Direct taxation of businessesi Tax on profitsDetermination of taxable profitFrench corporation tax
French corporation tax is assessed on the earnings determined by commercial accounts established under French generally accepted accounting principles (GAAP), subject to specific tax adjustments. Income and expenses are recognised on an accrual basis. Some financial instruments, and any outstanding foreign currency debts and receivables, are taxed on a mark-to-market basis.
Favourable tax adjustments include accelerated depreciation of equipment, certain immovable fixtures, and full and immediate depreciation of some IP acquisition costs; and participation exemption on dividends received (95 or 99 per cent exempt) and on capital gains realised (88 per cent exempt) upon a substantial (i.e., at least 5 per cent) participation in French and foreign companies or partnerships (unless established in a non-cooperative state or territory (NCST)).
Unfavourable tax adjustments include:
- no deduction for amortisation of goodwill, trademarks and land;
- no deduction for most penalties;
- restricted or deferred deduction of net financial expenses, generally capped at the higher of 30 per cent of EBITDA or €3 million;
- further restricted or deferred deduction of financial expenses by thinly capitalised entities;
- conditional deduction of financial expenses on hybrid debt instruments and certain acquisition financing;
- restricted deduction of payments for services, including interest and royalties, to any entity domiciled or established in a low-tax country or in an NCST; and
- limited deduction for company cars and certain other expenses.
Generally, French corporation tax applies to earnings from business enterprises carried out in France or the taxation of which is attributed to France under a double taxation treaty. French corporation tax also applies to any profits generated by controlled foreign corporations (CFCs) established in a low-tax country unless a bona fide commercial purpose test is satisfied. Different tests apply depending upon whether the CFC is located inside or outside the EU and, if outside, in an NCST (see Section IX.ii). 'Low-tax country' is defined as a country where corporate income tax is lower than one half of French corporation tax with surcharges (i.e., lower than 14 per cent or 18 per cent).Capital and income
Income and capital gains are taxed at the same rate (currently 31 per cent plus surcharges) and can be aggregated, except for capital gains and losses realised upon the disposal of substantial participations, which are exempt or subject to special tax rates. A special lower rate (15 per cent, lowered to 10 per cent under the 2019 Finance Act, plus surcharges) also may apply to a portion of the net amount of royalties and other proceeds from the licensing or sale of patents, know-how, software and similar intangible property rights.Losses
Losses may be carried forward indefinitely and survive a change of ownership, but not a cessation or substantial alteration of business. Each fiscal year, carried-forward losses may shelter the sum of €1 million plus 50 per cent of the current year's profits. Losses may be carried back for one year up to €1 million.Rates
The standard rate of corporation tax currently is 31 per cent and will be gradually reduced to 25 per cent by 2022. For financial year 2019, a 28 per cent rate will apply to the first €500,000 of profits for all companies (with the remaining profits subject to the 31 per cent standard rate). In 2020, the standard rate of 28 per cent will apply to the full profit in 2020. It will drop to 26.5 per cent in 2021 and 25 per cent in 2022. In addition, a 3.3 per cent surcharge applies where the annual revenue (turnover) of a company exceeds €7.63 million, thus resulting in an effective rate peaking at 28.924 per cent in 2019.
Subject to certain anti-avoidance rules, qualifying dividends received and profits made on the sale of substantial participations are exempt, except for a recapture of costs equal to respectively 5 (or 1) per cent of the dividend or 12 per cent of the gain, thus resulting in an effective tax charge of 1.7 (or 0.33) per cent on dividends and 4.56 per cent on capital gains.
Special tax rates apply to profits generated by the sale of shares in listed real estate companies (19 per cent); to a portion of the net income arising out of certain royalties (15 per cent, to be lowered to 10 per cent); and the gain on certain venture capital funds where they do not qualify for the participation exemption.
For any financial year closed between 31 December 2017 and 30 December 2018, a temporary surcharge applied to companies with revenue (turnover) above €1 billion, and a further additional surcharge applied above €3 billion (subject to adjustments for the first €100,000 over each threshold). Each surcharge is equal to 15 per cent of the gross amount of corporation tax, before any tax credit or tax reductions. The resulting effective tax rate for these companies (approximately 320) amounted respectively to 39.43 per cent and 44.43 per cent.Tax credits
Under French domestic law, many incentives take the form of tax credits, the most important of which is the R&D tax credit, which amounts to 30 per cent of the qualifying expenditure not exceeding €100 million per year and 5 per cent for expenses in excess of such amount.
Except where CFC income is taxable in France, there is no unilateral relief for foreign tax. To the extent foreign-source income is taxed in France, and only where a double taxation treaty applies, foreign withholding taxes may be credited against French corporation tax pursuant to the relevant double taxation treaty (except for foreign withholding taxes on inbound dividends, which may be applied only on withholding taxes on outbound dividends, where the participation exemption applies). Where and to the extent the foreign tax credit cannot be credited against French corporation tax, for instance because of a net loss or insufficient taxable profits, it cannot be deducted. Whether excess foreign tax credits may be carried forward is currently litigated and has been referred to the European Court of Justice.Administration
Tax returns are due annually and must be filed electronically. Corporation tax returns filed by major companies must include certain information on the activities, assets and transfer pricing policy of the group, and certain information on major intra-group transactions. Country-by-country reporting is required from corporate groups that publish consolidated accounts and realise consolidated revenues in excess of €750 million per year.
Corporation tax is payable in quarterly instalments, the balance being payable upon filing of the tax return prior to the 15th day of the fourth month following the fiscal year end (or 15 May for corporations whose fiscal year coincides with the calendar year).
Generally, tax returns may be audited and taxes reassessed by the tax authorities up until the end of the third calendar year following the year when a tax was payable. Longer periods of limitation apply in certain cases. In certain situations, where the tax authorities are time-barred from reassessing an element of income or disallowing an expense, the tax may be reassessed on the first non-barred taxable year.
The tax authorities may challenge and set aside any tax avoidance scheme that is either a sham or exclusively tax-driven and seeks to benefit from an advantage contrary to the purpose of the law (general anti-avoidance rule) (see Section IX.i). Substantial penalties apply in such cases (80 per cent or 40 per cent). Where tax savings are the principal (but not exclusive) purpose of a scheme, the above general anti-avoidance rule may also apply but the penalties become conditioned upon the circumstances.
Guidance and comfort may be sought from the tax authorities both on points of legal interpretation and how particular facts will be treated. Where formally given, such guidance or clearance is binding upon the tax authorities and the tax courts. Apart from a judicial review of administrative regulations and certain individual tax rulings, there is no effective way to challenge a tax position announced by the tax authorities that a taxpayer finds unsatisfactory.Tax grouping
French tax laws enable corporate taxpayers belonging to the same group to elect for group taxation, resulting in the top French parent company becoming the sole corporate taxpayer for all members of the group on the aggregate net income of the group.Definition of a French tax group
The group can include only companies that are liable to corporation tax in France, and that are at least 95 per cent owned by the parent company, either directly or indirectly through intermediate companies that are members of the group or established in an EU jurisdiction. The 95 per cent-plus ownership condition must be satisfied for the full 12-month taxation period. Parent companies and qualifying subsidiaries may elect whether to be included in the integrated tax group, which may be modified each year.Group taxable income
Under the French tax integration or consolidation, the group's taxable income is not the consolidated income of the group (where intra-group profits and losses would have been eliminated), but rather an adjusted combined or amalgamated income of the companies composing the group. Basically, it consists of the algebraic sum of the taxable income or losses of all the group members determined as if each of them were independent taxpayers, subject to certain adjustments. Certain intra-group distributions of dividends trigger a 1 per cent recapture of costs (resulting in a 0.33 per cent tax charge).
As such, there are no transfers or surrenders of losses from one company of the group to another on terms to be mutually agreed. By operation of the law, all the tax losses shown by the members of the group are escalated – together with other tax attributes such as tax credits, either domestic or foreign – to the parent company of the group and sole taxpayer. The parent company may enter into a tax contribution agreement with each of its tax-integrated subsidiaries to determine the contribution of each subsidiary, and whether the subsidiary is compensated for the losses, tax credits and other tax attributes transferred to the parent company.Exit charges
Some adjustments to group income tend to temporarily neutralise the tax effect of certain intra-group transactions or situations but, following the exit of a subsidiary or the termination of the group (including following the acquisition of the parent company, or a merger or demerger where the parent company does not survive), all relevant neutralised items are de-neutralised and become taxable or deductible, as the case may be. They must be added to or deducted from the group taxable income for which the parent company is liable to corporation tax. Generally, exits from and termination of the tax group have a retrospective effect on the beginning of the current fiscal year. Where the group terminates as a result of a merger or acquisition of the parent company, the surviving companies of the group may be included in the tax group of the acquirer. Tax losses of the terminated group may be carried forward under certain conditions and restrictions. It is not uncommon for the target company and its ex-parent company to enter into an exit agreement to set certain consequences of the exit of the subsidiary from the tax group, especially with respect to tax losses and credits or other tax attributes.ii Other relevant taxesBusiness contribution on value added
As a partial substitute for the notorious and now removed local business tax, this business contribution on value added of 1.5 per cent is part of the local economic contribution (CET) and applies annually to the value added by any business established in France. This tax is deductible for corporation tax purposes.Local taxes
Businesses established in France must also pay a business contribution on property, which forms the other part of the CET and is calculated, at local authority rates, on the rental value of all properties used for the business.
French or foreign owners of a property located in France are also subject to the real estate tax, based upon the rental value of the property. All such local taxes are deductible for corporation tax purposes.Wealth taxes
Wealth tax on natural persons has been substantially narrowed by the Finance Act for 2018 to real property and shares in real property entities, except where such property is applied to a business activity of the taxpayer. Non-residents and certain residents are liable to such annual French net wealth tax either on their worldwide assets or on their French assets only. The taxable threshold remains at €1.3 million of taxable assets and the rate escalates from 0.5 to 1.5 per cent where the total net assets exceed €10 million. Pre-existing favourable tax regimes (e.g., the 'Dutreil' regime and regime applicable to investment in small or medium-sized businesses) have been abolished and replaced by new ones, such as exclusion from the taxable basis of shareholding of less than 10 per cent. Assets held through a foreign trust are included in the taxable base and must be specially reported annually by the trustee.
Legal entities are not subject to a general net wealth tax in France. Potentially, a 3 per cent annual tax may apply to the fair market value of properties directly or indirectly owned by certain foreign entities. Where applicable, the tax is not deductible for corporation tax purposes. Most investors benefit from one or more of the many exceptions applicable, as the tax rule's aim is to discourage anonymous investment in France by presumed tax evaders.Miscellaneous taxes
Many other taxes are applicable in France. Some have a very wide scope, such as the apprenticeship tax, based upon payroll in any industry or business sector, and the tax on corporate cars.
Other taxes are specific to certain industries (e.g., the payroll tax imposed at rates escalating from 4.25 to 13.6 per cent on businesses that are wholly or partially exempt from VAT such as insurance, banks, etc.) or certain forms of investment.Value added tax
French VAT applies substantially in line with EU rules on VAT. The standard rate is 20 per cent. Reduced rates are 10, 5.5 and 2.1 per cent.
There are currently no grouping rules in France for VAT purposes except for consolidated payments.Digital services tax
France does not currently operate any such tax but is contemplating doing so.Stamp duties, capital duties and registration taxes
Generally, French stamp duty applies at fixed flat rates on most corporate documents. There is no capital duty on the issuance of shares or other corporate instruments either for cash or for valuable property.
Registration taxes apply at proportional rates on most transfers of certain assets for a consideration or for the assumption of liabilities:
- real property: 5.09 per cent, possibly increased up to 5.8 per cent at local level;
- goodwill and equipment of a going concern, trademarks: 5 per cent;
- shares in unlisted real estate companies: 5 per cent; where made outside of France, the transfer of such shares must be reported by a notarial deed made in France;
- interest in an SNC, SARL: 3 per cent;
- shares in an unlisted SA, SAS: 0.1 per cent; and
- no tax is due on listed shares when no deed is established or executed in France.
A financial transaction tax applies at a rate of 0.3 per cent on the acquisition of shares and other equity instruments of listed French companies where the market capitalisation of the issuer exceeds €1 billion on 1 December of the preceding year. The list currently contains approximately 120 names. The tax currently does not apply to operations that do not result in an acquisition of shares (such as derivatives or contract for difference).
Where a deed is made to record a partition of assets among multiple owners who jointly owned them, a partition duty applies at a rate of 2.5 per cent uncapped.Gift and inheritance taxes
France operates a very wide-reaching gift and inheritance tax system. Subject to the provisions of few double taxation treaties, French gift and inheritance taxes apply on assets worldwide where the donor or deceased is or was a resident of France, or where the heir or beneficiary is a resident of France. Where none of the donor, deceased, heir or beneficiary is a resident of France, French gift and inheritance taxes apply on assets located in France only, including French real property indirectly held through companies, trusts and partnerships, and also including shares in unlisted real estate companies.
There is no inheritance tax on transfers to a surviving spouse, but transfers inter vivos between spouses and any transfers to children and other descendants may be taxed at escalating rates of up to 45 per cent. Transfers to third parties are taxed at 60 per cent. Both formal and informal transfers are taxable.