Doing Business in France: Corporate & Income Tax
As soon as
a foreign company conducts profitable business in France, the said profit is
taxed in France.
This rule applies regardless of the type of company:
-
Subsidiary
-
Branch
-
Permanent
establishment
In the case
of a branch or a permanent establishment with no separate legal status, the
proceeds of the business conducted in France is derived from the accounts of
the foreign company.
Tax
treaties signed between France and over one hundred countries generally help
avoid double profit taxation in France and in the foreign country of
origin. The concept of permanent plant is defined in each individual tax
treaty.
Determination of taxable profit
-
Taxable
profit is calculated on income minus deductible expenses. Income encompasses
all proceeds from business, sales, or services. Only expenses incurred as
part of the business conducted can be deducted.
Deductible
expenses:
Some
deductions are limited
-
The
deductibility of certain categories of expenditures is limited in order to
prevent abuse. This is in
particular the case with so-called "extravagant expenditures", such as the
use of private vehicles: in
that
case, the deductible depreciation and rent expenses are capped at 18,300
euros incl. VAT.
The amounts
billed by a parent company to its French subsidiary are deductible
-
The
management expenses, red interest, and fees, to name just a few, are
deductible. However, the company must be able to prove that the relevant
services have actually been performed and that the amounts charged are in
line with common market practices.
Depreciation
-
Depreciation rules are particularly favourable. Fixed assets are depreciated
according to the straight-line method, based on their likely life span.
Acceleration multiples ranging from 1.25 to 2.25 are applied to the
straight-line depreciation rates, according to the normal useful life span
of the assets concerned.
This
provision applies to all production goods, except those that were purchased
second hand.
Software depreciates over 12 months.
Reserves
-
Reserves
for depreciation are allowed, providing that they can be justified and
affect clearly identified accounts, inventories, values, or tangible assets.
However, reserves for layoffs are not deductible, and nor are those for
future or expected losses on long-term contracts in progress.
Rates
-
Excluding
temporary additional contributions, applicable rates are as follows:
-
Standard
rate of 33.33%,
-
Reduced rate of 19% in a limited number of cases. Capital gains on
non-voting shares, fund
or
venture capital organization shares (venture mutual funds, venture capital
companies), and
patent
royalties.
-
Smaller companies are subject to a rate of 15% for the portion of profit
below 38,112
€,
and to the
standard rate beyond.
Losses carryforwards
-
Ordinary
losses may be carried forward over the five following years or charged to
the three previous years.
Losses resulting from depreciation may be carried forward indefinitely.
Long-term net capital losses can be charged against similar capital gains
for 10 years.
Groups of companies
-
The French
tax incorporation system is particularly attractive. It enables groups of
companies to compensate for the profits and losses of their French
operations within the consolidation scope, and makes transactions easier
between companies that belong to the same group. It applies optionally if a
French parent company holds at least 95% of the shares of the incorporated
group.
This system
must have been adopted expressly for a period of five years before the first
day of the financial year for incorporated companies.
Repatriation of profits
-
Repatriation of profits generally takes three forms:
-
transfer or
distribution of the net income of the branch or subsidiary
-
interest
charged on loans and advances granted by the foreign parent company;
-
royalties or management
fees
Value-added
tax and customs duty -
Value-added tax (VAT) is a tax on the consumption of
goods and services, and is paid by the consumer.
Businesses
are only charged with collecting the tax on sales, and deduct the VAT they
have paid on purchases and investments from the amount collected. If VAT
paid on purchases exceeds VAT collected on sales, the resulting VAT credit
is reimbursed to the business on application.
Goods exported in
or
outside the EU are totally exempt from VAT.
Rate
-
The
standard rate on sales of goods and services is 19.6%, but reduced rates
apply to a number of cases. Thus, 5.5% is the rate that applies to foods,
certain farm products, drugs (5.5% or 2.1%), books, hotels, public
transportation, newspapers and magazines, certain leisure activities, etc.
Uniform
customs duty throughout the European Union
-
Goods
circulate freely within the EU and duty is charged on imports only once,
even when they are shipped on from one member state to another. Goods
arriving in France for re-export to another EU country can be received in
France without payment of duty or VAT.
No fiscal obstacle to billings for interest, royalties or management fees
-
Amounts
must be justified and in line with the rates applied in the context of
normal management between independent companies. French authorities may
require evidence that prices applied are realistic.
Withholding
tax
-
Applicable
rates of withholding tax are defined in tax treaties between France and the
countries concerned. No withholding tax is charged on dividends or earnings
of branches paid to European parent
companies or the head offices of European companies.
For example, the
tax treaty with the US sets withholding tax at 5% of dividends, branch
earnings and management fees.
This
rises to 15% for dividends distributed to US residents individually owning
less than 10% of the equity of the French company. In general, no
withholding tax is charged on interest payments for loans within the same
group of companies.
Generous
exemptions for dividend flows through holding companies.
-
Holding
companies based in France, and which have interests in French or foreign
companies, may redistribute the dividends received from companies in which
they have interests exceeding 5% to shareholders abroad:
-
without any tax, if the parent company of the holding company is based in an EU member state
-
subject only to withholding tax, as per tax treaties, if it is based
outside the EU.
However, a
distinction should be made between holding companies for which foreign
equity interests represent over two-thirds of total interests and those with
French equity interests, since the former are subject to special exemptions
and deductions.
Local
tax -
Business
tax (taxe professionnelle)
-
Business
tax is levied by local communities. It is determined each year in the
district where the premises and the establishments of the taxpayer are
located.
The tax
base is made of the sum of the three following values :
Other local
taxes are property tax (taxe foncière), charged to owners of land and
buildings, and housing tax (taxe d'habitation), charged to occupants
of non-professional premises, whether owners or tenants. They are assessed
on the basis of the rental value of the property.
Fiscal
incentives for investors
-
Tax measures have been adopted to encourage companies
that invest in difficult areas or take over ailing companies.
Tax credits
- Research and training
-
In order to
promote research and training, tax credits are provided on expenses devoted
to these two areas. These expenses may be entirely deducted from the
corporate tax due.
If they are not
deducted, they are paid back.
|
|
Tax credit |
|
Research |
|
Training |
|
Condition |
Increased research expenses(1) as compared to the average of the
previous two years |
Increased training expenses as compared to the previous year, at a
level higher than the one set by law. |
|
Rate |
50% of the increase |
35% of the increase |
|
Capped at |
6,100,000 euros |
150,000 euros |
|
Deductible from: |
the tax
on corporate profits due for the current financial year and the next
three financial years.
- Any future residual credit is paid back immediately in the case of
brand new companies, during the first 3 years and after 3 years in
other cases.
- Unused tax credits may be realized with a bank. |
the tax
on corporate profit due for the current financial year.
- Credit is paid back if not deducted. |
|
Temporary
business tax (taxe professionnelle) exemptions
-
In certain
areas, the local communities (municipalities, departments, regions, and
groupings of local communities that have their own tax system) are allowed
to grant temporary total or partial business tax exemptions to companies
that settle, expand, or take over ailing companies. Under no circumstances
may the exemption exceed 5 years. It may, on the other hand, last less.
Temporary
corporate tax exemption
-
New
companies
-
Newly-created companies settled in certain parts of the country may, under
certain conditions, benefit from a temporary and digressive corporate tax
exemption. The exemption amounts to 100% during the first 24 months. Profits
are subject to taxation for one quarter, one half or three quarters of their
amount depending on whether they have been achieved during the first,
second, or third 12-month periods following the exemption period,
respectively. The exempted profit is limited to 225,000 euros per 36-month
period. This measure is limited to companies where other companies hold no
more than 50% of capital stock.
Besides, companies that benefit from the corporate tax exemption can benefit
from a 2-year exemption from the business tax and the property tax
(providing that local communities have had deliberations to that effect).
Ailing
company takeover
-
Companies
set up to take over ailing industrial organizations (legal recovery
procedures, etc.) may, under
certain conditions, benefit from a 24-month corporate tax exemption.
The
buyers must not have held,
either directly or indirectly, more than half of the troubled company's
capital stock during the year
preceding the takeover.
They
may also, subject to the deliberations of local communities, benefit from
business tax and property tax exemptions.
If
business and jobs are not maintained for at least 3 years, all
tax
benefits are cancelled.
Rules of
special interest to foreign companies
-
Headquarters and logistics centers
-
Like other
countries in Europe, France has a special system for taxing headquarters and
logistics centers.
These centers have a specific purpose: they are created to provide
specialized services, with
headquarters allowed to handle only management, administrative, coordination
and control functions, and logistics centers limited to packaging, labelling
and distribution. Services must be provided only to
companies within the same group. Such an approach, based on prior
determination of margin, rules out the risk of reassessment that might
otherwise exist for such activities, assuming that earnings might be
repatriated.
Taxation is calculated on the basis of a fixed rate of margin based on their
operating costs and which is the object of a ruling negotiated with tax
authorities. In general, it is between 6% and 10%
of
total ordinary operating expense for headquarters, and 4% to 7% of that same
total for logistics centers.
The
centers are subject to business tax (taxe professionnelle) as
provided by French law and
thus
may benefit from a two-year exemption for newly-created businesses.
Headquarters can also enjoy exemptions linked to the regional planning
priorities mentioned above.
Finally, under tax rules offsetting the
cost
of expatriation, both headquarters and logistics centers may pay special
compensation that is partly or fully exempt from income tax to their
expatriate employees. To qualify, they must file a request with the
tax
authorities.
|
