When a French company wants to expand into the United States, setting up a local subsidiary can quickly become necessary, not least to contract with US partners.
The choice between an LLC and a C corporation goes beyond the formalities of incorporation, however. It determines how profits are taxed in the United States, how they come back to France and the tax consequences of a future sale. These points should be considered together, before the subsidiary is formed.
In brief
For an operating subsidiary that will distribute its profits, a C corporation is often the clearest structure. Its dividends bear US withholding tax, which the France–US treaty can reduce under certain conditions, and may then be largely exempt in France under the participation exemption, provided all its conditions are met.
A pass-through LLC may make the French company that owns it directly taxable on the US profits. In France, its classification depends on its legal features, and the treatment of distributions and any application of the participation exemption call for a separate analysis.
Whatever the choice, recharges between the two companies, permanent establishment risk and the preparation of a sale should be dealt with from the outset, together with the CPA who will look after the subsidiary in the United States.
The type of entity decides the tax position on both sides
The United States taxes a C corporation on its own profits at the 21% federal rate, plus any state tax. An LLC, by contrast, is a pass-through by default. Its profits are taxed at the level of its members, which, for a subsidiary, means at the level of the French company (IRS).
France, for its part, does not follow the US classification. It compares the subsidiary with French entities, based on its governing documents and the law of the state where it was formed (CE, 24 November 2014, no. 363556). That classification does not, by itself, make the subsidiary's profits taxable in France. The territorial scope of French taxation, where the business is carried on and, where relevant, the France–US tax treaty must also be considered. We explain that method in our article on how France taxes US companies.
For the parent company, the practical question therefore has two parts. Who will be taxed in the United States, the subsidiary or the French company itself? And will the profits come back to France as exempt dividends?
How do C corporation dividends come back to France?
After US withholding tax, reduced by the treaty depending on the size of the holding, and then under the participation exemption if its conditions are met.
The France–US tax treaty provides, subject to its conditions, for three maximum rates of withholding (Article 10). The general rate is 15%. It is capped at 5% where the beneficial owner of the dividends is a company directly holding at least 10% of the subsidiary's voting stock. Withholding is eliminated where that company has held at least 80% of the voting power for the twelve months ending on the date entitlement to the dividend is determined. That holding is never enough on its own. The beneficial owner must also meet the conditions for access to treaty benefits, including one of the tests of the limitation on benefits clause in Article 30, which relate in particular to its listing, its ownership and its business. None of these reduced rates is automatic, and claiming them requires providing the subsidiary with the documentation required by the IRS (Form W-8BEN-E).
In France, those dividends may qualify for the participation exemption (régime mère-fille) if all the requirements of Articles 145 and 216 of the French Tax Code are met, including those relating to the parent, which must be subject to corporate income tax, to the shareholding, of at least 5% of the capital, and to the holding period, of at least two years. Classification of the subsidiary as a company is not sufficient on its own. The dividends are then exempt, except that 5% of them is added back to taxable income as a deemed charge for expenses. The French tax authorities accept the regime whatever the subsidiary's legal form and wherever it has its registered office.
The US withholding also raises the question of whether it can be credited in France. The treaty tax credit is subject to the conditions of Article 24(1)(a) and to the way it interacts with the participation exemption. In any event, it is limited to the corresponding French tax on the income concerned. Where the dividends qualify for that exemption, the withholding may, as a rule, be a final cost for the parent. The example below covers only the tax on a $100,000 distribution, not the tax already paid by the subsidiary on the profits distributed.
US withholding at 5%, or $5,000, which generally remains a cost.
No withholding if the holding reaches 80% of the voting power for the required period and the other treaty conditions, including those of Article 30, are actually met.
French tax on the 5% add-back, that is $5,000 added back and taxed at the standard 25% rate, about $1,250.
Hence the value of checking, when the subsidiary is set up, whether the conditions for the zero rate can be met.
What changes with an LLC owned by the French company?
A US LLC disregarded for federal tax purposes may cause its French parent to be directly taxable on US business income. In France, the LLC must first be classified by reference to its legal features, and the treatment of distributions is a separate question.
An LLC owned by a single company is, by default, a disregarded entity for US tax purposes. The French company is therefore treated as carrying on the business in the United States directly. It files its own US returns and is taxed there on the US profits. With several members, the LLC is treated as a partnership, and each foreign member is taxed in the United States on their share.
In France, an LLC is classified by comparing its legal features with those of French entities. The Conseil d'État treated a California LLC as comparable to a French SAS (CE, 12 November 2025, no. 502894), but that conclusion cannot be generalised to every LLC. US tax transparency does not determine the French classification, and eligibility for the participation exemption must be assessed in light of the classification adopted and the regime's own conditions. If the LLC is analysed as a partnership taxed under Article 8 of the French Tax Code, it cannot be a subsidiary for participation exemption purposes (French tax guidance).
An LLC may also elect to be taxed as a corporation in the United States (Form 8832). The election brings its US treatment closer to that of a C corporation, but it does not change its French classification, which still depends on its governing documents. The choice between the two forms therefore depends on the context. A C corporation often gives a simpler reading for an operating subsidiary that will distribute its profits. An LLC can work in other situations, for example where the subsidiary has US members who want pass-through treatment, after a French review of its governing documents.
How should costs be recharged between the French company and its US subsidiary?
At arm's length, for real services, with documentation that stands up on both sides.
The French parent may provide its subsidiary with management, accounting, IT or staffing services. Genuine services rendered for the subsidiary's benefit should be priced at arm's length. Shareholder activities carried out solely in the parent's own interest do not necessarily justify a recharge. Underpriced services may be adjusted in France, in particular under Article 57 of the French Tax Code, and unjustified recharges may be challenged in the United States.
The IRS applies its own transfer pricing rules and checks, on its side, that the costs deducted by the subsidiary reflect real services provided at an arm's length price. A written agreement describing the services and how they are priced, regular invoices and some evidence, such as time records or reports, form the basis of that documentation. Above certain thresholds, formal transfer pricing documentation becomes mandatory in France.
The subsidiary can also be funded through a shareholder loan from the French company. Repayment of the principal is not income, which makes the loan a flexible tool during the start-up phase. Interest, however, must stay within the limits accepted on both sides.
Employee travel and permanent establishment risk
The subsidiary is a separate company, and merely controlling it does not create a permanent establishment for the parent. Occasional trips by employees, to meet clients or oversee the subsidiary, do not create one on their own either, nor do activities of a preparatory or auxiliary character. The position changes where the French company has a fixed place of business in the United States through which it carries on its business, or where its employees habitually exercise authority to conclude contracts there in its name (Article 5 of the treaty). It then becomes taxable in the United States on the profits attributable to that permanent establishment.
The risk also runs the other way. Staff based in France working for the subsidiary, or a manager running it from France, may create a permanent establishment risk depending on the facts. The subsidiary's place of effective management must also be considered separately. Roles and decision-making authority should therefore be allocated when the subsidiary is set up. US states apply their own nexus tests and are not necessarily constrained by the treaty.
Preparing the sale from day one
The entity chosen at the outset shapes how a sale will be taxed on both sides.
A gain realised by a French company on shares of a C corporation is generally taxable only in France under the treaty (Article 13). One exception concerns, in particular, companies whose assets consist mainly of US real property (IRS).
In France, the long-term capital gains regime for qualifying shareholdings is distinct from the participation exemption on dividends. Its requirements and exclusions must be assessed separately.
Dividends, participation exemption. At least 5% of the capital, shares kept for two years, where appropriate after the distribution under a holding undertaking, and 5% of the dividend added back to taxable income (French tax guidance).
Capital gain, qualifying shareholdings. Shares that are titres de participation for accounting purposes, or shares eligible for the participation exemption recorded in that account or a special sub-account, held for at least two years at the date of sale, with 12% of the gross gain added back to taxable income (French tax guidance). Shares in real-estate-rich companies are among those excluded, and a gain realised within two years is taxed at the standard rate.
The sale of an interest in a pass-through LLC requires a separate US tax analysis. For a single-member LLC that is disregarded for US tax purposes, a disposal may be treated as a sale of the underlying assets. For a multi-member LLC taxed as a partnership, a foreign seller may be subject to US tax and to withholding under section 1446(f), generally at 10% of the amount realised, subject to the applicable exceptions and certifications (IRS). This regime is distinct from FIRPTA, which concerns certain US real property interests. The French tax treatment, for its part, depends on the LLC's French classification.
Filings in France and the United States
A C corporation at least 25% owned by a foreign company files its federal return (Form 1120) and, where it has reportable transactions with the French company or another related party, a Form 5472. Those transactions include, in particular, sales, rents, loans and interest.
An LLC owned solely by the French company follows specific rules. Although disregarded for income tax purposes, it is treated as an entity separate from its owner for this reporting requirement. It files a Form 5472, attached to a pro forma Form 1120, for the years in which it has reportable transactions, which include contributions, distributions and amounts connected with its formation or dissolution. Where the form is due, failure to file carries a penalty of $25,000 (IRS). The French company also reports its US profits itself, and state returns and taxes come on top.
In France, the parent applies the participation exemption in its corporate tax return and keeps the evidence supporting the prices charged with its subsidiary. Above certain thresholds, it prepares transfer pricing documentation.
Those filings are a matter for the subsidiary's CPA and the parent company's accountant. Our role is to settle the structure, document the French choices and check that the positions taken in both countries are consistent.
Beaupère & Guermouche Avocats advises SME owners who set up or reorganise a subsidiary in the United States, together with the subsidiary's CPA. Questions specific to entrepreneurs and to Americans living in France are covered in our article on how France taxes US companies.
Frequently asked questions
How long must the subsidiary be held for the participation exemption?
Two years. The exemption applies from the first distribution if the parent undertakes to keep the shares for that period. If it sells them earlier, the exemption is withdrawn. For the capital gains exemption on a sale, by contrast, the two years must have elapsed at the date of sale.
Is a written agreement needed to recharge costs to the subsidiary?
It is strongly advisable. An agreement describing the services provided and how they are priced is the first piece of evidence in a tax audit, in France and in the United States.
Do the US subsidiary's losses reduce the French parent's tax?
As a rule, no. French tax consolidation only covers companies subject to French corporate income tax, and a C corporation's losses stay in the United States, where they are carried forward against its future profits.
General information, up to date as of 23 October 2026, which does not constitute legal advice. The right structure depends on the business, the owners and the expected flows, and must be assessed case by case with advisers in both countries.