Hong Kong dividends: the French exemption is no formality
A French holding company received dividends from its Hong Kong subsidiary and claimed the participation exemption.
The French tax authorities challenged the exemption.
The Montpellier Administrative Court upheld approximately EUR 1.21 million in additional tax, interest and penalties in relation to dividends received between 2016 and 2018.
The group’s explanation was commercial: a major French customer had required the Hong Kong structure following quality issues with a supplier. The difficulty was proving that explanation.
The court looked closely at the subsidiary’s actual operating arrangements:
No employees in Hong Kong.
No physical operating resources there.
Quality control performed in Taiwan by Taiwanese subcontractors, under the supervision of a Taiwanese director.
The court also noted that the subsidiary had paid no Hong Kong profits tax during the relevant years and treated that non-taxation as a tax advantage contrary to the purpose of the French participation exemption.
Another practical point: correspondence produced to support the customer-driven rationale had not been translated into French.
Applying the anti-abuse provisions then in force, the court considered the arrangement non-genuine and upheld the reassessments, including a 40% penalty for deliberate non-compliance.
For France–Hong Kong groups, the practical lesson is broader than tax residence or incorporation.
What matters is the company’s actual contribution to the business.
Its commercial purpose, functions, resources and responsibilities should be identifiable and supported by contemporaneous evidence. Where activities are outsourced, the respective roles of the company and its service providers should also be clear.
Contracts, operational correspondence and decision-making records therefore matter throughout the life of the structure - not only when a tax audit begins.
The French treatment of dividends should be considered alongside the Hong Kong treatment of the underlying profits.
This remains a first-instance judgment concerning the rules applicable to 2016–2018, and its findings are highly fact-specific.
Importantly, the judgment does not establish that the absence of Hong Kong profits tax is, by itself, sufficient to characterize an abusive arrangement.
Read the full judgment (French) – Montpellier Administrative Court, 12 October 2026, No. 2305158
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