US Subsidiary to French Parent: Repatriating Profits Under the Treaty

I. The dividend, the default channel

A. The American withholding: 30%, 5% or zero

Under domestic law, a dividend paid by a US corporation to a foreign company bears a 30% withholding, collected by the subsidiary itself. The France-US treaty reduces it in two steps (convention of 31 August 1994, art. 10, as amended by the protocol of 13 January 2009). The rate falls to 5% when the beneficial owner is a company holding directly at least 10% of the voting rights of the American payer, and to 15% in other cases. And it falls to zero when the French parent has held, directly or indirectly through residents of either State, at least 80% of the voting rights of the American subsidiary for twelve consecutive months preceding the date on which entitlement to the dividend is determined, provided the parent also satisfies one of the specific tests of the limitation on benefits clause (art. 10, para. 3). The subsidiary applies the treaty rate on the basis of the documentation provided by the parent (Form W-8BEN-E) and reports the payment to the IRS.

B. The limitation on benefits clause, the condition that commands zero

The zero rate is reserved for French parents that pass one of the tests of Article 30. For a listed company, the trading test usually applies. For the typical small or mid-sized French group, owned by its founders and managers, the relevant test is that of ownership and base erosion: at least 50% of the voting rights and value must be held, for at least half the days of the year, by qualifying residents of France, and less than 50% of the parent's gross income may be paid, as deductible payments, to persons who are not qualifying residents (art. 30, para. 2, e). A founder-owned SAS passes easily. A start-up whose parent is majority-owned by foreign investment funds may fail it; it must then rely on the derivative benefits test (equivalent beneficiaries in the European Union or North America, art. 30, para. 3), on the active trade or business test, which requires the French activity to be substantial in relation to the American one (art. 30, para. 4), or on a discretionary determination by the American competent authority (art. 30, para. 6). The analysis must be done before the first dividend, not after the IRS asks for it.

C. In France: the parent-subsidiary regime, and why any US withholding is lost

On the French side, a parent holding at least 5% of the capital, kept for at least two years, benefits from the parent-subsidiary regime (CGI, art. 145): the dividend is deducted from its taxable profit, apart from a share of costs and charges of 5% (CGI, art. 216). The reduced 1% rate applies only within French tax groups and to subsidiaries established in the European Union or the European Economic Area, not to an American subsidiary. In practice, the French corporate tax on an American dividend is therefore about 1.25% of the amount received. The two-year holding period does not have to be completed before the distribution, but if the shares are sold earlier, the parent must repay the tax it was exempted from, with late-payment interest.

The consequence for American withholding is decisive. The treaty grants a French credit only for American-source income that is not exempted from corporate tax under French domestic law, and the credit cannot exceed the French tax corresponding to the net income (convention, art. 24, para. 1, a). The Conseil d'État has applied this cap strictly, including under the France-US treaty (CE, 11 May 2021, n° 403692). On a dividend exempted by the parent-subsidiary regime, a 5% American withholding is therefore a definitive cost. That is the whole value of the zero rate: it is not a timing advantage, it is the difference between a repatriation costing about 1.25% and one costing over 6%.

II. The alternative channels

A. Intercompany interest

Interest paid by the subsidiary to its French parent on a genuine loan is, in principle, taxable only in France, without American withholding, except for interest that depends on the debtor's profits, which the source State may tax at a limited rate (convention, art. 11). On the American side, the deduction of net business interest is limited to 30% of adjusted taxable income, computed again on an EBITDA basis for tax years beginning after December 31, 2024 (IRC, section 163(j), as amended in 2025), with an exemption for businesses below an inflation-adjusted gross receipts threshold. The flaw of this channel is economic: the interest is deductible in the United States at the federal rate of 21% plus state tax, and taxed in France at the corporate rate of 25%. Shifting profit by interest does not reduce the group's total tax, and often increases it, whereas the same profit paid as a dividend costs about 1.25%. An intercompany loan finances the subsidiary; it is not a repatriation tool.

B. Royalties and service fees

Since the 2009 protocol, royalties are taxable only in the State of residence of their beneficial owner: no American withholding (convention, art. 12). But their deduction in the United States depends on an arm's-length price, which the IRS controls under section 482 of the Code. The courts now read that provision strictly by its text: in 3M Co. v. Commissioner (8th Cir., 1 October 2025), the Eighth Circuit invalidated the transfer pricing regulation on blocked income, holding that the statute does not allow the IRS to allocate income the taxpayer could not legally receive. The case shows both the limits of IRS power and the intensity of the scrutiny: intercompany royalties are among the most examined flows. Like interest, they move profit from a rate of about 25 to 30% in the United States to 25% in France, without real tax gain, and service fees add a further risk when French staff perform the services on American soil, which we mapped in our article on permanent establishment. These channels are justified only by a genuine French contribution, priced and documented, never by the wish to empty the subsidiary.

C. The return of capital

A distribution exceeding the subsidiary's current and accumulated earnings and profits is not a dividend for American purposes: it reduces the parent's tax basis in the shares, then becomes a capital gain (IRC, section 301(c)). The subsidiary may elect not to withhold on the portion not paid out of earnings and profits, on the basis of a reasonable estimate made at the date of payment (Treas. Reg. § 1.1441-3(c)(2)). The channel is useful for returning surplus capital, not accumulated profit. On the French side, the qualification of the amount received follows its own rules, French law requiring, for French companies, that all profits and reserves have first been distributed before a payment can be treated as a return of capital (CGI, art. 112, 1°). A crossed analysis is essential before any such operation.

III. The branch alternative

A. The branch profits tax and its treaty cap

A French company operating in the United States through a branch rather than a subsidiary bears, in addition to corporate tax, a branch profits tax on the dividend equivalent amount of the branch's profits. The treaty caps it at the 5% rate, and excludes it entirely for a French company that satisfies the same limitation on benefits tests as those required for the zero dividend rate (convention, art. 10, paras. 8 and 9). On the French side, the profits of the American branch are excluded from French corporate tax under the territoriality principle.

B. Why the branch is rarely the better repatriation vehicle

For a qualifying French company, the branch and the subsidiary therefore arrive at a comparable repatriation cost. The branch adds what the subsidiary avoids: no separation of American liabilities from the French balance sheet, an allocation of profit between head office and branch to defend before two administrations, and an immediate exposure of the whole French company to state taxes and to American litigation. We explained in our roadmap for French founders why the subsidiary remains the default structure; repatriation adds no argument in favor of the branch.

IV. The grid and our position

A. Which channel for which profile

• Profitable subsidiary held at 80% or more for twelve months, by a founder-owned French parent: dividend at zero withholding, French cost of about 1.25%. This is the target.
• Parent majority-owned by foreign investors: test the limitation on benefits before the first distribution; failing a test, the 5% withholding becomes a definitive cost to be weighed against waiting or restructuring.
• Holding below 80%, or for less than twelve months: 5% withholding if the holding reaches 10% of the voting rights; it may be worth waiting until the twelve-month period is completed.
• Genuine French intellectual property or services: royalties or fees at arm's length, documented on both sides, for their real amount only.
• Surplus capital without accumulated profit: return of capital, with a crossed analysis of the French qualification.

B. Document before paying

The sequence matters as much as the rate: verification of the twelve-month holding at 80% of the voting rights, documented analysis of the limitation on benefits test, Form W-8BEN-E provided to the subsidiary before payment, estimate of earnings and profits, board decision, and on the French side, verification of the parent-subsidiary conditions and of the two-year commitment. A dividend paid at 30% because the documentation arrived late can be partly recovered by a refund claim, but at the cost of months of procedure and a cash advance to the American Treasury.