US LLC, Gulf holding, offshore structure: why the undistributed profits of a low-taxed foreign entity are taxed in France.
A French resident holds a company in a low-tax jurisdiction, a US LLC set up to house a securities portfolio, a holding established in a Gulf jurisdiction, or an offshore structure receiving financial income. As long as the company distributes nothing, the individual assumes that these profits, accumulated abroad, escape French tax. The opposite is true. French tax law has two formidable anti-deferral devices, article 123 bis of the General Tax Code for individuals and article 209 B for companies, which allow the profits of a low-taxed foreign entity to be taxed in France even though no distribution has taken place.
These devices rest on a simple idea: locating income, mainly financial, in an entity subject to a privileged tax regime must not allow French taxation to be deferred indefinitely. Recent case law, concerning transparent structures such as the US LLC, and the evolution of European Union law, which now requires the deduction of the tax paid by the foreign entity, profoundly renew the field and call for heightened vigilance from any holder of a foreign participation.
We first present the two devices and their common logic (I), then their concrete application through the case of the US LLC and transparent entities (II), before examining the framing by EU law, the safe-harbour clauses and our recommendations (III).
I. Two anti-deferral devices: articles 123 bis and 209 B
A. Article 123 bis, for individuals holding a foreign financial entity
Article 123 bis of the French General Tax Code (CGI) subjects to income tax the share of profits realised by a legal entity established outside France and held by an individual resident in France, where three conditions are met. The person must hold, directly or indirectly, at least 10 % of the shares, interests, financial rights or voting rights of the entity. The entity must be subject to a privileged tax regime within the meaning of article 238 A of the CGI, that is, taxed there at a level more than 40 % lower than it would be in France. Finally, its assets or estate must be mainly composed of financial and monetary assets, which targets cash or portfolio management structures rather than operating businesses.
A tax on undistributed profits. Where these conditions are met, the profits and positive income of the foreign entity are deemed to constitute investment income of the French resident, taxable in their hands even though no distribution has occurred. The deferral that the accumulation of profits in the foreign structure would allow is thus neutralised. The taxable profits are reconstructed under the rules of the CGI, as if the entity were subject to corporate income tax in France, which entails, as we shall see, significant consequences as regards the applicable preferential regimes. This device, old but regularly reactivated, is one of the main tools against the offshoring of passive income by individuals.
B. Article 209 B, its transposition to companies
Article 209 B of the CGI pursues the same objective with respect to legal persons subject to corporate income tax. Where a company established in France operates a business outside France, or holds directly or indirectly more than 50 % of the securities of a foreign entity subject to a privileged tax regime, the profits of that business or entity are deemed to constitute taxable income of the French company. This mechanism, which corresponds to the controlled foreign company (CFC) rules, aims to prevent groups from lodging profits in low-taxed subsidiaries without any real economic counterpart.
An exception based on substance. Article 209 B contains an exemption clause where the foreign entity carries on an effective industrial or commercial activity. Within the European Union, the device applies only to artificial arrangements designed to circumvent tax, in line with the requirements of the Court of Justice's case law. The logic is consistent with that which runs through the whole of contemporary international tax law: low taxation is reprehensible only where it corresponds to no real economic activity. A genuine operating subsidiary, endowed with means and carrying on an effective activity, in principle escapes the reattribution of its profits, whereas a financial shell is fully exposed to it.
II. The US LLC and transparent entities
A. The transparency that becomes a trap
The case of the limited liability company (LLC) held by a single member resident in France offers a striking illustration of how article 123 bis works. In the United States, a single-member LLC is treated as a transparent entity, indeed a disregarded one for tax purposes, so that it pays no tax there on its profits. From the French standpoint, that same LLC is assimilated to a sole-member undertaking falling under the partnership regime, hence to a structure whose profits would be taxable in France if it were established there. The combination of these two characterisations produces a decisive result: the entity paying no tax in its State of incorporation while its profits would be taxable in France, it is regarded as benefiting from a privileged tax regime.
This analysis, adopted by recent administrative case law, turns US tax transparency into a trap for the ill-informed French resident. What, in the eyes of US law, is a simplification becomes, under article 123 bis, the very criterion for taxing in France the undistributed profits of the LLC. The holder who believed they had sheltered their financial income finds themselves taxed in France on sums they have never received, as investment income. The reasoning is transposable to many other transparent or exempt structures established outside France.
B. The terms of taxation: a double-edged regime
The application of French preferential regimes. Since the entity's profits are reconstructed as if it were subject to corporate income tax in France, case law allows the application of the corresponding preferential regimes, in particular the parent-subsidiary regime where the entity itself receives dividends from subsidiaries. This transposition can significantly reduce the profit deemed distributed to the resident, which is a tempering favourable to the taxpayer. The reconstruction is therefore not mechanically unfavourable, and a fine analysis of the applicable rules can substantially mitigate the taxable basis.
The limits arising from the absence of a treaty. The flip side lies in the refusal of certain advantages reserved to entities established in the Union or in a State linked to France by a tax treaty on administrative assistance. The 40 % allowance applicable to distributed income, provided for in article 158 of the CGI, has thus been refused in respect of a US LLC, for want of meeting this condition. Likewise, the application of the France-United States tax treaty was set aside on the ground that neither the member nor the LLC was taxable in the United States, a position whose consistency with the assimilation of the LLC to a partnership may be debated. This tension illustrates the complexity of a device where the characterisation retained at one stage entails consequences at others, sometimes unfavourable, sometimes protective.
III. EU law framing and safe-harbour clauses
A. Safe-harbour clauses and rebuttal evidence
Neither device is an irrebuttable presumption. Article 123 bis contains a safe-harbour clause that sets aside its application where the taxpayer shows that holding the entity has mainly an object and an effect other than locating profits in a State with a privileged tax regime. This clause, initially reserved for entities established in the European Union, has had its scope extended by the interpretive reservations of the Constitutional Council, which allow the taxpayer to adduce rebuttal evidence, including for entities established outside the Union, as well as to establish that the income actually realised is lower than the lump-sum amount sometimes retained. These safeguards give the good-faith taxpayer, whose structure answers a real economic logic, a substantial means of defence.
The same logic animates article 209 B, whose application within the Union is confined to artificial arrangements. The decisive boundary remains that of substance: a structure endowed with real means and carrying on a genuine activity can escape the devices, whereas a shell intended to capture passive income remains fully exposed. The taxpayer must therefore be able to document the economic reality of their presence, failing which the safe-harbour clause will remain a dead letter.
B. ATAD 1 and the compatibility of article 209 B
The most notable development comes from EU law. The directive of 12 July 2016 laying down rules against tax avoidance practices, known as ATAD 1, requires Member States to allow the taxpayer subject to the controlled-foreign-company rules to deduct from their tax liability the tax actually paid by the foreign entity, in order to avoid economic double taxation. The Court of Justice of the European Union, in a judgment of 26 February 2026, condemned a Member State that had not transposed this obligation, holding that, where a directive exhaustively regulates a question, Member States cannot neutralise one of its rules in the name of allegedly more protective domestic measures.
A serious question over French law. This decision invites reflection on the compatibility of article 209 B of the CGI with the ATAD 1 directive, since the French device was not amended following its entry into force. Under domestic law, the tax paid by the foreign entity is creditable in France only if it is of the same nature as French corporate income tax, which excludes, for instance, taxes on capital or on turnover. This restriction could prove incompatible with the deduction obligation laid down by the directive, as interpreted by the Court. The groups concerned have, in our view, every interest in examining the avenues of challenge that this development opens, in particular where they have borne abroad taxes that are not creditable under current French law.
C. Practical recommendations: characterise, document, anticipate
Characterise each foreign entity held. The first precaution is to analyse, for each foreign participation, whether it falls within the scope of article 123 bis or article 209 B, by examining the local level of taxation, the composition of the assets and the percentage of ownership. Transparent or exempt structures, foremost among them single-member US LLCs, deserve particular attention, because their favourable treatment abroad is precisely what triggers taxation in France.
Document substance and prepare the safe-harbour clause. Where the holding answers a real economic logic, one must gather, from the outset, the elements that establish that the structure does not have as its main object the location of profits in a privileged regime. Human and material means, effective activity, the economic rationale of the presence: these elements found the safe-harbour clause and must be documented contemporaneously, not reconstructed at the time of an audit.
Re-examine the crediting of foreign taxes in the light of ATAD. For companies subject to article 209 B, the evolution of EU law justifies a re-examination of the taxes paid abroad and their creditability in France. Where taxes that are not creditable under current domestic law have been borne, a compatibility analysis with the directive may open up avenues of challenge. We assist our clients in this audit and in securing their foreign participations.
Conclusion
Articles 123 bis and 209 B of the CGI deprive of all effect the strategy of accumulating passive income in a low-taxed foreign entity. Whether the holder is an individual or a company, the undistributed profits of a financial structure subject to a privileged tax regime are taxable in France, subject only to the safe-harbour clauses based on substance and economic rationale. The case of the US LLC shows that foreign tax transparency, far from protecting, can constitute the very criterion of French taxation.
Our conviction is that holding low-taxed foreign entities can no longer be contemplated without a rigorous analysis of their substance and of their treatment under these devices. At the same time, the evolution of EU law, which requires the deduction of the tax paid by the controlled entity, opens up avenues of challenge that groups would be wrong to neglect.
Our recommendation is clear: have each foreign participation characterised under articles 123 bis and 209 B, document the substance of structures that answer a real economic logic, and re-examine, for companies, the crediting of your foreign taxes in the light of the ATAD directive. Anticipation is here the only effective protection against taxation on profits never received.
Frequently asked questions
I hold a US LLC: am I taxable in France on its profits?
Probably, if you are a French tax resident and the LLC mainly holds financial assets. A single-member LLC is not taxed in the United States, which causes it to be regarded as benefiting from a privileged tax regime in the French sense. Article 123 bis of the CGI then allows its profits to be taxed in your hands, as investment income, even in the absence of any distribution. US tax transparency, meant to simplify, here becomes the triggering criterion for taxation in France.
What is the difference between article 123 bis and article 209 B?
Article 123 bis targets individuals resident in France holding at least 10 % of a foreign financial entity subject to a privileged tax regime, whose profits are taxed to income tax as investment income. Article 209 B targets companies subject to corporate income tax holding more than 50 % of a foreign entity with a privileged regime, whose profits are reattributed to the French company. The two devices share the same anti-deferral logic and contain safe-harbour clauses based on economic substance.
How can the application of article 123 bis be avoided?
By showing that holding the entity has mainly an object and an effect other than locating profits in a State with a privileged tax regime, which presupposes real economic substance and rationale. This safe-harbour clause, initially reserved for entities established in the European Union, has been extended by the Constitutional Council's reservations to entities established outside the Union. The taxpayer may also establish that the income actually realised is lower than the amount sometimes retained on a lump-sum basis. Contemporaneous documentation of substance is decisive.
Is article 209 B compatible with European Union law?
The question is seriously raised. The ATAD 1 directive requires the deduction of the tax paid by the controlled foreign company, and the Court of Justice held, in 2026, that a Member State cannot neutralise this rule in the name of stricter domestic measures. Yet article 209 B of the CGI allows foreign tax to be credited only if it is of the same nature as French corporate income tax, which excludes certain taxes. This restriction could be incompatible with the directive, opening up avenues of challenge for companies that have borne non-creditable taxes.