Can a foreign subsidiary really optimize your tax bill?

Posted On:03/01/2025 Updated On:10/10/2025
Tax articles
5 min read

Are you looking to reduce your tax burden and increase your bottom line? Setting up a foreign subsidiary might be the solution. But before you start, understand the tax implications and how to optimize your structure. A foreign subsidiary can provide access to more favorable tax treatment, helping you reduce costs and increase efficiency.

Can a foreign subsidiary really optimize your tax bill?
Tax optimization through a foreign subsidiary

How can a foreign subsidiary benefit your business?

A foreign subsidiary of a French parent company is considered a separate tax entity, subject to the tax laws of the country where it’s located. This means that profits made by the subsidiary are taxed in the foreign country, rather than in France. By setting up a subsidiary in a country with a more favorable tax regime, businesses can reduce their tax liability. For companies with complex financial structures, it’s essential to consider debt recovery strategies to minimize financial risks.
 
For instance, if a French company sets up a subsidiary in a country with a lower corporate tax rate, the subsidiary’s profits will be taxed at the lower rate, resulting in increased cash flow for the parent company. This can be particularly beneficial for companies with significant international operations. According to the OECD’s report on tax treaties, many countries have signed tax treaties to avoid double taxation and fiscal evasion.

Tax treaties can help to reduce the complexity and uncertainty of international taxation, and can provide a framework for cooperation between countries. – Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, 2020

How do tax treaties impact your foreign subsidiary?

When a foreign subsidiary pays dividends to its parent company, there’s a risk of double taxation. However, many tax treaties signed by France with various countries help to minimize cases of double taxation by promoting the principle of territoriality. This means that, in most cases, the profits made by the foreign subsidiary will be taxed in the country where it is based, while dividends and other income will be split between that country and France.
 
To avoid double taxation, it’s possible to opt for the parent company regime, provided that the holding company detains at least 5% of the subsidiary’s capital. Under this system, dividends are fully exempted from taxation in France, with the exception of a portion intended to cover costs and expenses, which must be added back to the parent company’s taxable income. For more information on tax assistance for individuals and corporate, please visit our tax assistance page. 

What are the key factors to consider when setting up a foreign subsidiary?

To ensure tax optimization, it’s essential to set up a subsidiary in a country that isn’t considered a “tax haven” under Article 238 A of the General Tax Code. This means choosing a country with a tax regime that doesn’t allow profits or income to be taxed at a rate more than 50% lower than the French corporation tax rate.
 
When selecting a country, businesses should consider factors such as the tax rate, tax base, and availability of tax treaties. By choosing a country with a favorable tax regime and a strong network of tax treaties, companies can minimize their tax liability and optimize their international structure. The World Bank’s Doing Business report provides valuable insights on the business environment and tax regimes in different countries.
 
If you’re dealing with complex business and commercial issues, it’s essential to have expert advice. My French Lawyer lawyers with expertise in business and commercial law, can help you navigate these issues and find the best solutions for your business.

The key to successful tax planning is to understand the tax laws and regulations in each country where you operate, and to structure your business accordingly. – Reuven Avi-Yonah, Professor of Law, University of Michigan, 2018

What are the best practices for setting up a foreign subsidiary?

To get the most out of a foreign subsidiary, businesses should follow best practices. This includes:

  • Conducting thorough research on the tax regime and laws of the foreign country
  • Ensuring compliance with French and foreign tax laws
  • Structuring the subsidiary correctly to minimize double taxation
  • Taking advantage of tax treaties and the parent company regime
  • Monitoring changes in tax laws and regulations

By following these best practices, companies can optimize their tax bills and minimize double taxation.

Case study: setting up a foreign subsidiary in Ireland

Ireland is a popular destination for foreign subsidiaries due to its favorable tax regime and highly skilled workforce. Let’s consider an example of a French company that sets up a subsidiary in Ireland to take advantage of the country’s 12.5% corporate tax rate. By setting up a subsidiary in Ireland, the company can reduce its tax liability and increase its cash flow. The subsidiary can also benefit from Ireland’s highly skilled workforce and favorable business environment. However, setting up a subsidiary can only reduce tax burden if there is a real activity in Ireland, what is called “substance” (activity, employees, premises etc…), this constitutes the difference between optimizing tax and get into a fraud.

If you’re interested in learning more about setting up a company, you can check out our company setting-up process.

Risks and challenges of setting up a foreign subsidiary

While setting up a foreign subsidiary can be a effective way to optimize tax bills, it’s not without risks and challenges. Some of the key risks and challenges include:

  • Compliance with local laws and regulations
  • Managing cultural and language differences
  • Ensuring adequate infrastructure and resources
  • Taking advantage of tax treaties and the parent company regime
  • Managing tax and financial risks

By understanding these risks and challenges, companies can take steps to mitigate them and ensure the success of their foreign subsidiary.

Maximizing your tax savings: the key takeaways

Setting up a foreign subsidiary can be an effective way to optimize tax bills and minimize double taxation. By understanding the tax laws and regulations in each country where you operate, and structuring your business accordingly, you can minimize your tax liability and maximize your wealth. With careful planning and expert advice, companies can navigate the complexities of international taxation and achieve their business goals.
 
Don’t wait any longer to optimize your tax bills and minimize double taxation. Get contact with My French Lawyer registered lawyers to learn more about how we can assist you in setting up a foreign subsidiary and achieving your business goals.

The goal of tax planning is not to avoid taxes at all costs, but to minimize taxes while maximizing wealth. – Chris R. Edwards, Tax Policy Economist, 2019

Book a meeting

Get expert advice for setting up a foreign subsidiary

Registered lawyers at My French Lawyer are at your disposal to address any questions you may have about setting up a subsidiary abroad. We offer personalized advice and guidance to help you navigate the complexities of international taxation, tailoring our solutions to your specific business needs and goals. Whether you’re looking to expand into new markets or optimize your tax structure, we’re here to support you every step of the way. Don’t hesitate to contact us today to learn more about how we can help you achieve your objectives.

You may also like

Contact