Substance does not undermine tax efficiency. It protects it.

In cross-border structuring, “substance” is often perceived as a constraint.

Something imposed by regulators. Something that dilutes tax efficiency.

That perception is wrong.

A recent decision of the Paris Court of Appeal confirms a more accurate — and more strategic — reality: when substance is real, it does not destroy tax efficiency. It secures it.

The case: tax efficiency combined with real economic purpose

The case concerned a financing structure implemented by the AXA group.

A Dutch company, fiscally resident in the United Kingdom, was interposed in a complex financing arrangement. The structure allowed AXA to benefit from significant tax advantages, notably through the UK group relief regime.

But the tax outcome was not the only effect.

The structure also produced a clear economic benefit: the group obtained a £673 million loan at an interest rate of 0.5%. That financing materially improved the group’s liquidity position under market conditions that would not have been achievable otherwise.

The tax authorities’ position: an artificial arrangement

The French tax authorities challenged the structure under Article 209 B of the French Tax Code, the French controlled foreign company (CFC) rules.

Their argument was straightforward:

• the subsidiary benefited from a privileged tax regime,
• the structure generated substantial tax savings,
• and the arrangement should therefore be treated as artificial and requalified.

In other words, tax efficiency was treated as evidence of abuse.

The court’s reasoning: substance as a safeguard

The Paris Court of Appeal rejected this reasoning.

The court did not deny that the structure was tax efficient.

It did not deny that the subsidiary benefited from a favourable tax regime.

What mattered was something else: the existence of a genuine economic purpose.

The financing arrangement served a real business objective and delivered a tangible economic benefit to the group. That was sufficient to activate the safeguard clause under Article 209 B and prevent the application of CFC taxation.

Tax efficiency, in itself, was not disqualifying.

Key lesson: low taxation is not enough to trigger CFC rules

This decision reiterates a fundamental principle that is often misunderstood.

A low effective tax rate abroad does not automatically justify the application of French CFC rules.

The burden of proof lies with the tax authorities.

To succeed, they must demonstrate that the arrangement lacks genuine economic substance and exists solely to avoid tax.

Where a real business purpose is established, the structure can withstand scrutiny — even if tax savings are part of the outcome.

Substance and tax efficiency are not opposites

This case illustrates a broader point.

Tax efficiency becomes fragile when it is disconnected from economic reality.

But when tax outcomes result from structures that serve a genuine operational, financial or strategic purpose, substance becomes a shield.

The more a structure reflects how value is actually created, financed or managed, the harder it is to dismiss it as artificial.

What this means for international structuring

For entrepreneurs and groups operating internationally, the implication is clear.

The objective should not be to choose between substance and tax efficiency.

The objective should be to design structures where tax efficiency flows from substance.

That requires:

• aligning legal form with economic function,
• documenting business rationale from the outset,
• and anticipating how tax authorities will read the structure through an anti-abuse lens.

Conclusion: substance is protection, not sacrifice

Substance does not kill tax efficiency.

It protects it.

Structures that combine clear economic purpose with coherent tax outcomes are not weaker. They are stronger.

Those built on form alone may look efficient on paper — until they are tested.