This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.
A number of French tax provisions on non-residents are not applied so long as the taxpayer is resident in an EU or EEA country. However, if the UK leaves both the EU and the EEA, there will be adverse tax consequences for UK companies operating in France.
Under French Controlled Foreign Company (CFC) rules, the profits of foreign subsidiaries, defined as being 50% owned by the parent, can be subject to tax in France if they are established in a 'tax haven'. A tax haven is defined as a state where the effective local tax burden is less than half of that which the company would have faced in France.
However, in most cases the rules do not apply within the EU provided the overall scheme cannot be deemed to be without any substance.
Current UK plans include a reduction in corporation tax to 17% in 2020. If the UK leaves the EU, and if French corporate tax remains higher than 34%, UK subsidiaries of French entities will fall under the CFC rules unless the parent company can prove that the siting of its subsidiary in the UK is not driven by the lower taxes applied there.
In the case of a corporate migration from France to the UK, an exit tax is due but the company can apply to spread payments over five years. This will no longer be possible if the UK leaves the EEA. If it leaves the EU but remains in the EEA, however, the spread payments will continue to be allowed.
Leaving the EU will also mean that UK groups no longer gain the benefit of the Parent-Subsidiary Directive or the EU Interest and Royalties Directive. However the double tax treaty that was entered into by the UK and France in June 2008 gives exemptions on dividends, interest and royalties. Brexit would therefore not affect the repatriation of profit from French subsidiaries to a UK parent company.
Brexit would also have no impact on the bilateral agreements that exist with Jersey, Guernsey and the British Virgin Islands, as those territories are already outside the EU.
The French consolidated tax regime is available when a French tax parent group holds an eligible French affiliate indirectly though a company established in an EEA state, or when French sister companies are both held by an EEA parent company. As long as the UK remains in the EEA, if not the EU, it will be able to take advantage of this regime.
Overall, from a French standpoint, the UK remaining in the EEA would limit the tax impact of leaving the EU as well as creating a new basis for economic relations.
Paris-based Franck Lagorce, partner and Steven Guthknecht, senior associate, are tax experts at Pinsent Masons, the law firm behind Out-Law.com.