Tax classification of US LLCs after the Carmejane ruling: limited liability now the preponderant criterion
A French tax resident holding a US-formed Limited Liability Company could, until recently, rely with reasonable confidence on the expectation that the entity would be treated, under French tax law, as a transparent partnership whose profits were directly attributable to its members. Over the course of a decade, the French administrative courts of appeal had built a consistent analytical framework whose conclusion appeared settled: the non-electing LLC was, in the vast majority of cases, assimilated to a partnership within the meaning of Article 8 of the French Tax Code (Code général des impôts, CGI). That certainty has now been shattered.
In a ruling handed down on November 12, 2025 (CE, 8th-3rd combined chambers, No. 502894, Ministre v. Carmejane LLC), the Conseil d'État (France's highest administrative court) fundamentally reconfigured the hierarchy of criteria used to classify foreign entities. The Court held that, where the bundle of indicators reveals structural hybridity, that is, where the entity's characteristics are spread relatively evenly between partnership and corporate features, the limitation of members' liability to the amount of their contributions constitutes the preponderant criterion that tips the classification towards a corporation. This decision overturns the position of the courts of appeal, which had expressly neutralised this criterion, and ushers in a period of major uncertainty for French tax residents who are members of US LLCs.
Our analysis proceeds in three stages. We first examine the methodology for classifying foreign entities as it existed before the Carmejane ruling and the way in which that ruling reshaped its architecture (I). We then analyse the precise scope of the Conseil d'État's decision and the reasons why limited liability has become a determinative marker of opacity (II). Finally, we draw out the practical consequences for French-resident LLC members, in a context where transparency can no longer be presumed (III).
I. The classification methodology: from a bundle of indicators to a hierarchy of criteria
A. The foundational framework: the Artémis in concreto analysis
The governing principle. The Conseil d'État established, in a landmark decision rendered by its full tax bench on November 24, 2014 (CE, plén. fisc., No. 363556, SA Artémis), the methodological framework governing the tax classification of any foreign-law entity under French law. When the tax judge is asked to rule on the tax treatment of a transaction involving an entity formed under a foreign legal system, the judge must first identify (having regard to all the characteristics of the entity and the law governing its formation and operation) the type of French-law entity to which it is most closely comparable. Only after completing this classification exercise may the judge determine the applicable tax regime: subjection to corporate income tax under Article 206 CGI (for corporations, known as "opaque" entities) or direct taxation of profits in the hands of the members under Article 8 CGI (for partnerships, known as "transparent" or "translucide" entities). This framework has been consistently reaffirmed, notably in Joy Events Ltd (CE, 9th-10th combined chambers, July 25, 2025, No. 489925) and World Investment Corporation (CE, 9th-10th combined chambers, April 2, 2021, No. 427880).
The bundle-of-indicators approach. The classification exercise rests on a bundle of indicators (faisceau d'indices) rather than any single criterion. The judge examines all the legal characteristics of the foreign entity (as defined by the law of its state of formation and its own constitutional documents) and compares them with the distinguishing features of French legal forms. The objective is not to find a perfect match, since foreign legal forms often have no exact French counterpart, but to identify the closest French category. The Conseil d'État has further clarified, in the Poirel decision (CE, 9th-10th combined chambers, February 28, 2025, No. 491788), that this method applies to all forms of foreign entity, including common law partnerships and German Gesellschaft bürgerlichen Rechts (GbR), as confirmed by the Jabs ruling (CE, 9th-10th combined chambers, June 2, 2025, No. 492796).
The seven analytical criteria. An examination of the case law reveals seven criteria that systematically structure the court's reasoning: formation requirements (the simplicity of filing Articles of Organization versus notarial formalities and legal publications), management and governance (flexibility of the Operating Agreement versus mandatory governance rules), member liability (limited to contributions or unlimited and joint), effective tax treatment in the state of formation (transparency or opacity), capital structure and contributions (shares with a stated par value or simple membership interest percentages), transferability of interests (freely transferable or subject to unanimous consent), and treaty treatment (the classification adopted by the applicable bilateral tax treaty). Before the Carmejane ruling, the courts of appeal treated these seven criteria as carrying equal weight, with no explicit hierarchy among them.
B. Pre-Carmejane case law: presumed transparency based on the neutralisation of limited liability
The Feelware line of authority. The first significant decision was the Douai Administrative Court of Appeal's ruling of May 12, 2011 (No. 09DA01666, Feelware LLC). The Court examined a single-member LLC formed in the United States that had not made a check-the-box election (Treas. Reg. § 301.7701-3) and was therefore treated as a disregarded entity for US federal tax purposes. After reviewing the classification criteria, the Douai Court concluded that the LLC should be placed in the category of "partnerships and other transparent entities" under the France-US tax treaty of August 31, 1994, and assimilated to a partnership within the meaning of Article 8 CGI. The US tax regime of complete transparency was treated as the most decisive criterion, while the members' limited liability was relativised without being explicitly neutralised.
The Emerald Shores decisions. The Marseille Administrative Court of Appeal went further in two rulings concerning the same LLC (3rd chamber, February 2, 2017, No. 16MA02619; 4th chamber, April 6, 2021, No. 20MA00725). The Court expressly held that the mere fact that members' liability was limited in proportion to their participation was insufficient to assimilate the LLC to a French limited liability company. In other words, limited liability was formally neutralised as a classification criterion: it could not, on its own, compel classification as a corporation. This position found support in the official tax guidance, with the BOFiP acknowledging that foreign partnerships could be recognised as transparent even where their members enjoyed limited liability (BOI-INT-DG-20-20-30, August 12, 2015, § 120 et seq.).
The pre-Carmejane consensus. On the basis of this body of case law, the prevailing position was as follows: for a non-electing single-member LLC, six of the seven criteria (light formation requirements, flexible management, nominal capital, restricted transferability, US tax transparency, treaty treatment) converged towards transparency, while the sole discordant criterion (limited liability) was held insufficient on its own to reverse the classification. The non-electing LLC was therefore regarded, with near-certainty, as a transparent partnership. It is this certainty that the Carmejane ruling has dismantled.
C. The Carmejane turning point: when structural hybridity demands a hierarchy of criteria
The reversal of the courts of appeal. The Conseil d'État's ruling of November 12, 2025 (8th-3rd combined chambers, No. 502894, Ministre v. Carmejane LLC) marks a methodological break. The Court does not abandon the bundle-of-indicators framework (it retains it as the analytical structure) but it introduces, for the first time, a principle of hierarchisation. Where an examination of a foreign entity's characteristics reveals structural hybridity, that is, where the indicators are distributed relatively evenly between partnership and corporate features, the Conseil d'État holds that the limitation of members' liability to the amount of their contributions constitutes the preponderant criterion that tips the balance towards corporate classification. This position directly overturns the Emerald Shores case law, which had expressly neutralised this criterion, and retrospectively recharacterises the Douai Court of Appeal's position in Feelware as tainted by an error of law.
The underlying rationale. The rapporteur public Romain Victor set out the reasoning in his conclusions. Limited liability is not an incidental or accidental attribute of the LLC: it is its very raison d'être. It is precisely to obtain this asset protection that US practitioners choose the LLC form rather than a sole proprietorship or general partnership. In French law, the limitation of members' liability is the most structuring feature of the distinction between partnerships and corporations. In a société en nom collectif (SNC, the French general partnership), partners are jointly and severally liable for the partnership's debts without limit (Commercial Code, Art. L. 221-1); in a société à responsabilité limitée (SARL) or société anonyme (SA), their liability is limited to their contributions (Commercial Code, Art. L. 223-1 and L. 225-1). When the other criteria fail to produce a clear orientation, it is therefore logically the liability regime that must break the tie; because it is the most fundamental marker of the nature of the members' commitment to the entity.
II. The Carmejane LLC ruling: limited liability as the determinative marker of opacity
A. The facts and the question before the Conseil d'État
The factual background. The Carmejane case concerned a Delaware LLC whose sole member was a French tax resident. The LLC had not made a check-the-box election and was therefore treated as a disregarded entity for US federal tax purposes. The French tax authorities had issued a reassessment on the ground that the LLC should be assimilated to a corporation subject to corporate income tax, and that the amounts received by the member constituted taxable dividends. The taxpayer challenged this analysis by relying on the Feelware and Emerald Shores case law, arguing that the LLC displayed all the characteristics of a transparent partnership. The administrative court of appeal upheld the taxpayer's position, applying the classical analytical framework and neutralising limited liability in accordance with the Emerald Shores precedent.
The Minister's appeal. The Minister for the Budget appealed to the Conseil d'État, arguing that the court of appeal had committed an error of law by refusing to give limited liability the weight it deserved in the assessment of the bundle of indicators. The Minister contended that, faced with an entity whose characteristics were distributed relatively evenly between the two French categories, the limitation of liability should be treated as a determinative factor rather than a neutralisable criterion. The Conseil d'État upheld this appeal.
B. The error of law: neutralising limited liability in a context of hybridity
The Conseil d'État's reasoning. The Court quashed the court of appeal's decision for error of law. The Conseil d'État held that, where the analysis of a foreign entity's characteristics reveals structural hybridity, that is, where some features bring the entity closer to French partnerships while others bring it closer to French corporations, the judge cannot simply count the criteria favourable to each category and adopt whichever gathers the larger number. The judge must assess the relative weight of each criterion according to its legal significance within the French law distinction between partnerships and corporations. In this hierarchy, the limitation of members' liability occupies a preponderant position, because it is the most structuring feature of the distinction between the two categories under French company law.
The scope of the ruling. In holding that limited liability is the preponderant criterion in situations of hybridity, the Conseil d'État does not say that this criterion is always determinative, nor that it alone suffices to compel classification. It says that, where the other criteria fail to produce a clear orientation (which is precisely the case for the typical US LLC, whose characteristics are spread between the two categories) limited liability must tip the balance. This nuance is critical. It means that a foreign entity whose every other criterion converged massively towards partnership classification could theoretically remain transparent despite its members' limited liability. But in the case of the LLC, where hybridity is structural and constitutive, limited liability becomes the decisive tiebreaker.
The overruling of Feelware and Emerald Shores. The Carmejane ruling effectively overturns the position of the administrative courts of appeal that had treated limited liability as a neutralisable criterion. The Marseille Court of Appeal's formulation (that the mere fact of limited liability was insufficient to assimilate the LLC to a French limited liability company) is now contradicted by the Conseil d'État, which holds on the contrary that this circumstance is, in a context of hybridity, the criterion that must tip the classification. Practitioners can no longer rely on the Feelware and Emerald Shores precedents to secure transparency for an LLC.
C. Confirmation by the Melun Tribunal and the relativisation of the treaty argument
The NEH LLC judgment. The Carmejane ruling sits within a broader jurisprudential movement. The Melun Administrative Tribunal had already held, several months before the Conseil d'État's decision (TA Melun, 3rd chamber, June 4, 2025, No. 2100623, Nalco France / NEH LLC), that a Delaware LLC should be assimilated to a corporation. The tribunal found that the structuring of capital into proportional membership units, combined with members' limited liability and a check-the-box election in favour of C Corporation status, pointed the classification towards opacity. This judgment, which might at the time have been perceived as an isolated decision rendered on atypical facts (a multi-member LLC that had elected corporate treatment in the US), is now confirmed and reinforced by the Carmejane ruling, which extends the reasoning to non-electing LLCs themselves.
The relativisation of the treaty argument. One of the most significant contributions of the Carmejane ruling concerns the articulation between domestic law and the France-US tax treaty of August 31, 1994. Article 4(4) (formerly Article 4(2)(b)(iv)) of the treaty provides that partnerships and LLCs fall within the category of transparent entities. The Douai Court of Appeal, in Feelware, had used this provision as an additional argument in favour of transparency. The Conseil d'État, in Carmejane, clearly established the analytical sequence: the domestic-law classification precedes the application of the treaty. The treaty's treatment of the LLC as a transparent entity does not bind the French judge in the domestic classification exercise. It cannot be used to circumvent the in concreto analysis or to neutralise the weight of limited liability. In other words, the fact that the treaty treats the LLC as transparent is not sufficient to impose transparency under domestic law if the entity's own characteristics, and in particular its members' limited liability, point towards opacity. The US tax election (disregarded entity or C Corporation) and the treaty treatment are merely two indicators among others in the bundle, and they cannot override the preponderant criterion of limited liability.
III. Practical consequences for French-resident LLC members
A. The fiscal paradigm shift: from business profits to dividends
Taxation under the transparency regime (before Carmejane). Where an LLC was classified as a transparent partnership within the meaning of Article 8 CGI, its profits were deemed directly received by the member in proportion to their rights in the entity. Taxable profit was determined at the LLC level under the French tax rules applicable to the relevant income category — industrial and commercial profits (bénéfices industriels et commerciaux, BIC, Art. 34 and 35 CGI) for commercial activities, non-commercial profits (bénéfices non commerciaux, BNC, Art. 92 CGI) for professional activities, property income (revenus fonciers, Art. 14 et seq. CGI) for real estate activities; and then attributed to the member, who was personally liable for income tax at the progressive rate, plus social contributions (CSG/CRDS at a combined rate of 17.2%) and, where applicable, self-employed social security contributions.
Taxation under the opacity regime (after Carmejane). If the LLC is now assimilated to a corporation subject to corporate income tax, the paradigm shifts dramatically. Amounts paid by the LLC to its French-resident member constitute dividends, taxable at the flat tax rate (prélèvement forfaitaire unique, PFU) of 31,4% (comprising 12.8% income tax and 18.6% social contributions) or, at the taxpayer's election, at the progressive income tax rate after application of the 40% allowance provided by Article 158(3-2°) CGI. Moreover, the LLC itself may be liable for corporate income tax in France if it has a permanent establishment there or derives French-source income. The application of the France-US tax treaty, and in particular its provisions on the elimination of double taxation, must then be reassessed within this new framework, since the classification as an opaque entity alters the attribution of income and the availability of treaty tax credits.
The concrete impact. For a sole member who was receiving, under the transparency regime, BNC taxed at the progressive rate (top marginal rate of 45% for income exceeding €177,106, plus social contributions at 17.2%, yielding an effective marginal rate of 62.2%), the shift to dividend treatment at 30% PFU may appear, at first glance, favourable. This appearance is deceptive, however. On one hand, the opaque LLC may itself be subject to corporate income tax in France or the United States, creating an additional layer of taxation on profits before distribution. On the other hand, the rules for deducting expenses, carrying forward losses, and crediting foreign tax differ significantly between the two regimes. The analysis must be conducted on a case-by-case basis, taking into account the nature of the activity, the amount of income, the existence or absence of a French permanent establishment, and the applicable treaty provisions.
B. Reporting obligations, audit risk and regularisation
Reporting obligations under the new paradigm. The shift from transparency to opacity fundamentally alters the member's reporting obligations. Under the transparent regime, the member reported their share of the LLC's result in the corresponding income category (BIC, BNC or property income) on their personal income tax return (Form No. 2042 and schedules). Under the opaque regime, they must report dividends received in the investment income category (Form No. 2042, box 2DC for PFU or 2BH for progressive rate election). If the LLC has a French permanent establishment, it must additionally file its own corporate tax return (Form No. 2065) and pay corporate income tax. The member remains required to report foreign bank accounts held in the LLC's name or in their own name in connection with the LLC (Form No. 3916 / 3916 bis), on pain of a €1,500 fine per account per year under the France-US framework (CGI, Art. 1736, IV bis).
Audit risk. The Carmejane ruling will inevitably trigger heightened scrutiny from the French tax authorities on cases involving US LLCs. Taxpayers who have reported their LLC income in the BIC, BNC or property income categories (transparent regime), relying on the Feelware and Emerald Shores precedents, now face the prospect of having that classification challenged by the audit services. The risk is amplified by the automatic exchange of tax information between France and the United States under the bilateral administrative assistance agreement and the FATCA framework (Foreign Account Tax Compliance Act), which provides the French authorities with detailed data on accounts and income held by French residents in the US. Failure to report LLC income may, in the most serious cases, be characterised as an undisclosed activity (activité occulte) within the meaning of Article 1728 CGI, exposing the taxpayer to an 80% penalty on the reassessed tax: precisely the penalty upheld in the Feelware case.
Regularisation considerations. French taxpayers who hold an LLC and have hitherto treated it as transparent should consider proactive regularisation. This does not necessarily mean admitting an error (the prior position was founded on case law that was then authoritative) but rather drawing the consequences of the evolution in the law and adapting future filings. Regularisation may take several forms: filing amended returns for non-time-barred years, adjusting the prospective tax treatment, or applying for a formal ruling (rescrit fiscal, LPF, Art. L. 80 B) to obtain the tax authorities' binding position on the LLC's classification. We consider that a formal ruling application is, in the current climate of uncertainty, the safest course of action.
C. Practical recommendations: anticipate rather than react
Have the LLC's classification re-examined. Every French tax resident who is a member of a US LLC should, in light of the Carmejane ruling, have the entity's tax classification re-examined. This review should be conducted by an adviser specialising in international taxation, taking into account all the LLC's characteristics (constitutional documents, Operating Agreement, effective US tax treatment, capital structure, transfer provisions) and assessing them against the new analytical framework established by the Conseil d'État. The objective is to determine whether the LLC now falls within the corporate category (which will be the case in the vast majority of situations) or whether particular characteristics still support a transparency argument.
Adapt the documentation and Operating Agreement. If the member wishes to maintain the LLC's transparency (because the BIC or BNC regime is more favourable, or for simplicity of reporting) they must ensure that the Operating Agreement reflects partnership features as strongly as possible. This strategy has its limits, however: members' limited liability is a structural attribute of the LLC form and not a mere contractual stipulation; it cannot be removed without abandoning the LLC form altogether. Since the Conseil d'État has elevated this criterion to preponderant status, it is now extremely difficult to maintain transparency for any LLC regardless of how the Operating Agreement is drafted. Taxpayers who wish to benefit from fiscal transparency should therefore consider alternative legal forms (a sole proprietorship for single-owner structures, a general partnership for multi-member structures) which do not confer limited liability and which, for precisely that reason, are more readily assimilable to French partnerships.
Anticipate the consequences of reclassification. Taxpayers who conclude that their LLC will now be classified as opaque must plan for the practical consequences: recalculation of tax on income received (dividends at PFU or progressive rate with 40% allowance), verification of any French corporate tax liability of the LLC itself, re-examination of the France-US tax treaty (particularly the provisions on dividends, permanent establishments, and elimination of double taxation), and adaptation of reporting obligations. This transition should not be endured passively but organised proactively, in coordination with both French and US tax advisers.
Monitor jurisprudential and doctrinal developments. The Carmejane ruling, although rendered by the Conseil d'État, does not definitively close the debate. The tax authorities may issue guidance commenting on this decision and specifying how it should be applied. It is also possible that preliminary questions may arise regarding the articulation between the domestic classification and treaty provisions, particularly in relation to Article 4(4) of the France-US treaty. Practitioners should remain attentive to these developments, which could refine or qualify the scope of the ruling.
Conclusion
The Conseil d'État's ruling of November 12, 2025, Carmejane LLC, represents a watershed moment in the French tax treatment of US LLCs. By elevating members' limited liability to the preponderant classification criterion where the bundle of indicators reveals structural hybridity, the Court has reversed the presumption that had prevailed for over a decade. The US LLC can no longer be regarded, as a matter of principle, as a transparent partnership within the meaning of Article 8 CGI. The courts of appeal case law (Feelware, Emerald Shores) that had neutralised this criterion is now obsolete.
We consider that this decision, although legally coherent, will create a period of significant disruption for the many French tax residents who hold US LLCs and had structured their tax affairs on the basis of transparency. The paradigm shift (from business profits taxed on the progressive scale to dividends subject to the PFU or the progressive rate with allowance) carries major consequences in terms of effective tax rates, expense deductibility, foreign tax credit utilisation, and reporting obligations.
Our recommendation is clear: every French tax resident who is a member of a US LLC should, without delay, have the entity's tax classification re-examined in light of the Carmejane ruling, adapt their tax filings accordingly, and consider, where appropriate, restructuring their investment or operating vehicle. The era in which LLC transparency could be presumed is over. Proactive planning and specialist advice are now indispensable.
Frequently Asked Questions
Is my US LLC now automatically opaque for French tax purposes after the Carmejane ruling?
Not automatically, but the probability has become very high. The Carmejane ruling does not establish an irrebuttable presumption of opacity: it retains the bundle-of-indicators framework but introduces a hierarchy among the criteria. Where the LLC's characteristics are distributed relatively evenly between partnership and corporate features (which is the case for the vast majority of LLCs) members' limited liability becomes the preponderant criterion and tips the classification towards a corporation. In practice, only LLCs whose every other characteristic converges massively towards transparency could still escape corporate classification, which is a very marginal scenario.
If my LLC is reclassified as a corporation, does my income become dividends?
Yes. Under the opacity regime, amounts paid by the LLC to its French-resident member constitute dividends, taxable at the 30% flat tax (PFU) or, at the taxpayer's election, at the progressive income tax rate after a 40% allowance. This income no longer falls within the activity-based categories (BIC, BNC or property income) and is no longer subject to the same expense deduction rules. The LLC itself may additionally be liable for corporate income tax in France if it has a permanent establishment there or derives French-source income.
Does the France-US tax treaty still protect my LLC's transparency?
No, or at least no longer in a determinative way. Article 4(4) of the France-US tax treaty of August 31, 1994 does place LLCs in the category of transparent entities. However, the Conseil d'État clearly established in Carmejane that the domestic-law classification precedes the application of the treaty. The treaty treatment is merely one indicator among others in the bundle, and it cannot neutralise the preponderant criterion of limited liability. The treaty will then apply to allocate taxing rights between the two states, but it cannot impose transparency if domestic law concludes that the entity is opaque.
Should I regularise my tax position if I have been declaring my LLC as transparent?
We strongly recommend it. If you have been reporting your LLC income in the BIC, BNC or property income categories based on the Feelware and Emerald Shores case law, your position was legally sound at the time. However, the Carmejane ruling changes the state of the law, and the tax authorities could now challenge the classification adopted for non-time-barred years. Proactive regularisation (through amended returns or a formal ruling application) is preferable to regularisation imposed during an audit, as it allows the taxpayer to benefit from mitigating circumstances with respect to penalties and late-payment interest.