How to prepare your French subsidiary for a tax audit ?

What happens when the French tax authorities decide to review your subsidiary’s accounts?

If your French entity is part of a foreign group, you are on their radar. Cross-border transactions, transfer pricing, VAT refunds — these are red flags for the Direction Générale des Finances Publiques (DGFiP). In France, around 4 out of 10 foreign-owned companies face a tax audit within the first five years of operations (DGFiP data).

As a senior CPA at Vachon, I’ve seen audits disrupt operations, drain resources, and lead to unexpected adjustments. But I’ve also seen well-prepared subsidiaries sail through the process. This guide will help you understand what triggers an audit, what to expect, and how to prepare.

 

1. Why French subsidiaries attract audits

Foreign-owned entities operate in a high-scrutiny environment. The DGFiP pays particular attention to:

  • Transfer pricing: intra-group transactions must follow the arm’s-length principle.

  • Large or recurring VAT refunds: high refund amounts often trigger a review.

  • Cross-border flows: royalties, interest, and service fees paid abroad.

  • Inconsistencies: figures in your corporate tax return (liasse fiscale) that don’t match VAT returns or annual accounts.

  • Sector risk profiles: industries with frequent fraud cases (e.g. e-commerce, construction).

If your group uses aggressive tax planning in other jurisdictions, expect French auditors to take a closer look.

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2. Types of tax audit in France

The French tax administration uses several audit formats. Each has its own process and timeline.

In France, tax audits generally fall into three main categories:

  • Desk audit (“contrôle sur pièces”) – This is a remote review where the tax authorities examine the returns you’ve filed and the supporting documents you’ve provided. Communication is typically by mail or online.

  • On-site accounting audit (“vérification de comptabilité”) – Here, auditors come to your premises to perform a full review of your accounting records, systems, and processes. It’s more in-depth and often involves several meetings with your finance team.

  • Cross-audit (“ESFP”) – This focuses on an individual’s tax situation, but it can be connected to a company audit, especially when a shareholder or director’s financial affairs overlap with the business.

Typical process:

  1. Notification — official audit notice sent by registered mail.

  2. Document request — may include FEC (Fichier des Écritures Comptables), contracts, invoices, transfer pricing files.

  3. Meetings — auditors interview key staff.

  4. Audit report — findings and proposed adjustments.

  5. Response — you can contest points within a set deadline.

 

3. Documentation and compliance essentials

For a French subsidiary or branch, certain documents must be ready before an audit starts. Missing or incomplete files can trigger penalties for example, €50 000 for failing to produce transfer pricing documentation.

Core documentation checklist:

  • FEC file mandatory electronic accounting export, structured to DGFiP standards.

  • Transfer pricing documentation Master File, Local File, Country-by-Country report (if applicable).

  • Tax returns corporate income tax, VAT, payroll taxes, withholding tax declarations.

  • Legal documents incorporation papers, shareholder agreements, board minutes.

  • Supporting evidence invoices, contracts, intercompany agreements, R&D credit files.

Retention rules: French law requires most accounting and tax records to be kept for six years; some, like transfer pricing documentation, must be updated annually.

 

4. Strategic preparation before an audit

Preparation is more than gathering documents, it’s about building an audit-ready position year-round.

  • Reconcile data: ensure figures match across tax returns, accounts, and management reports.

  • Test your FEC: run a compliance check to detect formatting errors before the DGFiP does.

  • Review transfer pricing: confirm intercompany charges are documented and justified.

  • Assess VAT compliance: check refund claims, exemption justifications, and EC sales lists.

  • Simulate an audit: internal pre-audit by your CPA to spot weaknesses.

At Vachon, we run quarterly compliance reviews for subsidiaries with high transaction volumes, reducing the risk of year-end surprises.

 

5. Using tax regimes to your advantage

Being compliant doesn’t mean paying more tax than necessary. France offers regimes and incentives that, if well-documented, can reduce your tax burden:

  • Parent-subsidiary regime: exempts most dividends from tax when conditions are met.

  • Tax consolidation: allows group companies to offset profits and losses.

  • R&D tax credit (CIR): up to 30 % of eligible research expenses.

  • Withholding tax reductions: possible under double-tax treaties.

The key: all claims must be supported by clear, audit-proof documentation.

 

6. How Vachon supports during a tax audit

Our role goes beyond preparing paperwork. We provide a structured, bilingual interface between your team and the DGFiP.

Step-by-step support:

  1. Initial risk review assess your exposure and identify sensitive areas.

  2. Document preparation gather and format all required files.

  3. Representation attend meetings with auditors, clarify technical points, manage communications.

  4. Negotiation where possible, argue for adjustments to be reduced or removed.

  5. Post-audit follow-up implement process improvements to avoid repeat issues.

Our experience with foreign group structures means we know where auditors tend to focus and how to respond effectively.

 

7. Benefits of working with Vachon

  • Lower risk of reassessment  through proactive compliance checks.

  • Faster resolution because documentation is complete and accurate.

  • Less disruption  we handle communications so your team can focus on business.

  • Strategic insight  audits can reveal opportunities to optimize your tax position.

What triggers a tax audit for a subsidiary in France?

Common triggers include transfer pricing issues, large VAT refunds, cross-border payments, and inconsistencies between tax returns and financial statements.

How long must I retain documents for a French tax audit?

Most accounting and tax records must be kept for six years; transfer pricing documentation must be updated annually.

Can my subsidiary be audited if the parent company is abroad?

Yes. The DGFiP audits French entities regardless of where the parent company is located.

What documents are required for transfer pricing compliance?

A Master File, a Local File, and, for large groups, a Country-by-Country report.

What support does Vachon provide during an audit?

We handle preparation, representation, negotiation, and post-audit improvements.