Taxable Entities
The principal entities subject to corporate income tax are stock companies (SA, SAS), private limited companies (SARLs and EURLs), partnerships limited by shares and French branches of foreign corporations. General partnerships (societes en nom collectif), joint ventures and limited partnerships (societes en commandite simple) may elect to be subject to corporate tax.

Rates of Tax

Standard Rates
For fiscal years beginning on 1 January 1993, corporate tax is assessed at a standard rate of 33 1/3% of taxable income including distributed profits.

Reduced Rates for Capital Gains
Long-term capital gains recorded in a special reserve account are taxed at a reduced rate of 19%, including long-term capital gains on the sale of the following:

- Patents and licences.
- Portfolio assets other than companies' shares and certificate of investments. Bonds, warrants on bonds and shares of investment funds are therefore subject to corporate income tax at a normal rate.
- Building land. The term "building land" includes within its scope land held for later development as well as land with buildings to be demolished or unfinished buildings, rights to heighten a building and shares of companies that have 50% or more of their assets invested in such lands, buildings or rights.
- Ordinary commercial property and other assets.

Corporate tax is based on a territorial concept. Both French and foreign companies are generally taxed only on income that has a French origin, including dividends and interest income received in France. Income is deemed to be derived from France if one or more of the following applies:

- the entity has a permanent establishment in France;
- the entity does business in France through a representative who does not engage extensively in other business; or
- the entity carries out a complete business transaction in France, such as the purchase and resale of goods within France.

Income Subject to Tax
To calculate taxable income, gross income is first determined, then authorised deduction are taken. Long-term capital gains are taxed separately.

Gross Income
Gross income includes profits arising from the enterprise's principal activity, as well as other income from various sources such as dividends on stock held for investment, the enterprise's rateable share of partnership earnings, real estate income and loan interest.

Gross operating profits consist of the value of total sales during the accounting period plus the value of inventory at the end of that period reduced by the following:

- the total cost of inventory purchased during the year;
- the value of beginning inventory; and
- manufacturing costs, if the entity is an industrial enterprise.

Relief in the form of the dividends paid credit and the participation exemption is available for income received from subsidiaries. (See Dividends.)

Royalty Income
Royalties received by a French company for patents or know-how are not part of gross income if these industrial property rights are registered by the company as fixed assets. Instead they are taxed separately at a favourable 19% rate. If the rights are purchased, the special taxation applies from the second year following the acquisition of the rights. This taxation makes France particularly attractive if royalties enter into tax planning. Favourable treatment is not available for payments between companies in the same group, unless the payment is made by a foreign company.

Capital Gains
Short-term capital gains include gains from the disposition of assets held for less than two years and gains equal to the amount of tax depreciation recorded on depreciable assets held for two years or more. Net short-term capital gains are included in ordinary taxable income. All other gains are long term, including gains on the disposition of non-depreciable assets held for more than two years and, for depreciable assets held for more than two years, on the amount of the gain exceeding the tax depreciation.

Long-term capital gains are taxed at a reduced rate of 19% if carried to a special long-term capital gains reserve. The difference between this rate and the full rate is payable, however, if the reserve is distributed.

Valuation of Assets

Inventory is valued at the lower of cost or market value at year-end. On the balance sheet, it is shown at cost; if market value is lower, a provision for depreciation must be noted separately as a deduction from cost. The first-in, first-out (FIFO) method of inventory valuation is allowed as well as the average cost method. The last-in, first-out (LIFO) method is not permitted.

Receivables and Payables
Receivables and payables are recorded on the balance sheet at their nominal amount. If a receivable becomes unrecoverable, it may be written off as an exceptional loss to the extent the debtor's insolvency is certain and final. If at year-end full or partial payment of a receivable is doubtful, a bad-debt provision may be set up.

Receivables and payables in foreign currencies entered on the balance sheet must be expressed in French francs. At year-end, they must be revalued using the year-end exchange rate. Any foreign-exchange gains or losses are includible in the determination of taxable income.

Securities are recorded on the balance sheet at historical cost, subject to valuation at year-end. The valuation method depends on the nature of the investment. No adjustment is made for unrealised profits, but unrealised losses may be subject to a provision for depreciation. This provision is considered as a long-term capital loss, which is not deductible from taxable income. It may be offset over a 10-year period against long-term capital gains. Shares in mutual funds (OPCVM) are excluded from these rules. These shares must be valued at their liquidation value at the end of the accounting year and the corresponding gain or loss is included in taxable income.

Fixed assets
Fixed assets are normally valued at historic cost, unless they have been revalued. Historic cost includes the actual purchase price and the additional costs necessary to prepare the asset for use, such as transportation costs, customs duties, and installation and assembly costs. It is net of VAT, to the extent that the VAT on cost is creditable against VAT on sales. Revalued assets are recorded at the revalued amount. The amount of such a revaluation is normally subject to corporate income tax.


Business expenses
Business expenses incurred for the direct interest of the company are deductible. Certain expenses deemed to be excessive are not allowed as deductions or are only partially deductible. Consequently, annual depreciation on motor-cars and the cost of leasing cars is limited. A company must provide the tax inspector with additional information regarding the compensation, travel expenses and certain other expenses of its highest paid employees.

Depreciation and Amortisation
To be deductible for tax purposes, depreciation must be booked in the accounting records. The economic useful lives of depreciable assets depend on the practice of the business sector concerned. See below table of rates that are frequently accepted in practice.

Accelerated depreciation using the declining-balance method is available for machinery, most office equipment, scientific-research equipment, warehouse equipment and hotel installations. Purchased software may be depreciated over a 12-month period.

Depreciation Rates
Annual depreciation rates vary by industry. The rates in the following table are frequently accepted in practice.

Item			Method 			Rate (%)	
Commercial real estate 	Accelerated 		2 to 5	
Industrial buildings 	Accelerated 		5	
Residential hotels 	Accelerated 		5	
Equipment 		Accelerated 		10 to 15	 
Machinery 		Accelerated 		10 to 20	 
Containers 		Accelerated 		12.5	 
Trucks 			Accelerated 		25	 
Cars 			Straight line 		20	 
Aeroplanes 		Accelerated 		12.5	 
Computers 		Accelerated 		13.3	 
Patents and		Straight line 		20
industrial know-how

Pollution-control buildings

Pollution-control buildings, if their construction was completed from 1 January 1990 to 31 December 1995, may be depreciated over a 12-month period, provided they are included in already existing production complexes.

For tax purposes, no depreciation is allowed for land, goodwill or, in most cases, trademarks or most trade names. A company may book a provision for these non-depreciable assets only when it sustains an actual loss in the underlying value of the asset.

Amortisation of the cost of patents and industrial know-how depends on the period of use or protection. The minimum useful life for a patent acquired on or after 1 January 1988 is five years.

Reserves and Provisions
A distinction is made in France between reserves, which are accumulated profits, and provisions, which are amounts set aside on the balance sheet and deductible from taxable income.

Companies are required to maintain a legal reserve. A minimum of 5% of net profits after tax must be set aside annually until the legal reserve fund equals 10% of corporate capital. Other reserves are provided for either in the bylaws or in a shareholders' meeting.

Provisions for depreciation are included on the balance sheet. The other two types of provisions are special regulated provisions (provisions reglementees) and provisions for risks and expenses (provisions pour risques et charges).

To be deductible from taxable income, provisions for risks and expenses must be related to a specific item of loss or expense and must be recorded in the accounting records. The loss or expense must be clearly determined, deductible and have its origin in the current fiscal year. When the expense or loss is realised, it must be offset against the provision. When a provision is no longer necessary, it must be added back to taxable income.

Special regulated provisions, although granted as deductions for income tax purposes, do not correspond to actual expenses or losses. They are fiscal incentives that have the character of reserves. These provisions are subject to detailed and extensive rules. The most important are provisions for the following:

- establishing a business abroad;
- commodity market fluctuations; and
- inventory price increases.

A French company, establishing a foreign subsidiary or a branch as a sales outlet or market-research facility, may create a tax-free reserve. To qualify, the French company must own at least 331/3% of the subsidiary.

For foreign commercial investments, the tax-free reserve is equal to the losses incurred by the subsidiary or the branch within the first five accounting years, limited for a branch to the amount of capital invested, for a subsidiary, the amounts paid to the shares' acquisition, with a maximum of FF20 million for companies rendering services. The reserve must be reported as taxable income in proportion to the profit derived each year from the subsidiary over a maximum 10-year deferral period.

The application of these rules was extended by the 1995 finance act for foreign non-commercial investments, but the beneficiary needs to obtain prior consent from the French Tax Administration.

After obtaining prior consent, a French company may create a tax-free reserve if it makes an industrial investment in a non-EU country through a branch or a 10% stake interest in a foreign company. The reserve is equal to one-half of the capital invested during the first five years of operations. The reserve must be added back to income over five years, beginning with the sixth accounting year.

Tax Credits

Foreign Tax Credits
In general, French law does not allow a foreign tax credit; income subject to foreign tax and not exempt from French tax under the territoriality principle is taxable in France net of the foreign tax paid. Most tax treaties, however, provide for a tax credit generally corresponding to withholding taxes on passive income. Furthermore, under internal law, dividends received from foreign subsidiaries benefit from favourable tax treatment under certain conditions (see Participation Exemption).

Research Tax Credit
Increases in research expenditure are eligible for a tax credit computed on a marginal basis (credit d'impot en accroissement), from 1991 to 1995. The credit is granted for research activities performed in France either directly or through government-approved research entities. Qualifying expenditure include the following:

- Depreciation of assets used specially for research activities, including patents, as well as buildings purchased or the construction of which was completed on or after 1 January 1991.
- Wages and related charges for staff exclusively assigned to research activities.
- Other expenses, which together may not exceed 75% of staff wages and related charges.

The credit is equal to 50% of the excess of research expenditure in the subject year over the average amount of such expenditure incurred during the two preceding years after revaluation using the consumer price index. The credit is limited to FF 40 million.

Continuing Education
For the years 1994 to 1998, companies increasing their professional education expenses may be entitled to a tax credit equal to 25% of the increase of these expenses over those incurred in the preceding calendar year. The education tax credit is limited to FF 1 million.

If expenses benefit employees aged 45 years or more, employees of companies with staffs of less than 50 persons, or less skilled workers, the percentage for the tax credit is 40% instead of 25%, and the ceiling is raised to FF 5 million.

Tax Holidays

The French Government has established enterprise zone of 750 acres each in Dunkerque, la Ciotat and la Seyne. A corporation is exempted from income tax for its first 10 years if it has operating premises in the zone and employs at least 10 persons after two years. Companies dealing in certain products, such as steel, synthetic fibres or ships or car building, or engaged in certain activities, such as distribution, banking and insurance, are not eligible for this tax exemption.

Commercial and industrial companies established after 1 October 1988 may benefit from a tax holiday if their operations consist exclusively of a newly created activity and if 50% or more of their share capital is not owned, directly or indirectly, by other companies. A managing activity performed in the other company by any individual shareholder of the new company is considered as indirect ownership of a company. The amount of the tax exemption gradually declines after the first two years of a company's existence as seen in the table below.

 	Period (Months) 	 Income Tax Exclusion (%)
	1 to 24	 		100
	25 to 36	 	75
	37 to 48	 	50
	49 to 60	 	25

Industrial and commercial companies located in the North of France (Nord Pas de Calais) and employing at least 10 individuals are eligible for a tax credit equal to 22% of the amount of their industrial investment during the 36 months following the establishment. A prior consent of the European Commission is required if the activity concerns iron and steel metallurgy, synthetic fibres, shipbuilding or car manufacture.

Companies created in Corsica from 1 January 1988 through 31 December 1994 benefit from a corporate tax exemption for eight years if all of the following apply:

- 50% or more of their voting rights are not held, directly or indirectly, by other companies;
- the activity is newly created; and
- the activity concerns industry, the hotel business, or construction and public works.

Minimum tax must be paid, however.
An eight-year exemption from corporate tax subjected to a prior consent is also granted to companies establishing a new activity through a subsidiary or branch in Corsica from 1 January 1991 to 31 December 1994 if the activity concerns industry, construction, agriculture or craftsmanship.

Loss Carryovers
Ordinary losses are allowed to be offset against net capital gains as well as ordinary income. They may generally be carried forward for a period of five years. To the extent that the losses result from depreciation charges, however, they are allowed to be carried forward indefinitely.

Short-term capital losses are deductible from ordinary taxable income. Long-term capital losses may be carried forward against net long-term capital gains for 10 years.

Because trading profits are taxed at a 331/3% rate and long-term capital gains at a rate of 19%, offsetting trading losses against capital gains is not normally advantageous.

Losses may be carried back for a period of three years. The carryback results in a credit that may offset any future corporate tax liability and is not refundable unless it remains unused for five years.

Treatment of Groups of Companies
A French company and any French subsidiaries in which it has a 95% or more ownership interest may qualify for special tax treatment. For the treatment to apply, the 95% holding may be direct or indirect but must have existed for the entire fiscal year. In addition, the parent company may not in turn be 95% or more owned by another French company subject to corporate tax.

Profits and losses arising from the different entities in the group may be offset without limitation. The taxable income of each company is first determined separately in accordance with generally applicable tax rules. Then the parent company makes certain adjustments to eliminate the tax consequences of intra-group transactions. The parent company is liable for the corporate income tax due on the overall fiscal result.

Reintegrations may be usually imposed if a subsidiary leaves the group within the first five years that the special tax treatment is utilised by the group.


Dividends Paid Credit
To reduce double taxation of corporate profits (taxation at both the corporate and shareholder levels) dividends paid by a French company provide a tax credit (avoir fiscal). The credit is equal to 50% of the amount received by the shareholder. If the distributed profits have not been subject to tax in France because, for example, they were realised abroad, or if the distributed profits were taxable during a financial year ending more than five years earlier, the shareholders are still entitled to the tax credit, but the company must pay a precompte mobilier. The precompte mobilier is equal to the avoir fiscal and serves as a substitute for corporate tax on profits not previously subject to tax and as a distribution incentive for other profits. If dividends are paid from the special reserve for long-term capital gains, the precompte mobilier is limited to the difference between 331/3% of the distributed gain before all taxes and the reduced tax previously paid on the long-term capital gains. The precompte mobilier may be reimbursed under tax treaties.

Participation Exemption
Dividends and other ordinary income distributions may qualify for the participation exemption (regime des societes meres et filiales) if the recipient is a parent company. To qualify, the parent company must be an entity that is liable for corporate income tax at the standard rate and must hold a minimum of 10% of the share capital of the subsidiary at the time of the distribution. The holding may be less than 10% if the shares cost at least FF 150 million. The shares held must be either registered or deposited with an establishment approved by the tax administration. In addition, the shares must have been originally subscribed by the parent company or, if acquired later, must be subject to an agreement, entered into by the parent company, to hold them for at least two years.

If all of the above conditions are met, the parent company is exempt from corporate income tax on dividends received.

Sometimes, the take-over of the parent company or of the subsidiary may lead to taxation of dividends if the above conditions are no longer met, i.e. following the take-over of a subsidiary by a third party, it is possible that the parent company no longer holds the 10% minimum of the share capital in order to benefit for the participation exemption regime.

The 1995 tax bill stated that the capital contributions, exchanges and cancellations of shares further to corporate reorganisations, are not anymore considered as a disposal of shares with respect to the obligation of holding the shares during at least two years.

Because these dividends are exempt from corporate tax, the precompte is due when they are redistributed by the parent company to its shareholders. Foreign-source dividends are subject to special treatment under certain conditions.

Tax credits and avoirs fiscaux may not be offset against corporate tax, because credits apply only if taxable income results. They may be used solely to pay the precompte mobilier due on redistributions.


A merger can be effected either by the acquisition of one or more companies by another or by the creation of a new company. Tax advantages are granted to encourage such reorganisations. The following provisions apply to entities subject to corporate taxation if the shareholders of companies absorbed receive only shares in exchange for the company's assets.

An acquired company is not subject to tax on capital gains resulting from the transfer of its depreciable fixed assets. It may, however, elect to have these gains taxed immediately at the reduced rates described in Rates of Tax. If this election is not made, these capital gains are integrated into the taxable income of the acquiring company within the five years following the merger and taxed at the standard rate. The distribution of the acquiring company's shares to the acquired company's shareholders is not treated as a taxable event.

Net capital losses incurred on contribution of depreciable assets by an acquired company are either deductible from the acquired company's taxable income or transferable to the acquiring company. Reserves of the acquired company are not taxed unless the tax basis of such reserves is reduced to zero.

Tax-deductible provisions and the special long-term capital gain reserve of an acquired company must be recorded on the balance sheet of the acquiring company. Unless the tax authorities consent otherwise in advance, tax losses of the acquired company may not be carried forward for use by the acquiring company. Capital gains on non-depreciable assets of the acquired company are taxable only at the time of sale by the acquiring company. The basis for measuring the gain is the purchase price of the assets paid by the acquired company.

After the merger, assets are depreciated based on their value determined in the merger. Whether gain or loss on disposition of these assets is considered long term or short term is determined by the date of their acquisition by the acquired company.

Merged corporations benefit from reduced rates of registration taxes.

Spin-offs and Partial Transfers
A spin-off (scission) is a transaction in which one company contributes all its assets and liabilities to two or more companies in return for shares of those companies, then dissolves and distributes the shares received to its shareholders. A partial business transfer (apport partiel d'actif) is a transaction in which one company transfers part of its assets to one or more companies in return for their shares. For spin-offs or partial transfers to benefit from the same favourable treatment granted to mergers, prior approval must be received from the Ministry of Economy and Finance. Approval is not required if the partial business transfer concerns one or more complete and autonomous sectors of activity. The transferring company, however, must retain the shares received for five years and use the original value of the assets transferred as the basis for computing any future capital gains on sale of the shares.

If a foreign company is involved in the reorganisation, these favourable tax benefits may be available only if the prior agreement of the tax authorities is obtained.

Dividends, Interest and Royalties Paid to Foreign Affiliates

Dividends Paid to Foreign Affiliates
Dividends paid to foreign affiliates by French companies subject to corporate tax are subject to a 25% withholding tax. Depending on treaty provisions, recipients may be entitled to the avoir fiscal (see Dividends Paid Credit). Dividends paid to a parent company located in the EU are exempt from withholding tax provided the parent company has held at least 25% of the distributing company for two years.

In general, interest payable on loans or bonds contracted outside France is exempt from withholding tax. Other interest paid to non-residents are subject to a withholding tax at the following rate:

- 15% on certain bonds, other transferable loan rights and shareholder stopped accounts;
- 35% on treasury bonds issued from 1 January 1990 (15% if issued from 1 January 1995); and
- 35% on accrued interest on debts, deposits, warranties and current accounts till 31 December 1994 (15% as of 1 January 1995).

Bonds issued on or after 1 January 1987, government bonds issued on or after 1 January 1984 and various other bonds under certain conditions are exempt from withholding tax but not from the 4.4% social contributions. If applicable, however, most tax treaties reduce or eliminate the withholding tax.

This capitalisation rules apply to loans granted by a parent company. Interest on such loans is tax deductible if the subsidiary's share capital is fully paid up and the interest rate charged does not exceed the average rate paid on French bonds issued by private companies (6.4% for fiscal years ended on 30 September 1994). A third limitation, that the loan does not exceed 150% of the amount of the subsidiary's share capital, applies only to shareholders considered to be actually managing or controlling 50% or more of the French company. This third limitation, however, does not apply to a French parent that qualifies for the participation exemption.

Royalties paid to non-resident individuals or companies for the use of patents, trademarks, copyrights or know-how are subject to a withholding tax of 331/3%. This rate is reduced by most treaties.

Management Fees
Management fees paid to non-residents are subject to a standard 331/3% withholding tax. As in other countries, management fees, as well as royalties, paid to non-resident related parties should be determined at arm's length to guarantee their deductibility. Arm's length management fees are determined separately for each situation.

Headquarters Offices
Foreign companies may take advantage of a special headquarters regime in France. The headquarters offices may be established either as a French company or as a French branch of the foreign company. The basis for computing corporate tax can be negotiated with the French tax authorities and is usually between 8% and 10% of the office's operating expenses.

The contThe content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Pierre Knoepfler on +33 (1) 46 93 70 00.
© Business Monitor 1995 Tel +44 171 820 7733.