Foreign Holding Companies: Why Substance Is No Longer Enough
Contested tax residence, beneficial ownership denied, suspicion of a privileged tax regime and, now, a tax on passive holding companies: the foreign holding company has never been so exposed. An overview of a case law full of twists and turns.
There is nothing unlawful about holding one's shareholdings through a Luxembourg, Swiss, Belgian or Singaporean company. The Court of Justice has said so since Cadbury Schweppes (CJEC, 12 September 2006, C-196/04): establishing oneself in a State to benefit from more favourable legislation is not, in itself, an abuse. "In itself" only. For the French tax authorities now have a particularly well-stocked arsenal to neutralise the foreign holding company, and the tax courts very often side with them. Three battlegrounds emerge.
I. Tax residence: the registered office protects nothing
The place of effective management, the decisive criterion
Since the Paupardin decision (Conseil d'État, 16 April 2012, No 323592), the place of effective management is where the persons holding the most senior positions take the company's strategic decisions. The place where the board meets is only one indicator among others (CE, 7 March 2016, No 371435, Compagnie internationale des wagons-lits): what matters is where decisions are actually prepared, even if they are formally adopted elsewhere.
Recent illustrations are severe and consistent:
a holding company that had transferred its seat to Luxembourg, where it had only a 13 m² office at a domiciliation agent and an accountant present a few hours a week, while contracts continued to be signed in Paris (CE, 15 March 2023, No 449723);
a Luxembourg company whose seconded local manager acted only on the instructions of the two French-resident shareholders (Nantes Administrative Court of Appeal, 27 January 2023, No 21NT02375);
a Singaporean holding company whose local "director" signed only after having been specifically authorised to do so (Montreuil Administrative Court, 14 February 2025, No 2314660);
a Luxembourg holding company that did hold its board and shareholder meetings locally, but merely implemented decisions "it had not inspired" (Rouen Administrative Court, 18 November 2025, No 2305065);
a brand-holding company effectively managed from its French establishment, as revealed by dawn raids (Toulouse Administrative Court of Appeal, 11 June 2026, Sté Mark Holding).
Heavy financial consequences
Recharacterisation means all of the company's profits are taxed in France. Above all, since the activity is deemed undisclosed, the authorities apply the 80% surcharge and the ten-year reassessment period. The taxpayer can escape this only by demonstrating an error, assessed in particular in light of the level of taxation in the other State and the existence of exchange of information (CE, plenary, 7 December 2015, No 368227; CE, 27 November 2020, No 428898). In Mark Holding, the court thus reduced the penalty from 80% to 40%, as the company had duly declared a permanent establishment in France and its Luxembourg premises were not a mere letterbox.
Liability to tax: a better-defined risk
Treaty residence requires being "liable to tax". An entity exempt by reason of its status or activity is not (CE, 9 November 2015, No 370054, LHV; CE, 20 May 2016, No 389994, Easyvista). Conversely, exemption of certain income only does not cause loss of residence (CE, 2 February 2022, No 443018), and the criterion does not require effective taxation (CE, 30 September 2025, No 490793, Sté Lolie). An important point for Franco-Swiss practice: the Versailles Administrative Court held that a Swiss parent company benefiting from the "participation reduction" remains a resident of Switzerland, even if during the period it received only exempt income (Versailles Administrative Court, 8 December 2025, No 2301090, Sté Sunnen).
II. Outbound dividends: the beneficial-owner battle
An autonomous concept, an objective evidentiary regime
Since the CJEU's "Danish" cases (26 February 2019, C-115/16 and C-116/16 in particular), beneficial ownership is an autonomous condition, distinct from abuse. The Conseil d'État has drawn all the consequences: the authorities need not demonstrate fraudulent intent; it is enough for them to produce elements calling into question the status of the apparent beneficiary, and it is then for the taxpayer to prove the contrary (CE, 5 June 2020, No 423809, Eqiom and Enka). This condition applies even where the treaty does not expressly provide for it (CE, 8 November 2024, Sté Foncière Vélizy Rose).
The courts reason on the basis of a body of evidence: identical amount, nature and near-simultaneity of the inbound and outbound flows; a 100% ownership chain; a pure holding company without resources or autonomy. In Foncière Vélizy Rose, the dividend had been passed on the day after it was received. But the trend is hardening: a holding company that does not redistribute may also be disregarded for lack of substance (Versailles CAA, 27 May 2021, Alphatrad; Paris CAA, 6 November 2025, Transart International), and the existence of material and human resources does not immunise the company where the flow-related indicators are consistent.
The Planet solution: a narrow way out
Where the holding company is disregarded, it remains possible to invoke the treaty between France and the State of residence of the true beneficiary (CE, 20 May 2022, No 444451, Sté Planet). It is still necessary to establish the payment, its French source, the identical nature of the income, its connection with the initial flow and the residence of the ultimate beneficiary. In practice, taxpayers most often fail on the evidence (Paris Administrative Court, 19 November 2025, No 2400552, SAS Colbravo).
Article 119 ter CGI: a breach opened by EU law
This is the good news: the courts of appeal of Nantes (7 October 2025, No 24NT02819, Centigon Holdings France) and Paris (27 January 2026, No 24PA02158, Aaxen) have held that the requirement of a place of effective management in a Member State, laid down by Article 119 ter, does not appear in the Parent-Subsidiary Directive. It is enough that the company is regarded as resident by its State of establishment and does not have its treaty tax domicile outside the Union, without any need to identify the Member State where its place of management is located. The European Commission, moreover, sent France a letter of formal notice on 11 March 2026.
Treaty clauses: vigilance remains essential
The Sunnen case, already cited, shows the other side of the coin: although resident in Switzerland, the holding company was nevertheless refused the exemption under Article 11 of the Franco-Swiss treaty. Controlled by non-residents, with no employees or premises of its own, it failed to show that the ownership chain pursued any objective other than the treaty benefit: alleged but undocumented coordination functions are not enough. In the same vein, a Tangier offshore holding company subject to a flat-rate tax could not benefit from the Franco-Moroccan treaty (Paris CAA, 30 April 2026, No 24PA04972). Finally, Article 119 bis A CGI, commented on in the BOFiP on 16 March 2026, introduces for certain treaties a precautionary withholding tax, refunded only on proof, supported by a substance file.
III. Privileged tax regime, holding-company tax, abuse of law: the noose tightens
Privileged tax regime: a welcome clarification
Is a foreign holding company whose dividends and capital gains are fully exempt subject to a privileged tax regime within the meaning of Article 238 A, for want of any add-back for costs and expenses? The question arose from the L'Air Liquide (CE, 15 November 2021) and Axa (CE, 5 July 2022) decisions, which treat that add-back as taxation at a reduced rate, and the Versailles court had answered in the affirmative (6 June 2024, No 22VE00325, appeal pending). On 10 June 2026, the authorities ruled the other way: a foreign regime of equivalent exemption is not, on its own, privileged for the purposes of Article 209 B, "even in the absence of any add-back". Uncertainty remains as to whether this position carries over to Article 123 bis, which concerns individuals.
Tax on passive holding companies: the international blind spot
Applicable to financial years ending on or after 31 December 2026, the tax targets companies controlled by more than 50% by an individual, holding at least €5 million in assets and receiving mainly passive income. A formidable feature: where the holding company is foreign, the taxpayer is no longer the company but the French-resident shareholder, unless it is demonstrated that the foreign location is not intended to circumvent French legislation. This difference in treatment makes the scheme's compatibility with the free movement of capital seriously debatable. Its interaction with tax treaties containing a "wealth" article is also an open question.
Abuse of law: from substance to raison d'être
The main lesson is probably here. Material substance does not prove the absence of abuse: a Luxembourg company carrying on a genuine financial activity has seen its interposition disregarded for lack of any economic, organisational or financial motive (CE, plenary, 25 October 2017, No 396954, Verdannet). Conversely, the absence of resources is not enough to establish artificiality (CE, 27 January 2011, Bourdon). Legal scholarship now distinguishes three tests: reality (premises, directors, functioning of corporate bodies), rationality (why this company, why there?) and effectiveness (its real involvement in the transaction). Faced with a holding company which, by nature, requires few resources, it is the structure's raison d'être that the courts look for. The Abuse of Law Committee illustrated this by issuing an opinion unfavourable to the authorities where the interposed companies held other shareholdings, bore genuine costs and had directors on site (session of 11 September 2025, case No 2025-19).
In practice: five reflexes
Audit actual governance: who decides, from where, and what written records prove it?
Document the holding company's non-tax raison d'être (group organisation, financing, succession, foreign partners) from the moment it is formed.
Monitor the flows: a dividend passed on unchanged within a short time is the first indicator the authorities look for.
Build the evidence file in advance (residence certificates, bank records, identity and residence of the ultimate beneficiaries).
Model now the impact of the tax on passive holding companies and check eligibility for the safeguard clause.
The foreign holding company is not doomed. But it must now be conceived, governed and documented as a genuine business, not a mere address. That demonstration is prepared before the audit, not during it.
Frequently asked questions on the taxation of foreign holding companies
Can a foreign holding company be taxed in France?
Yes. If its place of effective management is in France, that is, if strategic decisions are actually prepared and taken there, the holding company is taxable in France on all its profits, even if its registered office is in Luxembourg, Switzerland or Singapore. The authorities may also apply the 80% surcharge for undisclosed activity and a ten-year reassessment period.
Is holding board meetings abroad enough to fix tax residence there?
No. The place where corporate bodies meet is only one indicator. The courts look for where decisions are actually inspired and prepared: a mere domiciliation, a local manager acting on instructions or the absence of own resources regularly lead to the place of effective management being located in France.
What is the beneficial owner of a dividend?
It is the person who actually has the right to use and enjoy the dividend, without being obliged to pass it on to a third party. A pure holding company, without resources or autonomy, which passes on the dividends it receives within a short time is in principle not regarded as the beneficial owner and loses the exemption or reduced withholding tax rate. In practice, the burden of proof lies on the taxpayer.
Can a European holding company still benefit from the withholding tax exemption under Article 119 ter CGI?
Yes, provided it is the beneficial owner of the dividends. The administrative courts of appeal of Nantes (7 October 2025) and Paris (27 January 2026) have also held that the requirement of a place of effective management in a Member State is not compatible with the Parent-Subsidiary Directive: it is enough that the company is resident in a Member State under its legislation and does not have its treaty tax domicile outside the Union.
Who pays the tax on passive holding companies when the holding company is located abroad?
Where the holding company is foreign, the taxpayer is not the company but the French-resident individual shareholder who controls it, unless it is demonstrated that the foreign location is not intended to circumvent French tax legislation. The tax applies to financial years ending on or after 31 December 2026.
How can a foreign holding company be secured against a tax audit?
By documenting, before any audit, three elements: the reality of the structure (governance, resources, place of decision-making), its rationality (the non-tax reasons for its existence and location) and its effectiveness (its actual role in the transactions). Material substance is necessary, but it is the holding company's raison d'être that the courts look for.
Eve d'ONORIO di MEO
Partner, Certified Specialist in Tax Law
Alister Avocats (Marseille) – D'Onorio di Meo Avocats (Geneva)
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