Tax optimization is essential for managers of companies operating internationally.
So, what strategies and tax arrangements are recommended to minimize the tax burden?
To begin with, a company domiciled for tax purposes in France and generating profits in Dubai needs to take certain steps to optimize its income. It is important to note that any company domiciled for tax purposes in France is obliged to declare all its worldwide income, the tax domicile being determined by the company's registered office.
Take the example of a company whose head office is in France: this company will have to declare all its income, including that from 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 business.
Prerequisites: Ensuring economic substance for your subsidiary in Dubai
In international tax law, the notion of “economic substance” is essential to ensure proper tax compliance. For a subsidiary in Dubai, this means establishing real and significant economic activities in the country where the company is registered
This includes the establishment of various tangible elements such as local employees, physical assets, revenues generated and expenses related to the company's operations.
To create a solid economic substance, it is crucial that the company engages in genuine commercial activities. This can take the form of selling products or services, hiring local staff, acquiring assets needed for operations, and investing in local projects.
Although the tax treaty between France and the United Arab Emirates does not expressly mention economic substance, it does require the creation of an autonomous permanent establishment, guaranteeing 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 fixed place of business.
Once this economic substance has been established, two methods can be envisaged to optimize the company's profits for tax purposes.
Parent-daughter optimization
In France, all companies are subject to corporate income tax. However, it is possible to optimize a company's tax position by setting up a suitable financial arrangement. The “Mother-Daughter” 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 law, the “parent company” is exempt from taxation on dividends received from its subsidiary, provided the latter is at least 5% owned. This system avoids double taxation of profits (corporate income tax) on dividends received. To benefit from this exemption, several conditions must be met:
For example, if a parent company is domiciled in France, it can own a subsidiary abroad, such as in the United Arab Emirates. This arrangement enables the parent company, which is resident in France for tax purposes, to avoid paying tax on dividends received from the subsidiary. Profits made by the subsidiary, which are subject to corporate income tax in the country of origin, except in the United Arab Emirates where corporate income tax is not yet in force, can be transferred in the form of 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 2058-A tax form.
Tax consolidation
The tax consolidation system enables a group of companies to file a consolidated tax return. This means that the companies in 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 establish the total amount of corporate income tax due by the group. Tax consolidation is particularly advantageous for reducing tax costs, notably by avoiding double taxation and optimizing tax deductions. To benefit from this regime, the parent company must hold at least 95% of the capital of each consolidated company, whether 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 equity interests are subject to a 12% tax on the share of costs and expenses. Dividends distributed between consolidated companies, they 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 corporate groups by consolidating financial results and optimizing tax charges, while complying with the required ownership and consolidation conditions.
Take advantage of your tax benefits
A company can set up a tax optimization system by adopting the approaches described above. However, it is crucial that these strategies are based on real and effective economic substance. Without such substance, abuse of rights could be found, with adverse tax consequences.
To ensure effective and compliant tax optimization, 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 just purely tax arrangements. Ensuring this economic substance avoids the risk of requalification by the tax authorities and maximizes the benefits of your tax optimization.