Luxembourg holding, Dubai company, Panama structure: in 2025 and 2026 France's Supreme Administrative Court set three limits on Article 123 bis of the CGI.
An entrepreneur resident in France placed part of his financial wealth, a few years ago, in a foreign company: a Luxembourg holding, a free zone company in the United Arab Emirates, a Panamanian entity receiving income from intangible rights. Profits accumulate there, lightly taxed or untaxed, and nothing is distributed. During an audit, often fuelled by international administrative assistance, the French tax authorities assess those profits as if he had received them, under Article 123 bis of the French General Tax Code. This anti-avoidance rule is often presented as an unstoppable weapon. Yet between November 2025 and July 2026, France's Supreme Administrative Court (Conseil d'État) handed down three decisions, all in favour of taxpayers, that redraw its boundaries.
The practical question is twofold. Under what precise conditions does a foreign company held from France expose its shareholder to Article 123 bis? And how does the rule interact with the flat-rate or zero-rate regimes offered by some jurisdictions, from the Moroccan offshore regime to Emirati free zones? Our position is clear: Article 123 bis is not an automatic presumption against every offshore structure. The court has set limits that protect taxpayers who document their file. But in the UAE, since the introduction of a federal corporate tax, the preferential regime condition will almost always be met, and the defence shifts to the nature of the assets, the legal form and proof of a non-tax purpose.
We first set out how Article 123 bis works (I), then the three limits laid down by the Conseil d'État (II). We then examine the interaction with tax treaties through the Moroccan example (III), before applying these lessons to Emirati structures and setting out our recommendations (IV).
I. How Article 123 bis of the CGI works
A. Three cumulative conditions
Article 123 bis of the French General Tax Code (Code général des impôts, CGI) targets individuals domiciled in France who hold, directly or indirectly, at least 10% of the shares, financial rights or voting rights of a legal entity (company, organisation, fiducie or comparable institution) established outside France. Where that entity is subject to a preferential tax regime and its assets mainly consist of securities, receivables, deposits or current accounts, its profits or positive income are deemed to be investment income of the individual, in proportion to their rights (CGI, art. 123 bis, 1). The rule belongs to the family of controlled foreign company (CFC) rules, applied here to individuals.
Broadly assessed holdings. Indirect holdings include rights held through a chain of interests, the percentage being obtained by multiplying the successive rates. They also include rights held by the spouse, ascendants and descendants, which count towards the 10% threshold without being included in the taxable income (CGI, art. 123 bis, 2). The threshold is also presumed to be met by the settlor or deemed settlor of a trust, and by any person who transferred assets to an entity located in a non-cooperative State or territory (CGI, art. 123 bis, 4 ter).
A comparative notion of preferential regime. Whether the regime is preferential is determined under Article 238 A of the CGI, by comparison with the tax a company subject to French corporate tax would have borne. Since 1 January 2020, an entity is treated as subject to a preferential regime if it is not taxable in its State or if the tax it pays there is 40% or more lower than the tax it would have owed in France under ordinary rules (CGI, art. 238 A, para. 2). This is a comparison of tax amounts, not headline rates, which leaves room for technical debates that recent case law has now resolved.
B. Heavy consequences, tempered by a safeguard clause
Profits are deemed received on the first day of the month following the close of the entity's financial year and are computed under French rules, as if the entity were subject to French corporate tax. Local tax is deductible if comparable to corporate tax. Where the entity is located in a State with no administrative assistance agreement with France, or in a non-cooperative State or territory, taxable income cannot be lower than a deemed amount computed on the entity's net assets (CGI, art. 123 bis, 3). Subsequent distributions are not taxed a second time, except for any excess over the income already taxed (CGI, art. 123 bis, 4).
A two-tier safeguard clause. The rule does not apply where the entity is located in an EU Member State, or in a State linked to France by an administrative assistance agreement and by a recovery assistance agreement comparable in scope to Directive 2010/24/EU, which is not non-cooperative, if the holding cannot be regarded as an artificial arrangement designed to circumvent French tax law. For other States, the burden of proof is reversed: the rule is set aside if the taxpayer shows that the operation of the entity or the holding of its shares has a main purpose and effect other than locating profits in a low-tax State (CGI, art. 123 bis, 4 bis). Classifying the host State under these agreements is therefore an essential first step in any analysis.
II. Three judicial limits protecting the taxpayer
A. The preferential regime test takes the participation exemption into account
In Level One, a married couple owned the whole of a Luxembourg financial holding company (Soparfi), to which the husband had contributed his shares in a French limited liability company. The holding received dividends from its subsidiary that were exempt in Luxembourg. The tax authorities argued that this full exemption amounted to a preferential regime and taxed the holding's profits in the hands of the couple. The Conseil d'État held that the benchmark tax, namely the tax the entity would have owed "under ordinary conditions in France", includes the French parent-subsidiary regime (participation exemption) under Articles 145 and 216 of the CGI (CE, 30 June 2026, No. 496618, Level One, para. 5).
Fraus legis as the tax authorities' reserve. The court accepted that the tax authorities may rely on the general principle against fraud on the law (fraus legis) to disregard the participation exemption in the comparison, outside the formal abuse of law procedure. They must still prove that the contribution of shares could have had no motive other than tax, which they failed to do. The court also clarified the effect of the 5% add-back for costs and expenses: where costs actually incurred exceed that add-back, the dividends bear no French tax. Since the Luxembourg holding's costs exceeded the add-back, it would have paid no tax in France; it could not therefore be regarded as subject to a preferential regime, and the couple's assessment was discharged (same decision, paras. 12 to 14). For a passive holding with qualifying participations, the argument is now firmly established.
B. Assets are measured at real value, and an intangible right is not a receivable
Sunpex concerned a professional footballer who had granted a wholly owned Panamanian company the right to exploit his image. The tax authorities had taxed, under Article 123 bis, all the sums received by the company. The Conseil d'État recalled that the rule only targets entities whose assets consist, for at least half of their total value, of securities, receivables, deposits or current accounts. It held that this condition is assessed on the basis of the real value of the assets; the tax authorities may only use book value where the taxpayer fails to show that real value differs (CE, 12 Nov. 2025, No. 501567, Sunpex, para. 2).
Proof through expert valuation. The image right recorded as an asset of the company is not a receivable within the meaning of Article 123 bis. The taxpayers had produced an expert report valuing that right at EUR 9.3 million, i.e. 55.5% of total assets; the tax authorities, which merely relied on book value without challenging the report, could not dispute it for the first time before the Supreme Court (same decision, paras. 3 to 5). The lesson is methodological: a company with significant intangible or operating assets can fall outside the rule, provided their real value is established by a serious valuation produced during the litigation.
C. A transparent foreign company falls under Article 8, not Article 123 bis
In Addyx, a married couple had each set up a single-member Luxembourg limited liability company, to which they contributed their shares in a French advisory company. The tax authorities taxed the profits of these companies under Article 123 bis, with an 80% penalty for fraudulent practices. The Conseil d'État restated the method: the court must first identify, in light of the foreign company's features and governing law, which type of French company it resembles, and then derive the applicable tax regime (CE, 6 July 2026, No. 501276, Addyx, para. 4).
A narrowly defined scope. Relying on the legislative history of the 1999 Finance Act, the court held that Article 123 bis cannot apply to the profits of a foreign company comparable to one of the tax-transparent French companies covered by Article 8 of the CGI: the shareholder is then taxed directly on their share of profits, in the category matching the actual activity. Single-member Luxembourg limited liability companies, comparable to French limited liability companies whose sole shareholder is an individual, fell under Article 8 (CGI, art. 8, 4°); the assessment under Article 123 bis, made for a different year and in a different income category, was discharged with penalties (same decision, paras. 5 and 8). The ruling does not remove French taxation: it changes its legal basis, year and category, which is often enough to defeat a poorly grounded assessment.
III. Tax treaties and flat-rate regimes: the Moroccan example
A. A flat-rate levy is not a corporate income tax
Flat-rate regimes also matter where the foreign company receives French-source income and claims treaty benefits. A Moroccan holding company governed by Law No. 58-90 of 5 June 1991 on offshore financial centres had received dividends from its French subsidiary, subject to French withholding tax under Article 119 bis of the CGI. It sought a refund under Article 13 of the France-Morocco tax treaty of 29 May 1970, which exempts from withholding tax dividends paid to a beneficial owner domiciled in Morocco "if they are taxable in Morocco in the name of the beneficiary" (our translation).
The court's reasoning. The Paris Administrative Court of Appeal noted that Moroccan law subjected offshore holding companies, during their first fifteen years, to a flat-rate corporate tax, in full discharge of all other taxes on profits, set at the equivalent of USD 5,000 a year. It held that this flat levy, worth about EUR 4,300 and not based on the amount of profits, cannot be regarded as identical or similar to the corporate tax covered by the treaty. The dividends could not therefore be regarded as taxable in Morocco, and the treaty exemption was refused (CAA Paris, 30 Apr. 2026, No. 24PA04972, para. 8).
B. Residence forms and administrative guidance are not enough
Two further arguments were rejected and deserve practitioners' attention. First, form No. 5000 is merely a tax residence certificate: it does not establish that income is taxable, which can only follow from the law of the State of residence. The fact that the dividends had been reported to the Moroccan tax authorities was equally irrelevant. Second, the company relied on published French administrative guidance on the treaty under Article L. 80 A of the French Tax Procedure Code; the court held that this safeguard could not be invoked, since the withholding taxes challenged did not result from the reassessment of a prior tax (same ruling, paras. 8 to 10).
C. Cautious transposition to other zero-rate or flat-rate regimes
The wording of the France-Morocco treaty, which makes the exemption conditional on the dividends being taxable in Morocco, is specific, and the solution does not transpose mechanically to every treaty. It nonetheless reveals a clear trend: a regime that exempts profits, or replaces tax with a flat amount unrelated to them, does not allow the entity to claim treaty benefits that depend on taxation in the State of residence. The same logic drives Article 123 bis, whose key is a comparison with French tax. For any structure located in a preferential regime, the analysis should therefore proceed in two steps: exposure to Article 123 bis in the hands of the French-resident shareholder, and the possible loss of treaty benefits on French-source flows received by the entity.
IV. Application to Emirati structures and recommendations
A. After the federal corporate tax: a regime that remains almost always preferential
By Federal Decree-Law No. 47 of 2022, the United Arab Emirates introduced a corporate tax applying to financial years starting on or after 1 June 2023, at 9% on profits above AED 375,000. Free zone entities meeting the relevant conditions (Qualifying Free Zone Persons) benefit from a 0% rate on qualifying income (official WAM news agency, 9 Dec. 2022). This tax does not take Emirati structures outside Article 123 bis. A 9% rate on a comparable base will generally produce a tax more than 40% lower than French corporate tax, and a 0% rate is by definition a preferential regime.
The comparison remains concrete. The lessons of Level One nevertheless apply fully. For an Emirati holding receiving dividends from participations that would have qualified for the French participation exemption, the comparison must include that exemption: if the holding would have paid little or no French tax on those dividends, the absence of tax in the UAE does not, on its own, amount to a preferential regime. The analysis must therefore be carried out flow by flow and year by year, not on headline rates alone.
B. The single-member free zone company: Article 123 bis or Article 8?
Many Emirati structures held by French residents are single-shareholder free zone companies. Addyx calls for a systematic preliminary question: is the company comparable to a French limited liability company whose sole shareholder is an individual, in which case it falls under Article 8 of the CGI rather than Article 123 bis? The answer depends on the features of each legal form (liability limited to contributions, nature and transferability of shares, management structure) and must be established on the basis of its governing law. It matters: under Article 8, the shareholder is taxed every year on their share of profits, in the category matching the actual activity (business or professional income), not as investment income.
This recharacterisation can be a decisive defence against an assessment based solely on Article 123 bis, as in Addyx. It is also a point of attention upfront: a French resident who is the sole shareholder of such a structure must understand that escaping Article 123 bis does not mean escaping French tax, but rather being taxed differently, potentially more heavily where the activity is operational.
C. Substance, proof of a non-tax purpose and the firm's position
Where the host State does not meet the conditions of the first limb of the safeguard clause, the taxpayer must show that the operation of the entity or the holding of its shares has a main purpose and effect other than locating profits in a low-tax State. That proof rests on concrete elements: premises, employees, locally resident managers, local clients, contracts signed and performed locally, decisions taken in the host State. A company reduced to a registered address and a bank account will not succeed.
Our position. Article 123 bis should be treated as a technical rule whose every condition can be debated, not as an automatic sanction against any offshore structure. The 2025 and 2026 decisions show that the tax authorities lose when they rely on book values, headline rate comparisons or loose characterisation of the legal form. Conversely, a taxpayer who documents neither the real value of the assets, nor the legal form of the company, nor the substance of its presence, is exposed to annual taxation of profits never received. For any foreign structure held from France, we recommend an audit covering the characterisation of the legal form, asset composition at real value, a quantified comparison with French tax and, where relevant, a substance file.
Conclusion
Within eight months, the Conseil d'État set three major limits on Article 123 bis of the CGI. The preferential regime is assessed by comparison with French tax, participation exemption included (Level One). Asset composition is assessed at real value, and an intangible right is not a receivable (Sunpex). A foreign company comparable to a French tax-transparent company falls under Article 8, not Article 123 bis (Addyx). In parallel, the Paris Administrative Court of Appeal confirms that a flat-rate levy unrelated to profits does not unlock treaty benefits that depend on actual taxation.
We are convinced that the defence against Article 123 bis is won through technique and evidence. In the UAE, where the federal corporate tax has not removed the preferential character of the regime, the debate will increasingly turn on legal form, asset composition and substance.
We recommend that any French resident holding at least 10% of a lightly taxed foreign company have their position reviewed before any audit. The cost of that review bears no comparison with annual taxation of undistributed profits, with social levies and, where applicable, the 80% penalty for fraudulent practices.
Frequently asked questions
When does Article 123 bis of the French tax code apply to a company held abroad?
It applies where an individual domiciled in France holds at least 10% of an entity established outside France, subject to a preferential tax regime, whose assets mainly consist of securities, receivables, deposits or current accounts. The entity's profits are then taxed each year in the individual's hands as investment income, even if not distributed. A safeguard clause can set the rule aside where there is no artificial arrangement or, outside the EU, where a mainly non-tax purpose is proven.
Is a Dubai company subject to a preferential tax regime under French law?
In most cases, yes. The 9% UAE federal corporate tax rate, and a fortiori the 0% rate on qualifying income of free zone companies, generally results in tax 40% or more lower than French tax. The comparison must nevertheless be made case by case, taking into account the participation exemption the company could have claimed in France, as the Conseil d'État held in 2026.
Does a single-shareholder foreign company escape Article 123 bis?
It can, if it is comparable to a French limited liability company whose sole shareholder is an individual. The Conseil d'État held in July 2026 that such a company then falls under Article 8 of the French tax code: its shareholder is taxed directly on their share of profits, in the category matching the activity. This does not remove French tax, but changes its legal basis, year and category, which can defeat an assessment based on Article 123 bis.
Can an offshore company subject to a flat-rate tax claim treaty benefits?
Not where the treaty benefit requires the income to be taxable in the State of residence. The Paris Administrative Court of Appeal held in April 2026 that a Moroccan flat-rate tax of USD 5,000 a year, unrelated to profits, is not similar to corporate tax. The dividends received from France were therefore not taxable in Morocco within the meaning of the treaty, and French withholding tax was upheld.