiciled for tax purposes in France is required to declare all of its worldwide income, with tax domicile determined by the company's registered office.
Take the example of a company whose registered office is in France: that company will be required to declare all of its income, including that generated in the United Arab Emirates. In tax terms, a company's profit is defined as the difference between taxable income and deductible expenses. In other words, profit represents the amount on which the company will be taxed, demonstrating the viability of its activity.
Prerequisites: Ensuring Economic Substance for Your Dubai Subsidiary
In international tax law, the concept of "economic substance" is essential to ensuring appropriate tax compliance. For a Dubai subsidiary, this means establishing real and significant economic activity in the country where the company is registered. This includes establishing various tangible elements such as local employees, physical assets, generated revenues and expenses related to the company's operations. To create solid economic substance, it is crucial that the company engages in genuine commercial activities. This may take the form of selling products or services, hiring local staff, acquiring assets necessary for operations and investing in local projects. Although the tax treaty between France and the United Arab Emirates does not explicitly mention economic substance, it requires the creation of an autonomous permanent establishment, ensuring that the subsidiary has sufficient physical and functional presence to be considered an independent entity. This requirement is essential if the subsidiary is to meet international standards for a fixed place of business. Once this economic substance has been established, two methods can be considered to optimise the company's profits for tax purposes.
Parent-Subsidiary Regime
In France, all companies are subject to corporate income tax. However, it is possible to optimise a company's tax position by putting in place an appropriate financial arrangement. The "Parent-Subsidiary" regime is an attractive option for companies domiciled for tax purposes in France but with international operations, such as in the United Arab Emirates. Under French tax legislation, the "parent company" is exempt from taxation on dividends received from its subsidiary, provided the latter is held at a minimum of 5%. This system avoids double taxation of profits (corporate tax) on dividends received. To benefit from this exemption, several conditions must be met:
The subsidiary must be held at a minimum of 5% by the parent company.
The subsidiary must be subject to corporate income tax.
The subsidiary must be established in the European Union or in a country that has signed a tax treaty with France (the United Arab Emirates meets this criterion).
There must be no cross-shareholdings between the companies, meaning the companies must not hold shares in one another.
For example, if a parent company is domiciled in France, it may own a subsidiary abroad, such as in the United Arab Emirates. This arrangement allows the parent company, which is a French tax resident, to avoid paying tax on dividends received from the subsidiary. Profits generated by the subsidiary, subject to corporate income tax in the country of origin — except in the Emirates where corporate tax was not yet in force — can be transferred as dividends to the parent company. These dividends will then be taxed at 5% for the share of costs and expenses only, in accordance with Articles 145 and 216 of the French General Tax Code (CGI). This exemption must be declared on the parent company's tax form 2058-A.
Tax Consolidation
The tax consolidation system allows a group of companies to file a consolidated tax return. This means that the companies within the group are not considered as separate tax entities, but as a single taxpayer in the eyes of the tax authorities.
Under this system, the profits and losses of each company in the group are consolidated, resulting in specific accounting entries. This process makes it possible to determine the total amount of corporate income tax owed by the group. Tax consolidation is particularly advantageous for reducing tax costs, notably by avoiding double taxation and optimising tax deductions. To benefit from this regime, the parent company must hold at least 95% of the capital of each consolidated company, either directly (by the same shareholders) or indirectly (via a company held by the same shareholders).
In addition, sales of fixed assets within the group are exempt from corporate income tax, although sales of shareholdings are subject to a 12% tax on the share of costs and expenses. Dividends distributed between consolidated companies are also exempt from corporate income tax, but are subject to a 1% share of costs and expenses.
This regime facilitates the tax management of groups of companies by consolidating financial results and optimising tax charges, while complying with the required ownership and consolidation conditions.
Making the Most of Your Tax Advantages
A company can put in place a tax optimisation system by adopting the approaches described above. However, it is crucial that these strategies are based on genuine and effective economic substance. Without this substance, an abuse of rights could be identified, with unfavourable tax consequences. To guarantee effective and compliant tax optimisation, it is therefore imperative that the company's operations are substantial and tangible. In other words, the tax strategies put in place must reflect genuine economic activity and not merely tax arrangements. Ensuring this economic substance avoids the risk of reclassification by the tax authorities and maximises the benefits of your tax optimisation.