The parent-subsidiary regime: the 5% add-back
The parent-subsidiary regime exempts dividends received from subsidiaries, with the exception of a share of costs and expenses. This add-back, its rate and its base are the subject of a mass audit campaign that affects many groups. Shareholding conditions, scope of tax consolidation, interaction with European law: the points of friction are precise, and often open to debate. The firm secures the application of the regime and defends reassessments.
- Regime
- Parent companies and subsidiaries (French Tax Code art. 145)
- Principle
- Subsidiary dividends exempt, except for the share of costs and expenses (French Tax Code art. 216)
- Rate
- Add-back of 5% of the total income from the participations
- Consolidation
- Rate reduced to 1% between companies of the same consolidated group (art. 223 A)
- Profile
- Holding companies, groups and mid-cap companies receiving dividends from subsidiaries
Exemption of dividends, except for the add-back
The parent-company regime (French Tax Code art. 145 and 216) avoids the economic double taxation of dividends: the income from participations received by the parent company from a subsidiary is deducted from taxable profits, with the exception of a share of costs and expenses.
This add-back is set at 5% of the total income from the participations, tax credit included. It is reduced to 1% for dividends received between companies belonging to the same tax consolidation group (French Tax Code art. 223 A), and in certain assimilated European situations. It is therefore the add-back, and not the dividend, that remains taxed.
The conditions of the parent-subsidiary regime
The benefit of the regime requires compliance with precise conditions (French Tax Code art. 145):
- Holding of at least 5% of the subsidiary’s capital;
- Shares held in full ownership or in bare ownership;
- Undertaking to retain the shares for two years;
- Form and liability to corporate income tax of the parent company.
Failure to comply with a single one of these conditions may lead to the challenging of the regime, and therefore to the taxation of the entire dividend, and no longer of the add-back alone.
The frequent audit points
Reassessments most often relate to: the threshold and duration of the shareholding (breach of the retention undertaking), the add-back rate applied (5% instead of 1% or vice versa), the base retained, the treatment of foreign-source dividends and the articulation with the parent-subsidiary directive, or the application of the regime to shares without voting rights. Each calls for a case-by-case review.
Securing and defending
Upstream, the firm secures eligibility for the regime (thresholds, retention undertaking, documentation) and the correct add-back rate. During an audit, the defence focuses on compliance with the conditions of article 145, the applicable rate, the base, and the articulation with Union law for European flows. Where appropriate, we bring the litigation before the tax judge and draw on favourable case law.
At the close of the litigation, close to 35% of matters concerning the parent-subsidiary regime and the add-back are resolved, in whole or in part, in favour of the taxpayer. Case law, both national and European, offers solid levers.
Parent-subsidiary regime: your questions
What is the rate of the share of costs and expenses?
In principle 5% of the total income from the participations, tax credit included (French Tax Code art. 216). This rate is reduced to 1% for dividends received between companies of the same tax consolidation group (French Tax Code art. 223 A) and in certain assimilated European situations.
What conditions must be met to benefit from the parent-subsidiary regime?
Hold at least 5% of the subsidiary’s capital, retain the shares for two years, and meet the conditions of form and of liability to corporate income tax (French Tax Code art. 145). Failure to comply with a condition may lead to the taxation of the entire dividend.
What is the risk in the event of a breach of the retention undertaking?
The challenging of the regime for the shares concerned, hence the taxation of the corresponding dividend, together with interest and, where appropriate, penalties. The situation is open to debate depending on the circumstances of the disposal.
Does the regime apply to dividends from foreign subsidiaries?
Yes, subject to conditions, with a specific articulation for subsidiaries established in the Union (parent-subsidiary directive). Extra-European flows and anti-abuse clauses call for a dedicated analysis.
My group is subject to an audit on the add-back: what should I do?
Have the rate, the base and the shareholding conditions reviewed without delay, and organise the response within the time limits of the adversarial procedure. The firm secures these points and pursues the challenge if necessary.
A reassessment on the parent-subsidiary add-back?
A confidential first exchange to review the rate and the conditions of the regime, and to defend your position before the tax authorities.
This page presents the parent-subsidiary regime for information purposes; each matter calls for a specific analysis. References to the French Tax Code (art. 145, 216, 223 A) in force at the date of writing.