Luxembourg or Netherlands holding: myths, realities and required substance

Quick answer. Creating a holding in Luxembourg or the Netherlands is not a magic recipe to cut your tax. The sought-after advantages — exemption of dividends (parent-subsidiary regime) and of capital gains on participations — already exist in France. A foreign holding only has value if it has real economic substance: premises, staff, effective management bodies and decisions taken on site. Failing that, it is exposed to reclassification, to abuse of law (Article L64 of the tax procedures code) and to the anti-avoidance rules of the ATAD directive (EU 2016/1164). The proposed ATAD 3 "Unshell" directive would specifically target shell companies lacking substance.

The idea that it would be enough to house your shareholdings in a Luxembourg or Dutch holding to "optimise" your tax is stubborn. It ignores two realities: favourable holding regimes also exist in France, and administrations, armed with the ATAD directive and the automatic exchange of information, hunt down arrangements without substance. Before considering a holding abroad, you must understand what a holding really brings, in France as elsewhere, as we explain regarding the advantages of a holding.

A holding owns participations in other companies. Its strengths are first legal and organisational (running a group, transfer, leverage), and secondarily tax-related. Yet the tax advantages are not the preserve of foreign jurisdictions:

• The parent-subsidiary regime (Articles 145 and 216 of the tax code, transposing Directive 2011/96/EU) allows, in France, an exemption of dividends received from subsidiaries, subject to a 5% fee and charge portion (i.e. 95% of dividends exempt).
• Capital gains on participations held for at least two years benefit in France from an exemption, subject to a 12% taxable portion.

In other words, most of a holding's advantages are found in a French holding, without the risks of an artificial cross-border arrangement.

If a foreign holding is justified for real operational reasons (a group present abroad, for example), it must imperatively have economic substance:

• Premises and own resources on site;
• Qualified staff actually performing the functions;
• Effective management bodies, whose decisions are taken locally (so-called directional substance);
• A real activity, beyond the mere passive holding of securities.

A holding reduced to a "letterbox", with no staff or local decision, is reclassifiable: it may be denied access to tax treaties and directives, and its arrangement set aside.

Several measures frame these arrangements:

• The ATAD directive (EU 2016/1164), transposed in all Member States, includes a general anti-abuse clause, rules on controlled foreign companies, a limitation of interest deductibility and rules on hybrid arrangements (ATAD 2). It applies in Luxembourg, the Netherlands and France alike.
• Abuse of law (Article L64 of the tax procedures code) allows the French administration to set aside an artificial arrangement whose purpose is exclusively or mainly tax-driven.
• The ATAD 3 proposal ("Unshell"). Still under discussion, this proposed directive would deprive shell companies, not meeting minimum substance criteria, of access to treaties and directives. Its possible adoption would reinforce the substance requirement.

Added to this is the transparency of beneficial owners (registers, automatic exchange of information), which makes opaque arrangements increasingly hard to conceal.

The family holding company. To organise the holding and transfer of an estate, a French family holding most often meets the need, without the risk of a foreign arrangement.

The group genuinely established abroad. A Luxembourg or Dutch holding can be relevant if it accompanies a real activity on site, with the corresponding substance. The criterion remains economic reality.

Upstreaming dividends. The interplay with tax treaties, withholding tax and the parent-subsidiary directive must be analysed: a poorly built arrangement can increase, not reduce, the tax.

• Compare with France first. Before looking abroad, check what a French holding already allows: often the essentials.
• Substance is not negotiable. Without premises, staff and effective management, the arrangement is fragile.
• Abuse of law looms. An exclusively or mainly tax-driven arrangement can be set aside (Article L64).
• ATAD applies everywhere. Anti-abuse clause, controlled foreign companies, interest limitation: the rules exist in Luxembourg and the Netherlands.
• Transparency is advancing. Beneficial-owner registers and information exchange reduce the value of opaque arrangements.

Recently, a director was considering creating a Luxembourg holding to "optimise" the holding of his French participations, on the strength of advice heard at a dinner. The analysis showed that the sought-after advantages — exemption of dividends and of capital gains on participations — were already accessible via a French holding, with no reclassification risk. The Luxembourg holding, with no real substance, would mainly have exposed the arrangement to abuse of law and ATAD rules, for zero tax gain. We steered the client toward a French structure, simpler and safer.

Our conviction, as accountants registered with the Ordre, is that the holding is an excellent structuring and transfer tool, but that its location abroad is only justified by an economic reality, never by the tax argument alone. French regimes are competitive; arrangements without substance are increasingly risky. A holding is first conceived around organisation and transfer objectives, alongside holding taxation and director's wealth management.

Hayot Expertise advice. Before creating a holding abroad, ask yourself a simple question: what does it bring that a French holding would not already? In most cases, the French regimes (parent-subsidiary, exemption of capital gains on participations) meet the need. If a foreign setup is justified for operational reasons, ensure real substance: premises, staff, effective management on site. Without substance, the arrangement is a target for abuse of law and ATAD rules. The best optimisation is the one that withstands an audit.