Exempting 95 % of a dividend, and paying on the rest

SA Ferrand receives 200 000 € of dividends from its subsidiary. With no special regime it pays 50 000 € of corporation tax. Under the parent-subsidiary regime it pays 2 500 €. Before you read on: what is left taxable when a dividend is called exempt?

Two conditions, a threshold and a period

The parent-subsidiary regime exists for a simple reason: without it, a profit already taxed at the subsidiary would be taxed a second time at the parent when distributed. The regime prevents that chain of double taxation.

Article 145 of the tax code sets the access. The holdings must represent at least 5 % of the issuing company's capital, a deliberately low threshold that opens the regime to minority holdings.

The second condition is a commitment of duration: the shares must be held for two years where they represent at least 5 % of capital. The commitment is given on subscription and verified afterwards.

A variant exists for smaller holdings: a threshold of 2.5 % of capital combined with 5 % of voting rights, under specific conditions and with the holding commitment raised to five years.

The two thresholds do not measure the same thing. One counts capital, the other counts voting rights, and a company may cross the first without approaching the second where several share classes coexist.

The lower threshold therefore comes at a price: a five-year commitment instead of two. The legislator opens the regime wider but asks for a longer proof of durable holding in exchange.

The share of costs and expenses, the incomplete exemption

Article 216 of the tax code sets out the mechanism: net participation income may be deducted from the parent company's total net profit. The dividend therefore leaves the taxable base.

But a share comes back. Set at 5 % of total participation income, it stands on a standard basis for the costs the parent bears in managing its holding, which the legislator refuses to let it deduct twice.

The exemption is therefore never total: it covers 95 % of the dividend, the remaining 5 % being taxed at the ordinary rate. That is what the common phrase "95 % exemption" actually covers.

A reduced rate of 1 % applies in two cases. The first covers dividends exchanged between members of the same tax-consolidated group, held for more than a year. The second covers certain subsidiaries established in the European Economic Area.

What the regime rules out

The regime is not open without reserve. Certain investment companies are excluded, as are property entities under specific regimes, whose own exemption would make the layering unjustified.

Income from companies established in non-cooperative States and territories is also excluded. The scheme assumes effective taxation upstream, failing which it would not prevent double taxation but create double exemption.

The regime is optional and applied holding by holding. A parent may therefore use it for one subsidiary and not another, depending on whether the holding commitment looks sustainable.

Breaking the commitment before two years causes the regime to be reversed for the shares sold, with the corresponding late interest. The commitment bears on holding, not on intention.

One articulation with the next module is worth setting out now. The parent-subsidiary regime and tax consolidation are not competitors: the first deals with dividends, the second with all results, and a consolidated group applies both.

That combination is what explains the 1 % rate. Within a consolidated group, dividends move between companies whose results are already consolidated for tax, and the add-back no longer has the same economic justification.