Foreign company run from France: the tax exposure

I. Place of effective management, the cornerstone of taxation in France

A. Territoriality of corporate income tax and the notion of a business operated in France

French corporate income tax rests on a principle of territoriality that sets it apart from most large foreign systems. Under article 209, I of the French General Tax Code (CGI), only profits earned through a business operated in France, together with profits whose taxation is allocated to France by an international treaty, fall within the scope of French tax. The principle cuts both ways: it excludes from French tax the profits of a foreign operation carried on by a French company, but it allows, conversely, a foreign-law company that in reality operates a business on French soil to be taxed in France. The company's nationality, its place of incorporation and the address of its registered office are, in this respect, not decisive.

The administrative guidelines specify the contours of this notion of operation in France (BOFiP, BOI-IS-CHAMP-60-10-10 and BOI-IS-CHAMP-60-10-30). A business is treated as operated in France where it carries on an activity there on a habitual basis, whether through an autonomous establishment, through representatives without independent professional standing, or by completing a full commercial cycle there. The establishment is characterised by an installation of a certain permanence endowed with its own autonomy within the legal entity. The place where management decisions are taken is, by its very nature, a material connecting factor, which explains why the place of effective management may, on its own, suffice to establish an operation in France.

B. Place of effective management and permanent establishment under tax treaties

Where a bilateral tax treaty applies, the analysis splits in two, because the French administrative courts reason according to the principle of subsidiarity: they first verify that the tax is well founded under domestic law, then check that no treaty provision stands in the way. Most treaties concluded by France, whether the France-Luxembourg treaty of 20 March 2018, in force since 1 January 2020, or the models inspired by the OECD Model Convention, define a resident of a State by reference to liability to tax there by reason of domicile, residence or place of management. Where a legal person is dual-resident, the decisive tie-breaker is precisely the place of effective management, that is, the place where strategic decisions are, in substance, taken.

Defining the place of effective management. Neither domestic law nor most treaties expressly define this notion, which case law has shaped over successive disputes. The place of effective management is understood as the place where the persons holding the most senior functions take the strategic decisions that determine the conduct of the enterprise's affairs as a whole. It is not to be confused with the place where a board of directors formally meets, nor with the address of a domiciliation provider, nor with the place of mere administrative or accounting execution. What matters is where the corporate will is actually formed, which calls for a concrete, case-by-case assessment of where real power lies.

The permanent establishment as a treaty relay. Where the foreign company is regarded as having its place of effective management in France, the authorities invoke the treaty concept of permanent establishment, generally defined (on the model of article 5 of the OECD Model Convention and, for Luxembourg, article 5 of the 2018 treaty) as a fixed place of business through which the enterprise carries on all or part of its activity. A place of management appears expressly, in those provisions, among the examples of installations capable of constituting a permanent establishment. The consequence is severe: the profits attributable to that permanent establishment, indeed the entire result where the company has no substance anywhere else, become taxable in France. The international dimension is plain, since the same operation is assessed simultaneously under French domestic law, the law of the State of the registered office, and the treaty linking them.

II. When the resident shareholder becomes a de facto director

A. The body of evidence: the lack of substance abroad

Proof of the place of effective management never rests on a single criterion but on a body of consistent indicia, which the court appraises on the facts. The first set of indicia concerns the poverty of substance in the State of the registered office. The authorities routinely point to the absence of dedicated business premises, the absence of employees, the absence of a dedicated telephone line or email address, and the exclusive reliance on a domiciliation, management and accounting provider. A company that is, in the foreign State, no more than a letterbox operated by a third-party provider offers little resistance to recharacterisation, because it has locally no human or material means enabling it to form and carry out a genuine corporate policy.

The second set of indicia, more telling still, concerns the French location of the acts of management. Documentary checks frequently reveal that the accounts are kept under French standards, that some invoices pass through an accounting firm established in France which in turn instructs the foreign providers, or that the local providers have no decision-making autonomy and systematically defer to a contact resident in France. Where documents seized at the director's home or at the French premises of other group companies show that financial and strategic decisions are settled from France, the location of real power is no longer in doubt. Recent administrative case law, in particular several rulings handed down in 2025 and 2026 concerning Luxembourg holding companies held by a single French shareholder, illustrates this fact-driven approach.

B. The shareholder's role and the de facto director doctrine

The most delicate, and most instructive, point concerns the characterisation of the resident shareholder's role. A shareholder, even a sole one, is entitled to take an interest in the company, to ask questions, to demand accounts: this is the conduct of the diligent shareholder, which does not suffice to shift the place of management. Everything changes where the shareholder exceeds the prerogatives normally attaching to the status of member and interferes in day-to-day management. Case law accordingly applies the characterisation of de facto director, close to the notion of master of the business (maître de l'affaire), where the person personally takes the company's financial decisions, management decisions and strategic orientations.

The absence of a formal office is no shield. A key lesson from recent case law deserves to be stressed forcefully: the fact that the shareholder holds no formal corporate office, has no signing authority and no power over the company's bank accounts in no way prevents characterisation as a de facto director. What is sought is not the title but the real power. As soon as the resident shareholder has a direct and decisive involvement in the conduct of the company's affairs, that person is deemed to manage the company effectively from France, and the company's place of management is located there accordingly. This dissociation between legal form and economic reality lies at the heart of the authorities' audit strategy.

The burden of proof and its shift. It is, in principle, for the authorities to establish, through objective evidence, that the place of effective management is in France. However, where the indicia gathered are sufficiently precise and consistent, the burden of rebuttal shifts to the taxpayer, who must then demonstrate the reality of an autonomous management exercised from abroad. That demonstration is, in practice, all the harder where the company has been stripped of any local substance. Hence the importance, for anyone structuring a foreign presence, of building a robust evidence file in advance, a point to which we return below.

III. Tax consequences and a prevention strategy

A. Cumulative reassessments: corporate income tax and value added tax

Recharacterising the place of management first entails subjecting the company to French corporate income tax on the profits attributable to the French permanent establishment, which most often means the entire result where the company carries on no genuine activity elsewhere. The effect does not stop at profits tax. For value added tax purposes, the place of taxation of services is determined by reference to the place where the supplier has established its business, a notion that likewise refers to the place where the essential management decisions are taken and where central administration functions are carried out (CGI, art. 259; Directive 2006/112/EC on the common system of VAT). Where that place is located in France, the services invoiced by the foreign company become taxable there, resulting in often substantial VAT reassessments that come on top of the corporate income tax reassessments.

The supposed neutrality of VAT does not erase the reassessment. Taxpayers frequently argue that the uncollected VAT would in any event have been deductible by the customer, so that the reassessment would be economically neutral. That argument is regularly set aside, in particular where the reverse-charge mechanism does not apply to the configuration at hand, or where the customer would not have had a full right of deduction. Prudence therefore dictates never to bank on alleged neutrality to play down the risk, all the more so since VAT reassessments come with late-payment interest and, where applicable, the relevant surcharges.

B. The undisclosed-activity penalty: 80 % surcharge and ten-year statute of limitations

The most formidable consequence lies in the characterisation of an undisclosed activity. Under article 1728, 1, c of the CGI, the failure to declare an activity that the taxpayer has not made known to a business formalities centre or to the commercial court registry, and for which the taxpayer has not met its filing obligations, triggers an 80 % surcharge on the evaded tax. Correlatively, article L. 169 of the Book of Tax Procedures (LPF) extends the authorities' reassessment period from three to ten years in the presence of an undisclosed activity. A foreign company with no French filings, whose place of management is later recognised on national soil, stands in the front line of this regime, since by hypothesis it has never declared the activity attributable to its French permanent establishment.

The good-faith escape, a narrow door. The taxpayer may try to escape the 80 % surcharge and the ten-year period by showing that it made a mistake justifying its failure to comply, for instance by invoking a legitimate belief that the tax was foreign. This escape is narrowly construed. The court examines whether the taxpayer could reasonably have been mistaken as to its obligations, and takes into account, where relevant, the tax advantage actually derived from the foreign arrangement to rule out good faith. Where the tax differential in favour of the foreign jurisdiction is significant, the excusable-error argument loses most of its force, and both the aggravated surcharge and the extended limitation period are upheld.

C. Practical recommendations: build and document substance

Locate decision-making power where the registered office is. The first rule, and the simplest to state, is that effective management must genuinely be exercised from the State of the registered office. This requires the management bodies to meet there, the strategic decisions to be actually debated and settled there, and the local directors to have real autonomy rather than the role of a mere rubber stamp. A director resident in France who wishes to retain strategic control of a foreign company must understand that such control, exercised from France, is precisely what triggers the risk; the answer lies in credible governance entrusted to persons present in the State of establishment.

Endow the company with substance proportionate to its activity. Substance is not just an address. It is measured by the human and material means the company has locally: premises put to professional use, qualified staff, equipment, genuine financial and banking autonomy. This substance requirement, already central in domestic law, is reinforced by the evolution of European Union law and by the international standards arising from the OECD BEPS project, which all converge on a single idea: the tax advantage attaching to a foreign location is justified only where a genuine economic activity is carried on there. A company without substance is today exposed not only in France but across the entire treaty and European chain.

Build an evidence file contemporaneous with the decisions. Because the burden of rebuttal may shift to the taxpayer, the traceability of governance is decisive. Detailed minutes of management bodies held in the State of the registered office, substantive agendas, documentation of financial arbitrages, service agreements reflecting a real allocation of roles: all of these must be created as matters unfold, not reconstructed for the purposes of an audit. A file put together after the fact, whose documents appear manufactured for the occasion, turns against the taxpayer. We assist our clients in setting up this documented governance, which is the best insurance against recharacterisation.