A US person who owns shares in a French company faces ongoing US tax obligations that arise from the ownership itself, independent of any salary, distribution, or other cash flow from the entity. The obligations arise because France classifies its main business entities as corporations, and those corporations are treated as foreign corporations under US tax law. Once a French corporation qualifies as a Controlled Foreign Corporation, US shareholders must report annually, include certain income currently, and manage the tax consequences of eventual distributions.
These obligations apply regardless of where the US person lives. A US citizen who returned to the United States after setting up a French entity, or who acquired shares in a French company as an investor, remains subject to the same CFC regime as a US citizen who lives in France and operates the company directly.
How French Companies Are Classified for US Tax Purposes
French operating entities — the SARL, SAS, SASU, EURL, and SA — are on the Treasury Department’s per se corporation list under Treas. Reg. §301.7701-2(b)(8). They are automatically classified as foreign corporations for US federal income tax purposes. No election is available to change this classification.
As foreign corporations, these entities are fully opaque for US tax purposes in the absence of Subpart F or GILTI inclusions. Income earned by the French company is not attributed to the US shareholder until it is distributed as a dividend — except when the CFC rules require current-year inclusion.
CFC Classification and US Shareholder Status
The CFC Threshold
A French corporation is a Controlled Foreign Corporation under IRC §957 when US shareholders, each owning at least 10% of the voting power or value, collectively own more than 50% of the entity. A single US person owning more than 50% makes the entity a CFC immediately.
A US person owning at least 10% qualifies as a US shareholder and is subject to:
- Annual Subpart F income inclusions (IRC §951)
- Annual GILTI inclusions (IRC §951A)
- Form 5471 filing obligations
Ownership below 10% does not trigger these obligations, but PFIC rules may apply if the French entity is passive in character.
Ownership by Attribution
US tax law attributes ownership between related parties under §958. Stock owned by a US person’s spouse, children, or parents, and stock owned by US entities proportionate to the person’s interest, is attributed to the US shareholder for purposes of determining whether the CFC threshold is met. A US person who directly owns only 40% of a French SAS may nonetheless be treated as owning more than 50% if attribution applies.
Current-Year Income Inclusions
Subpart F Income
Subpart F income (IRC §951) is included in the US shareholder’s gross income in the year the CFC earns it, regardless of any distribution. The categories of Subpart F income most commonly encountered in French company ownership include:
- Foreign Personal Holding Company Income (FPHCI): dividends, interest, rents, royalties, and gains from passive assets held by the CFC
- Foreign base company sales income: income from buying goods from or selling goods to related parties
- Foreign base company services income: income from performing services for or on behalf of related persons
Active operating revenue from a French trade or business does not generate Subpart F income. A French SAS that earns revenue from providing services to third-party clients in France generally produces no Subpart F inclusion. A French holding company that collects dividends from its subsidiaries does produce FPHCI.
GILTI
GILTI (Global Intangible Low-Taxed Income) under IRC §951A requires a current-year inclusion for the US shareholder’s pro rata share of the CFC’s net tested income above a 10% routine return on qualified business assets.
French corporate income tax (IS) at the standard rate of 25% exceeds the GILTI high-tax exclusion threshold (18.9%). By making an annual election, US shareholders can exclude from GILTI income taxed by France at the standard rate. Income subject to the 15% reduced IS rate, which applies to qualifying SMEs on the first €42,500 of taxable income, is below the exclusion threshold and may not qualify.
The §250 Deduction: Individual vs. Corporate Shareholders
Under IRC §250, a US C-corporation that includes GILTI in income may deduct a portion of that inclusion, reducing the effective US rate. Individual US shareholders do not have access to this deduction. A US citizen who owns a French CFC directly faces GILTI inclusions taxed at full individual ordinary income rates.
A §962 election allows the individual to elect to be taxed as a US corporation on Subpart F and GILTI inclusions in a given year. The election provides access to the §250 deduction and the §960 indirect foreign tax credit. It also creates a second layer of US tax when CFC earnings are actually distributed, because previously taxed earnings distributed above the amount already recognized are taxed again. The election requires careful modeling for both the inclusion year and anticipated distribution years.
Dividend Repatriation
French Withholding Tax
When a French IS-subject entity distributes dividends to a non-resident shareholder, France applies withholding tax at source. The US–France treaty (Article 10, as replaced by the 2009 Protocol) reduces the domestic 25% rate:
| Recipient | Treaty Withholding Rate |
|---|---|
| Corporate shareholder owning ≥80% of voting power (LOB conditions met) | 0% |
| Corporate or individual shareholder owning ≥10% of capital | 5% |
| All other beneficial owners | 15% |
The treaty rates apply only to the beneficial owner of the dividend. Claiming the reduced rate requires filing Form 5000 (attestation de résidence fiscale) with the French paying agent before or at the time of the distribution. Failure to file Form 5000 results in withholding at the 25% domestic rate.
Previously Taxed Earnings and Profits (PTEP)
Distributions of earnings that were previously included in the US shareholder’s income as Subpart F or GILTI are tracked as Previously Taxed Earnings and Profits (PTEP) on Schedule P of Form 5471. Distributions from PTEP are generally excluded from income when received. The French withholding tax on PTEP distributions is still creditable on Form 1116. Currency gain or loss on PTEP distributions must be recognized separately.
US Treatment of Dividends
A dividend from a French corporation received by a US individual shareholder is taxable in the US. The French withholding tax is creditable against US income tax on the same dividend under Form 1116. Qualified dividend treatment under IRC §1(h)(11) may apply to dividends from a French corporation if the corporation meets the definition of a qualified foreign corporation, which generally requires eligibility under a comprehensive income tax treaty with the United States. The US–France treaty qualifies.
Capital Gains on Sale of French Company Shares
Under Article 13 of the US–France treaty, gains from the sale of shares in a French company are taxable only in the residence state of the seller (generally the US, for a US-resident seller). An exception applies when the seller owns, directly or indirectly, 25% or more of the capital of the French company: in that case, France retains the right to tax the gain.
The saving clause means that US citizens owe US tax on the same gain regardless of treaty allocation. French capital gains tax paid by a US citizen on a French company sale is creditable against US tax under Form 1116.
Form 5471: Annual Filing Obligation
Form 5471 must be filed annually by every US person who:
- Owns 10% or more of a French SARL, SAS, SASU, EURL, or SA (Category 3 on acquisition; Category 5 as a US shareholder of a CFC)
- Serves as an officer or director of a French entity in which a US person owns 10% or more (Category 4)
- Acquires or disposes of stock, causing their ownership to cross the 10% threshold (Category 3)
A separate Form 5471 is required for each French entity. One form per corporation per year; there is no consolidated equivalent.
| Violation | Penalty |
|---|---|
| Failure to file (initial) | $10,000 per corporation per year |
| Continued failure after IRS notification | +$10,000 per 30-day period, up to $50,000 |
| Sustained failure | 10% reduction in allowable foreign tax credits |
Penalties apply automatically; no finding of willfulness is required.
Technical Reference
Treas. Reg. §301.7701-2(b)(8): Per se corporation list. French SARL, SAS, SASU, EURL, and SA are automatically classified as foreign corporations for US tax purposes.
IRC §957: CFC definition. US shareholders (each ≥10%) collectively owning more than 50% of a foreign corporation’s vote or value.
IRC §951: Subpart F inclusions. Current-year gross income inclusion for FPHCI and foreign base company income, regardless of distribution.
IRC §951A: GILTI inclusion. Annual inclusion for US shareholders of net tested income above the 10% QBAI return. High-tax exclusion available under Treas. Reg. §1.951A-2(c)(7) for income taxed above 18.9%.
IRC §250: §250 deduction. Available to US C-corporations on GILTI inclusions; not available to individual shareholders.
IRC §962: Election for individual US shareholders to be taxed as corporations on CFC income inclusions. Provides access to §250 and §960; creates a second tax layer on subsequent distributions.
Art. 10, US–France Treaty (1994, as replaced by 2009 Protocol): Dividend withholding rates. 0% for 80%+ corporate parent meeting LOB conditions; 5% for ≥10% corporate or individual shareholder; 15% for all others. Domestic rate is 25%.
Art. 13, US–France Treaty: Capital gains. Generally taxable only in residence state of seller. France retains taxing rights when seller owns ≥25% of the French company’s capital.
IRC §6038(b): Form 5471 penalty structure. $10,000 per corporation per year for initial failure; continuation penalties; FTC reduction.
Frequently Asked Questions
Do I owe US tax on profits retained inside my French company?
Yes, potentially, in the year the income is earned. If the French company qualifies as a CFC, US shareholders must include certain passive income (Subpart F) and net tested income above the routine return threshold (GILTI) in their gross income annually, regardless of whether the company distributes those earnings. French IS paid at the standard 25% rate generally eliminates GILTI exposure under the high-tax exclusion, but the analysis depends on the specific income type and the rate at which France taxes it.
What is the French withholding tax rate on dividends paid to a US shareholder?
The rate depends on the ownership level and entity type of the recipient. Under Article 10 of the US–France treaty, a US shareholder holding at least 10% of the French company’s capital receives dividends subject to 5% withholding. All other individual recipients pay 15% withholding. A corporate shareholder holding 80% or more and meeting the treaty’s Limitation on Benefits tests may qualify for 0% withholding. The domestic French rate without the treaty is 25%.
What is Form 5471 and who must file it?
Form 5471 is an annual information return required of US persons with qualifying interests in foreign corporations. Any US person who owns 10% or more of a French SARL, SAS, SASU, or EURL must file Form 5471. A US person who forms a new French entity, acquires a 10%+ interest, or serves as an officer or director of a French entity with 10%+ US ownership must also file. The penalty for failure to file is $10,000 per corporation per tax year.
Can I claim a foreign tax credit for French corporate income tax paid by my French company?
Yes, under certain conditions. A US corporate shareholder of a French CFC can claim a deemed-paid foreign tax credit under IRC §960 for French IS paid by the CFC on income included in the US shareholder’s gross income as a Subpart F or GILTI inclusion. Individual US shareholders cannot claim the §960 deemed-paid credit directly, though a §962 election provides access to it. French IS is not creditable against US tax on income that is not currently included in the shareholder’s income.
Are capital gains on selling French company shares taxable in France?
Potentially, yes. Under Article 13 of the US–France treaty, gains on shares in a French company are generally taxable only in the residence state of the seller. However, if the seller owns, directly or indirectly, 25% or more of the capital of the French company, France retains the right to tax the gain. The saving clause means US citizens also owe US capital gains tax on the same gain regardless of the treaty allocation.
What is the §250 deduction and why does it matter for individual shareholders?
The §250 deduction allows US C-corporations to deduct a portion of their GILTI inclusions, reducing the effective US tax rate. Individual US shareholders cannot claim this deduction and are taxed on GILTI inclusions at full ordinary income rates. A §962 election allows individuals to be taxed as if they were a corporation, gaining access to §250 and the indirect foreign tax credit, but it creates a second tax layer on actual distributions from the CFC.