Taxable base - Article 231 of the French Tax Code - Employers liable to VAT on less than 90% of their sales - Determination of the percentage of wages taxable.

1. An administrative appeal court decision recently ruled that the fact that a taxpayer has set up distinct business sectors subject to different VAT deduction rules cannot be raised for the determination of wage tax (taxe sur les salaires) (CAA Nantes, Nov. 12, 1996, no. 94.657).

2. Wage tax acts as a 'top-up' to VAT by taxing companies that are not subject to VAT on at least 90% of their sales. Prior to the application of the law no. 93.1353 dated December 30, 1993, the basis of computation of the wage tax was determined with reference to the percentage of deduction of input VAT (pro-rata). For example, if a company's VAT pro-rata was 60%, the company was liable to 40% of its theoretical wage tax bill.

3. When companies have distinct activities subject to different rules as regards the determination of the amount of input VAT they are allowed to recover, they are allowed to create distinct business sectors. They can recover input VAT according to the VAT pro-rata applicable to each sector. The same rules were applicable as regards the determination of the wage tax charge of the taxpayers, i.e. they were allowed to use the VAT pro-rata of each sector to determine the wage tax burden generated by the wages of the employees attached to each sector.

4. Pursuant to Article 18 of the law dated December 30, 1993, the legislator has defined the revenues to be taken into consideration for the purpose of determining the wage tax pro-rata. Such revenues include all transactions, even those not falling within the scope of VAT. Wage tax rules are therefore now autonomous in this respect.

Pursuant to Article 18, the Administrative Court considered that the rules applicable to wage tax were therefore no longer related to the rules applying to input VAT deductions. As a result, the Appeal Court judges concluded that the implementation of distinct business sectors relating to VAT could not be used to justify the determination of the wage tax liability.

The content of this article is intended to provide a French guide to the subject matter. Specialist advice should be sought for your specific circumstances.

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