Article 123 bis of the French Tax Code (FTC) and the Conseil d’État’s “Level One” decision: the difficulties raised by the characterisation of the QPFC

The Level One decision of 30 June 2026 was eagerly awaited. Since the Axa and Raymond rulings, which recognised that the quote-part de frais et charges (QPFC – the lump-sum add-back of costs and expenses) is partly taxable in nature for the purposes of treaty tax credits, a question remained open for anti-abuse provisions based on a comparison between French and foreign taxation. Should this analysis also lead to a State that exempts dividends received by a holding company, without applying any QPFC, being regarded as tax-privileged? In this case, the Conseil d’État answered in the affirmative as a matter of principle, while ruling out Article 123 bis of the French Tax Code (FTC) in the specific case before it.

The scope of this decision nevertheless deserves discussion, with regard to the objectives of the provision as well as to the Parent-Subsidiary Directive, the European freedoms and constitutional principles.

A favourable outcome in this case, but one with far-reaching consequences

Article 123 bis of the FTC allows, under certain conditions, the profits of a foreign entity whose assets are predominantly financial to be taxed in the hands of a French-resident individual who holds at least 10% of it, where that entity is subject to a privileged tax regime within the meaning of Article 238 A. This requires comparing the foreign tax with the tax that would have been due in France under ordinary conditions, by applying the ordinary French tax rules, including the parent-subsidiary regime of Articles 145 and 216 of the FTC where its conditions are met, as the Conseil d’État had already held in its first decision in this case (CE, 14 February 2022, Nos. 442061 and 442062).

In this case, the taxpayers held the Luxembourg company Level One, which received tax-free dividends from its French subsidiary ITD. The Conseil d’État transposed to the Article 123 bis mechanism the solution laid down in the Axa (5 July 2022, No. 463021) and Raymond (7 April 2023, No. 462709) decisions, confirmed by the Legrand decision (18 February 2025, No. 490792), according to which the QPFC has a dual nature. Up to the amount of the costs actually incurred to acquire or retain the income from shareholdings, it neutralises the deduction of expenses and therefore does not constitute a tax; for the excess, it constitutes a tax on the dividends.

The meaning of the decision is therefore clear: where the QPFC exceeds the actual costs relating to the shareholdings, the difference, multiplied by the corporate income tax (CIT) rate, constitutes theoretical French taxation which must be compared with the tax borne in the foreign State in order to assess whether its tax regime is privileged. If, on the contrary, the costs equal or exceed the QPFC, the dividends bear, according to this reasoning, no residual taxation in France.

As Level One’s expenses exceeded the QPFC for the years in dispute, Article 123 bis was ruled out. The Conseil d’État further specifies that, for the purposes of this reconstruction, the tax authorities may invoke the general principle prohibiting fraude à la loi (fraud on the law) in order to deny the benefit of the parent-subsidiary regime, although abuse was not established in this case.

To gauge the scope of the principle, one must now consider the many European holding companies and, beyond them, those of OECD States that exempt dividends without a lump-sum add-back exceeding the expenses actually borne. Where the comparison reveals a positive residual French tax, these structures may fall within the potential scope of Article 123 bis, subject to all of its conditions and to its safeguard clause. A comparative table of the legislation concerned is set out in the appendix.

A transposition of the Axa and Raymond case law that is far from self-evident

To understand the difficulty, one must go back to the purpose of the QPFC. The parent-subsidiary regime exempts dividends received by the parent company, but the latter must add back a lump sum of 5% of their amount, or 1% in the case of tax consolidation. Traditionally, this add-back was intended to restore the principle that expenses relating to exempt income are not deductible. The purpose of the QPFC was therefore to add back the costs deducted in connection with the receipt of dividends, which are exempt income. It did not, therefore, mean that the dividends themselves were taxed.

The Axa (CE, 5 July 2022, No. 463021) and Raymond (CE, 7 April 2023, No. 462709) rulings changed this reading for the offsetting of foreign tax credits. If the company receives €100 in dividends, the QPFC is €5 and its actual related costs are €3, the first €3 of the QPFC neutralise expenses; the remaining €2 therefore have, in practice, an effect similar to taxation. In this case, the dividends are regarded as subject to French tax for the purposes of offsetting treaty tax credits.

This solution is understandable in its context. Where a foreign subsidiary pays dividends subject to withholding tax, it is necessary to determine the amount of tax actually levied in France on that same income, in order to know to what extent the treaty tax credit may be used. The aim is to avoid juridical double taxation and to respect the allocation of taxing rights organised by tax treaties. Treaties may, moreover, establish autonomous mechanisms for this purpose, such as flat-rate tax credits, which need not correspond to any tax actually paid abroad. Ascertaining, for this particular purpose, whether a fraction of the dividends bears a French levy in practice therefore serves a precise function, justified by the mechanics specific to tax treaties.

But Article 123 bis pursues a different purpose. The issue is no longer to offset a tax credit, but to decide whether the taxation of the foreign entity is privileged compared with that which would have applied in France. This characterisation may result in the immediate taxation, in the hands of the individual shareholder, of profits that have not been distributed to them. The question is therefore not simply one of calculating a residual levy; it is whether the French reference regime remains an exemption of dividends coupled with a lump-sum add-back of expenses, or becomes a partial taxation of those dividends. The difference is essential. In the first case, a State that likewise exempts dividends without a QPFC applies a comparable regime; in the second, the absence of a QPFC may suffice, where actual costs are lower than the QPFC, to reveal lower foreign taxation and to open the door to Article 123 bis.

The public rapporteur in this Level One decision considered that there was no reason not to transpose Axa and Raymond, on the ground that both situations require the French tax to be reconstructed. This seems to us somewhat cursory. The fact that two mechanisms rely on the same calculation does not mean that they must necessarily be characterised in the same way, irrespective of their purpose. This transposition is all the more surprising given that the tax authorities have adopted a different analysis for Article 209 B of the FTC, an analogous provision applicable to legal entities. In an update to their guidelines dated 10 June 2026 (BOI-IS-BASE-60-10-20-20, No. 120), they accept that a foreign regime exempting dividends under conditions equivalent to the French parent-subsidiary regime does not, in itself, constitute a privileged tax regime, even in the absence of any QPFC add-back. More significantly still, the BOFiP news release accompanying this update expressly states that the Axa and Raymond case law, delivered for the purposes of offsetting foreign tax credits, does not call into question the exempt nature of the parent-subsidiary regime when assessing whether a foreign regime is privileged. The tax authorities thus draw precisely the distinction that the Conseil d’État refuses to adopt for Article 123 bis. The result is a divergence that is difficult to justify between two anti-abuse provisions pursuing similar objectives and resting on the same criteria for characterising privileged tax regimes. Finally, characterising as taxed income what the legislature had designed as exempt income with an add-back of expenses raises questions as to the limits of the court’s power of interpretation.

A characterisation at odds with the logic of the Parent-Subsidiary Directive

The difficulty is even more fundamental with regard to Directive 2011/96/EU. The objective of this Directive is to prevent profits already taxed at the level of a subsidiary from being taxed a second time when they are passed up to the parent company. Its Article 4 leaves Member States the choice between exempting dividends and crediting the tax paid by the subsidiary. France chose exemption, implemented by Articles 145 and 216 of the FTC. The principle is therefore simple: dividends are exempt in the hands of the parent in order to avoid their economic double taxation.

The Directive nevertheless allows States to refuse the deduction of expenses relating to the holding. Where management costs are fixed at a flat rate, Article 4(3) authorises an amount not exceeding 5% of the profits distributed. This point is decisive. The EU legislature expressly authorises a lump-sum amount of expenses to be added back, even if it does not correspond to the costs actually incurred. Take a parent company that receives €100 in dividends and incurs no management costs. The State may require it to add back a lump sum of €5 without the Directive ceasing, for all that, to present the mechanism as an exemption coupled with an add-back of non-deductible expenses. The possibility of applying a flat rate unrelated to actual costs is precisely enshrined in the text, which provides not for residual taxation but for an exemption of this income, and does so for all EU Member States.

Yet it is this very gap between the lump sum and actual costs that leads the Conseil d’État to regard the QPFC as a tax on dividends. What the Directive treats as a method of adding back expenses would thus become, for the purposes of Article 123 bis, a residual tax on exempt income.

One understands the economic reasoning underlying the Axa and Raymond rulings for determining the levy that has the effects of a tax against which a foreign tax credit may be offset; it is less clear why that reasoning should lead to altering, for an anti-abuse provision, the nature of a regime that the Directive expressly describes as an exemption. Moreover, if the dividends are genuinely taxed, even partially, the question arises of the treatment of the expenses relating to that taxable fraction: if a fraction of the income is taxable, a fraction of the expenses should consequently be deductible. The recharacterisation is therefore not merely a matter of vocabulary, since here it entails tax consequences unrelated to the objective of the parent-subsidiary regime, which was not the case for the earlier rulings, which addressed only the application of international tax treaties.

The consequences of this recharacterisation are far from trivial. Where it leads to the application of Article 123 bis, the profits received by the foreign holding company are immediately taxed in the hands of its individual shareholder, even though they have not been distributed. On top of this taxation comes the 25% increase in the taxable base, which, at the 12.8% income tax rate, represents an additional charge of 3.2 percentage points. This surcharge alone thus far exceeds the residual taxation resulting from the French QPFC, limited to 1.25% of the dividends, or even 0.25% where the 1% QPFC applies. Admittedly, this taxation is borne by the individual shareholder and not by the parent company, so that it cannot be equated, without further discussion, with a taxation of dividends prohibited by the Directive. The fact remains that it stems directly from the receipt, by the foreign holding company, of dividends exempted in accordance with that very Directive. If one follows through the economic reasoning adopted in the Axa and Raymond case law, which consists in identifying the levy actually imposed by reason of the receipt of dividends, it seems difficult to ignore this additional charge solely because it is legally borne by the shareholder. Such a consequence necessarily raises questions with regard to the objective of eliminating economic double taxation pursued by the Parent-Subsidiary Directive, compliance with which is ensured by the CJEU, notably in its AFEP decision of 17 May 2017 (C-365/16).

A potentially disproportionate restriction on European freedoms

Freedom of establishment (Articles 49 et seq. TFEU) and the free movement of capital (Articles 63 et seq.) prohibit, within their respective scopes, unjustified restrictions. Yet the Level One decision introduces a striking difference in treatment depending on where the holding company is located.

Take a French individual holding a pure holding company. If it is established in France, the holding company benefits from the parent-subsidiary regime; according to the analysis adopted by the Conseil d’État, the receipt of dividends may correspond to a maximum residual tax of 1.25% (or 0.25% where the QPFC is 1%). The shareholder is personally taxed only upon an actual distribution. If it is established in another Member State that fully exempts the same dividends, in accordance with the Directive, the holding company could, where there is positive theoretical French taxation and the other conditions are met, bring its shareholder within the scope of Article 123 bis.

On the figures assumed here, the shareholder would then bear personal taxation of 34.6%, compared with 31.4% on an ordinary distribution. But the real difference lies above all in the timing of the tax. In one case, the shareholder is taxed only when the holding company actually distributes the income to them; in the other, they may be taxed while the company retains the sums to finance its subsidiaries or acquire new shareholdings. They will then have to trigger a distribution to pay the tax, which reduces the holding company’s capacity to reinvest. Depending on the circumstances, this forced redistribution could moreover weaken the holding company’s standing as beneficial owner of the dividends received in the State where it is located.

The Cadbury Schweppes case law (CJEU, 12 September 2006, C-196/04) reiterates that a restriction intended to combat tax avoidance must target wholly artificial arrangements and remain proportionate. Is it proportionate, in order to prevent the saving of a theoretical 1.25% levy, to trigger immediate personal taxation of 34.6%? The question seems all the less theoretical given that certain foreign exemption regimes without a QPFC are precisely those authorised by the European Directive. For third countries, the free movement of capital calls for a separate examination, in particular of its scope and of any standstill clauses preserving earlier restrictions, but the principle of discrimination remains.

A threshold effect calling into question equality in bearing public burdens

The disproportion is equally manifest with regard to Article 13 of the Declaration of the Rights of Man and of the Citizen. As stated above, the 25% increase in the base alone generates, at a 12.8% tax rate, 3.2 additional points of income tax, more than twice the 1.25 points of theoretical French taxation avoided, and nearly thirteen times the 0.25 point corresponding to a 1% QPFC. Although corporate income tax is being compared here with personal income tax, the economic effect for the shareholder, which moreover justified the reasoning in the Axa and Raymond case law, is indeed disproportionate. This is without even counting the effect of bringing forward the shareholder’s taxation, already discussed.

The real paradox lies in the threshold thus created. Consider an exempt foreign holding company receiving €100 in dividends and compared with a French QPFC of 5%.

With €5 of related expenses, the QPFC is fully neutralised and Article 123 bis does not apply on that basis alone. With €3 of expenses, theoretical French taxation of only €0.50 arises [(5 − 3) × 25%]. With no expenses, it reaches €1.25.

Yet, in the latter two scenarios, characterisation as a privileged regime may trigger the same mechanism of immediate personal taxation of all the profits concerned, with no gradation according to the €0.50 or €1.25 theoretically avoided. The phenomenon is even more abrupt where the relevant QPFC is 1%.

The break is therefore stark. As soon as the related expenses fall below the lump sum, even very slightly, the taxpayer may find themselves subject to the same personal taxation mechanism as if the company bore no expenses at all. Conversely, expenses at least equal to the QPFC rule out, in this comparison, any residual taxation of the dividends. It is hard to see what the amount of a pure holding company’s operating costs reveals, in itself, about the existence of a fraudulent arrangement. The mechanism might even encourage expenses to be arranged up to the 5% threshold, or 1% as the case may be, whereas the normal operation of a passive holding company calls precisely for limited expenses.

The Conseil constitutionnel did, admittedly, uphold the 25% increase provided for in Article 123 bis in its decision No. 2019-793 QPC of 28 June 2019, but in the distinct context of concealed income. Here, the income may be fully declared and the foreign exemption entirely lawful. The Conseil constitutionnel has, moreover, struck down irrebuttable presumptions in Article 123 bis (decisions No. 2016-614 QPC and No. 2017-659 QPC), reiterating the need to allow the taxpayer to demonstrate the absence of any fraudulent purpose. The objective of combating fraud is unquestionably legitimate; the means employed must nonetheless remain proportionate to it and respect the ability to pay of a shareholder taxed on sums they do not necessarily have at their disposal.

Lastly, the combination of immediate taxation, an increase in the base and a residual tax advantage invites reflection, without prejudging whether it should be characterised as a penalty, on the relevance of an examination under Article 8 of the 1789 Declaration, which establishes the principle of proportionality of criminal penalties. The point is not to deny the anti-abuse purpose of the provision, but to assess the measure of its response, in particular given the uniform and automatic application of the Article, irrespective of the amount of French tax theoretically avoided.

Major uncertainties surrounding the safeguard clause

All these criticisms naturally presuppose that Article 123 bis actually applies. Its paragraph 4 bis provides for safeguard clauses which make it possible, depending on the situation and the State of establishment, to demonstrate that the holding does not constitute an artificial arrangement designed to circumvent French tax legislation, or that its main purpose and effect are other than the location of income in a privileged tax territory.

The Level One decision does not reveal how these provisions are now to be assessed. The Conseil d’État and the public rapporteur stopped at the absence of a privileged tax regime in view of the expenses actually borne and did not examine the impact of the safeguard clause. The earlier judgment of the Versailles Administrative Court of Appeal of 6 June 2024 was not very encouraging on this point. The court had noted that Level One employed no staff and carried on no economic or financial activity separate from holding its shareholdings. But above all, it had considered that the small size of the tax saving did not prevent a finding of an artificial arrangement.

This approach raises questions for pure holding companies. Must they be required to have employees, premises and an operational activity that their corporate purpose does not call for? A foreign establishment may be driven by perfectly legitimate reasons of company law, wealth structuring, proximity to partners or geographical diversification. Above all, can it seriously be argued that a possible saving of 1.25%, or even 0.25%, suffices to reveal the decisive tax objective of an establishment? While the small size of the advantage cannot, on its own, establish good faith, this criterion should at least form part of the analysis of the purpose of the arrangement.

For the foreign holding companies affected by this difficulty in comparing tax burdens, two arguments thus appear decisive in ruling out the application of Article 123 bis. The first consists in demonstrating that the expenses relating to the shareholdings fully neutralise the French QPFC. The second rests on the application of the safeguard clause, the conditions of which remain uncertain in this new context. If the second route takes account of the negligible tax advantage, the practical scope of the Level One ruling could be limited. If, on the contrary, only substance requirements ill-suited to pure holding companies prevail, the shareholder risks bearing the consequences of immediate and increased taxation for having been unable to prove a non-tax objective that was nonetheless genuine.

Conclusion

The decision of 30 June 2026 provides a useful answer on the method for comparing French and foreign tax for the purposes of Article 123 bis. However, by transposing to this comparison the distinction drawn for the offsetting of treaty tax credits, the Conseil d’État opens the way for a foreign regime that exempts dividends, in full compliance with the Parent-Subsidiary Directive, to be regarded as tax-privileged solely because the foreign company bears lower costs than the French QPFC. The consequences for shareholders may be significant, whereas the theoretical tax advantage is merely residual.

It thus remains to clarify how the costs relating to shareholdings are to be determined, the role of the small tax advantage in applying the safeguard clause, and the compatibility of the solution with the Parent-Subsidiary Directive, the TFEU freedoms and constitutional principles. For Article 209 B, the tax authorities have adopted a pragmatic reading that preserves the exemption’s nature as such. One can only hope that the tax authorities will extend to Article 123 bis the clarification they have already provided for Article 209 B, so as to prevent two provisions pursuing the same objective from leading to different characterisations of the same foreign dividend exemption regime. Failing that, these difficulties will have to be settled through further litigation, possibly with a preliminary reference to the CJEU. The decision settles the Level One dispute, but leaves largely open many questions concerning its application to comparable foreign holding companies. In this respect, we can only regret that the public rapporteur’s conclusions were so lacking on these points.