NAUD & SWARTZ
49, boulevard de Courcelles
Téléphone : 33 (0)1 44 29 23 23
Télécopieur (Fax) : 33 (0)1 42 27 90 85
Branch or Subsidiary in France
Advantages and Disadvantages
Legal nature of branch / subsidiary
A branch is an office through which a foreign company engages in business
in France. The branch has no independent legal personality (although it is
treated in some respects as though it were independent for tax and foreign
financial relations purposes). It follows that the foreign company is directly
and fully responsible for all liabilities and undertakings of its French
The subsidiary company, on the other hand, is a separate legal entity created
under and governed by French law. It is an independent entity from the foreign
parent company shareholder and, in principle, shareholders have no liability
for the debts or undertakings of the subsidiary, the recourse of the subsidiary's
creditors or co-contracting parties being limited to the assets of the subsidiary.
As a practical matter, even where group financial standing and corporate
policy effectively excludes the possibility of a subsidiary's bankruptcy,
the existence of limited liability at the subsidiary level - involving the
theoretical but legal possibility of leaving the subsidiary's creditors,
employees, tax office, etc. with no recourse beyond the subsidiary's assets
- may permit a favorable negotiated solution which would not be possible
where there exists no legal possibility of limiting liability to the French
subsidiary company's assets.
French law permits ensuring essentially the same measure of parent company
control over a subsidiary as that of head office control over a branch office.
The subsidiary offers a somewhat greater measure of flexibility in the sense
that, as opposed to the branch office, it may issue or transfer shares to
third parties (partners, investors, venture capitalists, managers, employees
or other group companies within the framework of a reorganization or joint
venture). It may also issue bonds or shares to the public and obtain quotation
on a stock exchange.
On the other hand, the subsidiary form renders applicable a law entitling
employees to profit participation when the company's activities reach certain
Despite the generally greater security that a branch form accords to creditors,
by reason of the direct legal liability of the foreign company, in practice
local government administrations, banks, suppliers and customers frequently
seem to feel more comfortable dealing with a locally incorporated company
(although they may nonetheless request the foreign parent's guarantee).
Foreign exchange control considerations
Foreign exchange controls have been abolished in France and it is virtually
inconceivable, in light of France's membership in the European Union and
adoption of the Euro currency, that such controls would be reinstated.
Foreign investment control considerations
At the present time, the creation of both branch office and subsidiary require
neither advance declaration nor approval. Only the acquisition of certain
existing business activity exercised in France requires advance declaration
and may, in limited cases, be the object of a government veto. See the Phillips
Giraud Naud & Swartz Firm Memorandum "Foreign Direct Investment in France".
Commercial lease law considerations
The lease of commercial premises in France confers upon the lessee a kind
of property right in the lease, in the form of a renewal right which cannot
be contractually excluded. In case of refusal by the landlord to renew
the lease at its expiration, the lessee is entitled to an indemnity representing
the prejudice caused to it by the non-renewal.
The law provides that this "renewal right", which is one of the key elements
conferring a monetary value upon commercial lease rights, does not benefit
non-French companies (other than companies established under the laws of
a European Economic Area member state) unless there exist reciprocal rights
in the foreign country in question. Since relatively few countries have comparable
commercial lease legislation, branch offices of U.S. or Japanese companies,
for example, do not benefit from the renewal right.
In certain cases, for example in the case of prime location retail sales
premises, the monetary loss to which the absence of the lease renewal right
could give rise would dictate the use of a subsidiary rather than a branch.
Both branch and subsidiary are subject to French company tax on their net
profits, the rules applicable being essentially the same.
There remain, however, several differences:
- a branch office is taxable on income effectively connected with its
activities (no tax being due on unrelated French source income of the foreign
company); a subsidiary is taxable on its entire worldwide income except that
which is effectively connected with a branch office outside France. Nothing,
however, prevents the foreign company from directly engaging in transactions
in France in which the subsidiary or branch is not involved;
- a branch office is not permitted to deduct royalties paid to its foreign
head office or interest on loans from its foreign head office; head office
source financing may, however, transit through another group company or,
in the case of financing, through a bank, in which case the relevant royalties
or interest may be deducted; in the case of a subsidiary, there is a limit
upon the deductibility of interest paid to the parent company based upon
the ratio of loans to capital; indirect loans may also escape from these
- if the losses of a subsidiary company exceed one half of its capital,
certain measures must be taken to make third parties aware of that fact and
to remedy the situation within a two-year period. No such obligation exists
for a branch office.
- French source income booked by a foreign head office must be included
in the French branch's taxable income if such income is "effectively connected
with" the branch office's operations.
- a branch may deduct a reasonable allocation of head office administration
expenses. In the case of a subsidiary, a deduction is only permitted for
clearly identified administrative services invoiced by the parent or other
- no value-added tax is due upon services invoiced between a head office
and a branch; since companies outside the European Union cannot deduct VAT
paid unless they export goods to the European Union, there are certain cases
in which using a branch rather than a subsidiary to render services would
effectively reduce the amount payable by the foreign company.
- depending upon the rules for fiscal consolidation applicable in the
country of the head office, branch profits may be taxable in such country
and branch losses may be deducted from head office profits; this factor sometimes
leads to choice of structure where losses are initially anticipated.
- the fact that the head office and branch are the same legal person permits
the French tax administration to require submission of the head office accounts
and other information (and thus be in a better position to challenge allocations
or interoffice transactions);
- a subsidiary benefits from the provisions of the tax treaties existing
between France and other countries, this is generally not the case for a
branch office (which in some cases also may not benefit from the provisions
of the treaties concluded by the country in which its head office is located);
- there exists a 25% "distribution tax" on branch after-tax profits;
this tax is reduced or eliminated by most tax conventions concluded by France;
when due, the distribution tax is collected annually together with tax on
corporate income, it can be refunded upon submission of proof that the foreign
company paid no dividends relating to the year in question;
- in the case of non-reimbursable funds made available by a parent to
a subsidiary other than through a capital increase (often called subsidies),
the amounts in question are treated as taxable income of the subsidiary and
are, in addition, subject to value added tax at a 19.6 % rate if the subsidy
is considered "commercial" as opposed to "financial" in nature.
Concerning transformation of branch into subsidiary (and vice-versa)
The contribution in kind or transfer of the assets and activities of a French
branch of a foreign company to a French subsidiary of that company may give
rise to both a transaction tax (droit d'enregistrement) and capital gains
tax, the tax basis for which may include a goodwill element based upon the
In certain cases, a tax-free contribution may be possible; however, it may,
depending upon the circumstances, require a tax administration ruling and
effective limitations upon the right to transfer the subsidiary's shares
during a three-year period.
The transformation of a subsidiary into a branch office of a foreign company
can also be envisaged within the framework of a European reorganization.
Once again, there may be French tax consequences, and a ruling may be required
in order to avoid taxation of capital gains.
The transformations may also give rise to tax consequences in other countries
whose entities participate therein.
If the likelihood of a later transformation is anticipated at the time of
the initial investment, the potential tax consequences of transformation
should be examined, particularly if it is expected that the branch or subsidiary's
business will become highly profitable.
Although filing fees are approximately the same, the costs of establishing
a subsidiary will be somewhat higher by reason of the additional paperwork
represented by the preparation of articles of incorporation, etc. However,
registering a branch requires a French translation of the company's Articles
of Incorporation, and the difference in establishment costs remains relatively
There is also a minimum capital requirement in the case of most subsidiaries,
while no minimum amount need be invested in a branch office. The minimum
capital an S.A., S.A.S. or S.A.S.U is € 37,000, of which at least 50% must
be paid up at the time of incorporation. Since August 1, 2003 there is no
longer a minimum capital for an SARL or EURL; however, at least 20% of the
capital must be fully paid up at the time of incorporation, and the Supreme
Court has held that shareholders may be held personally liable if the capital
is manifestly insufficient for the intended activity.
Operationally, the branch does not require a statutory auditor (required
by an S.A., S.A.S. or S.A.S.U. and, in limited cases, by an S.A.R.L. or E.U.R.L.);
however, required accounting services will otherwise be comparable (except
to the extent allocations of head office administrative expenses must be
prepared and later defended). As opposed to the subsidiary, no annual legal
and registration fees are required (in connection with shareholder and board
meetings) other than upon the occasion of changes of the branch manager,
branch office, etc.
Annual branch filing requirements are somewhat more onerous since they bear
upon both the foreign company's accounts and the branch's accounts.
On net balance, the branch is somewhat less expensive. The amounts involved
however, are such that they would not normally control the decision as to
the structure to be employed.
European Single Market aspects
In theory, the single "borderless" market introduced in 1993 and the Euro
currency introduced in 1999 should make the traditional country by country
subsidiary formula less attractive than a single "European" company operating
throughout the Community, or several companies each having responsibility
for defined regions (not necessarily corresponding to national borders).
Various groups have commenced reorganizations along these lines, in some
cases transforming their subsidiaries into branches.
In practice, it will probably take time for French public opinion and practice
to fully assimilate the idea of "European" as opposed to "French" companies;
although the European Union has recently adopted a Directive which, when
implemented, will result in a European Company form which may be incorporated
in any member state and which will no doubt accelerate the process. Language
and cultural differences, will remain in existence for some time to come.
It is therefore possible that the existence of local sales or service provider
companies will, at least for the foreseeable future, continue to prove commercially
more effective. Even if this is the case, it of course will not prevent
logistics functions such as importing, assembly, warehousing, after sales
service and administrative services from being consolidated and regrouped
"behind the scenes".
There exist no serious obstacles to being present in the French market through
either the branch or the subsidiary form of organization. Both forms are
employed in practice, and although the subsidiary form remains, for the moment,
more common, the use of branches is increasing.
Unless relevant tax or cost factors lead to a different conclusion in a specific
case, it seems likely that, at this time, the advantages of the local subsidiary
formula will generally continue to outweigh the disadvantages.
NOTE FOR U.S. INVESTORS
Use of a E.U.R.L or S.A.S.U. forms of company will permit a U.S. corporate
shareholder to elect that the French subsidiary be treated as a branch office
for U.S. Federal Corporation Tax purposes under the Internal Revenue Service
gcheck-the-boxh regulations. Such election in no way affects French tax
treatment; however, it permits combining limited liability in France with
taxation in the U.S. as a foreign branch of a U.S. company. Use of the S.A.R.L
or S.A.S. forms of company permit an election that the French companies be
treated as partnerships for U.S. Federal Tax purposes. No such election
is possible for the S.A. company form.
September 1, 2003
This Memorandum is not a legal opinion.
It reflects published or known laws, regulations
and practices as of the date set forth.
It does not seek to treat all possible hypotheses nor pretend
to furnish advice concerning concrete fact situations