Substance & Establishment France 2025 | BEPS/ATAD Requirements, Anti-abuse

Economic Substance: Critical Issue

In the post-BEPS (Base Erosion and Profit Shifting) and ATAD (Anti-Tax Avoidance Directive) context, economic substance requirements have become essential. A structure without real substance risks tax requalification, loss of treaty benefits, and significant penalties.

What is Economic Substance?

Economic substance demonstrates that a company has real presence and conducts effective activity. Key elements analyzed by French tax authorities:

• Physical premises: Office adapted to activity, not just a mailbox address
• Qualified personnel: Competent employees on site, in sufficient number
• Effective management: Strategic decisions made in France
• Operational capacity: Real means to conduct the declared activity
• Documentation: Minutes, contracts, correspondence attesting to activity

Permanent Establishment (PE)

A permanent establishment is created when a foreign company has a fixed installation in France through which it conducts business. The PE is taxable in France on its French-source profits.

PE Creation

• Fixed installation: Office, branch, factory, workshop
• Construction site: Duration exceeding 12 months
• Dependent agent: Person habitually concluding contracts on behalf of the company
• Computer server: Possible under case law (rare)

PE Consequences

• French taxation of profits attributable to PE
• Filing obligations (tax returns, VAT)
• Withholding taxes on certain flows
• Social obligations if staff in France

French ATAD Anti-abuse Rules

France has transposed EU ATAD I and II directives with several mechanisms:

Mechanism	Description	Application
CFC (art. 209 B CGI)	French taxation of profits from low-tax foreign subsidiaries	If ≥50% ownership and foreign tax <40% of French theoretical tax
Interest limitation	Cap on deductibility of financial charges	30% of fiscal EBITDA or €3M
Hybrid mismatches	Neutralization of asymmetries (double deduction, deduction without inclusion)	Hybrid instruments and entities
Exit tax	Taxation of latent capital gains on residence transfer	Transfer of seat or assets outside France
General anti-abuse clause	Reintegration of benefits from artificial arrangements	Main tax purpose without economic substance

Substance for Holdings

French holdings are subject to particular scrutiny. To benefit from the participation exemption (régime mère-fille) and capital gains exemption, they must demonstrate:

• Local governance: Board of directors/supervisory board meeting in France
• Investment decisions: Analysis and approvals made in France
• Dedicated personnel: At minimum an effective manager, ideally a team
• Adequate premises: Office enabling real exercise of functions
• Documentation: Meeting minutes, analysis notes, correspondence
• Financial means: Own financing capacity (not just back-to-back)

Risks in Case of Substance Failure

• Tax residence requalification: Company may be considered resident in another country
• Loss of tax treaty benefits: Reduced rates refused
• Challenge to participation exemption: Dividend taxation
• Taxation as French income: Dividends, interest, royalties
• Penalties: 40% (deliberate default) to 80% (abuse of law)
• Criminal sanctions: In case of characterized tax fraud

Compliance Best Practices

• Initial audit: Assess current substance level
• Action plan: Identify corrective measures
• Documentation: Build a substance file
• Governance: Formalize decision-making processes
• Regular review: Update documentation annually
• Transfer pricing: Ensure consistency with transfer pricing policy