Should I Set Up a Branch or a Subsidiary in France? Understanding the Differences and Tax Implications
If you’re looking to expand your business to France, one of the most important decisions you’ll need to make is whether to set up a branch or a subsidiary. Both structures allow foreign companies to operate in France, but they differ in terms of their legal, financial, and tax implications. In this article, we’ll take a closer look at the differences between a branch and a subsidiary, and the respective tax regimes associated with each.
1. What is a Branch?
A branch is a non-autonomous part of a foreign company that carries out business activities in France. It is not a separate legal entity from the parent company, and the parent company remains fully liable for the branch’s actions and debts. A branch can perform a wide range of activities in France, such as sales, marketing, distribution, research and development etc…
From a tax standpoint, a branch is treated as a permanent establishment of the parent company in France. This means that the branch’s profits are subject to French corporate income tax at the same rate as a French company (currently 25%). The taxable income of the branch is calculated by considering the revenues, expenses, and assets attributed to the French branch. The parent company may also be required to pay social contributions on the salaries paid to employees working in France.
It’s important to emphasize that the tax treatment of a branch may depend on the tax treaty between France and the country where the parent company is based. Some tax treaties may exempt a branch from French corporate income tax if the branch’s activities are limited to preparatory or auxiliary activities.
2. What is a Subsidiary?
A subsidiary is a separate legal entity incorporated under French law, and it operates independently from the parent company. A subsidiary can have its own management, employees, assets, and liabilities. The parent company may hold all or part of the subsidiary’s shares, and it may appoint some or all of the subsidiary’s directors.
From a tax perspective, a subsidiary is treated as a French company and is subject to French corporate income tax at the same rate as any other French company (currently 25%). The subsidiary’s taxable income is calculated based on its own revenues, expenses, and assets, without any direct link to the parent company’s financial statements. The parent company may receive dividends from the subsidiary, which are generally subject to withholding tax (but that taxation depends on tax treaties provisions).
3. Key Differences Between a Branch and a Subsidiary
The main differences between a branch and a subsidiary can be summarized as follows:
- Liability: A branch does not have a separate legal personality from the parent company, which means that the parent company is fully liable for the branch’s debts and liabilities. In contrast, a subsidiary is a separate legal entity, and its liability is limited to its own assets.
- Autonomy: A branch is not autonomous from the parent company, and it does not have its own management, employees, or assets. In contrast, a subsidiary is a fully autonomous entity that can operate independently from the parent company.
- Taxation: A branch is subject to French corporate income tax on its profits, which are calculated based on the revenues, expenses, and assets attributed to the French branch. A subsidiary is also subject to French corporate income tax, but its profits are calculated based on its own financial statements, without any direct link to the parent company’s financial statements.
4. Which Structure Should You Choose?
The choice between a branch and a subsidiary will depend on several factors, including the nature of your business activities in France, your financial goals, and your legal and tax considerations. Here are some general guidelines :
- Legal Requirements and Costs
Setting up a branch in France is generally less complex and less expensive than incorporating a subsidiary. To establish a branch, you’ll need to register with the French Trade and Companies Register, obtain a tax identification number, and appoint a legal representative in France. You’ll also need to provide various documents from your parent company, such as the articles of association and the financial statements. The costs of setting up a branch vary depending on the complexity of your business operations and the fees charged by your legal and accounting advisors.
In contrast, incorporating a subsidiary requires more formalities and paperwork, such as drafting the articles of association, selecting the board of directors, and depositing the share capital in a French bank account. You’ll also need to comply with ongoing legal and administrative requirements, such as filing annual accounts, holding shareholders’ meetings, and appointing statutory auditors. The costs of incorporating a subsidiary depend on the size and complexity of your business, the share capital required by law, and the fees charged by your legal and accounting advisors.
- Business Activities and Objectives
The choice between a branch and a subsidiary may also depend on the nature and scope of your business activities in France. If you plan to have a limited presence in France, such as a sales office or a small team of employees, a branch may be a more flexible and cost-effective solution. A branch can be established quickly and easily, and it allows you to have direct control over the operations and the staff in France. You can also benefit from the parent company’s brand and reputation, and you can avoid duplicating administrative and legal functions.
On the other hand, if you plan to develop a substantial business in France, such as a manufacturing plant, a distribution network, or a research center, a subsidiary may be a more appropriate option. A subsidiary provides a separate legal entity that can enter into contracts, own assets, and assume liabilities on its own behalf. This can protect the parent company from potential risks and disputes, and it can also facilitate fundraising and partnerships with French investors and customers. A subsidiary also allows you to benefit from the French legal and tax framework, and to adapt your business model to the local market conditions.
In conclusion, setting up a branch or a subsidiary in France involves different legal, financial, and tax considerations that depend on your specific business objectives and circumstances.
While a branch may be a simple and cost-effective way to establish a presence in France, it also entails some limitations and risks, such as a lack of autonomy and a potential exposure to the parent company’s liabilities. A subsidiary, on the other hand, provides a more independent and protected structure that can support a long-term and diversified business strategy, but it also requires more formalities and costs.
We recommend consulting with legal, tax, and accounting professionals who can help you evaluate your options and navigate the regulatory and administrative procedures in France. With the right expertise and guidance, you can make an informed decision that aligns with your business objectives and maximizes your success in France.
If you are still unsure about which structure to choose or need further guidance on legal and tax matters, it’s recommended to consult with a specialized firm such as AGN Avocats, which can provide you with tailored advice and support for your business expansion to France. Please get contact with our dedicated lawyers by clicking on www.agn-avocats.com