In addition to France, French tax law applies to Corsica as well as the overseas departments (departement d'outre mer) of Martinique, Guadeloupe (French West Indies), Reunion (in the Indian Ocean) and French Guyana. Taxable entities in these overseas territories all benefit, however, from tax rate reductions. Other French possessions, such as the overseas territories (territoire d'outre mer) of French Polynesia and New Caledonia, have their own tax system and are linked to France through tax treaties.

Because Monaco is part of the French customs territory, it is part of France for purposes of value added tax and customs duties.

The central government levies all the taxes and collects most taxes for its own benefit. Local authorities, regional departments and municipalities benefit from certain taxes.

Compared to other industrialised countries, France imposes a low tax burden on personal income, which is balanced by a relatively high burden in the form of social security contributions and levies for other social programmes. The revenues derived from value added tax and registration taxes are also significant.

Direct Taxes
Companies are subject to corporation income tax (which includes capital gains tax), business tax, payroll taxes and other taxes on business enterprises. Individuals are taxed on income including capital gains, net worth, and various municipal and local taxes.

The major direct taxes are assessed by, or must be reported to, tax inspectors who represent the General Tax Administration (Direction Generale des Impots). Local offices are Tax Centres (Centre des Impots). Taxes are paid to a tax collector who represents the Treasury Department (Direction Generale de la Comptabilite Publique). Local offices are the tax collectors' offices (tresorerie principale).

Indirect Taxes
The value-added tax (VAT) is the most substantial indirect tax. In addition, registration taxes are levied on transfers of certain assets or rights, on transfers by death or gift, and on the formation or reorganisation of companies. Various taxes are levied on financial transactions and insurance contracts as well as on the sales of certain products such as alcoholic beverages, tobacco and petroleum products.

VAT and registration duties are reportable and payable to special offices of the Direction Generale des Impots (Centre des Impots for VAT and Recette des Impots for registration duties), except for VAT on imports, which is reportable and payable to the customs authorities.

Sources of Tax Law
The following are the principal sources of French tax regulation in order of decreasing authority:

French tax treaties with other countries: Treaty provisions override all domestic laws and regulations unless they are less favourable than domestic provisions. The tax authorities generally issue guidelines that provide the interpretation of a new treaty's provisions and application.

EU regulations and EU directives when they become directly enforceable: Decisions and cases of the European Court of Justice are enforceable when the court determines that domestic regulations are incompatible with applicable EC rules. EU laws apply to the areas of VAT, customs rules, and direct and indirect taxes. Laws enacted by the French parliament: The most important tax law is the annual Finance Act, voted on at the end of December. All tax laws are incorporated into the General Tax Code (Code General des Impots). When requested, the Constitutional Court reviews the compatibility of such laws with the Constitution Decrees and regulations (decrets et arretes): Issued by the government, decrees and regulations serve to interpret and explain the application of tax laws. The texts are also included in the Code General des Impots. Decisions and cases of the Supreme French Courts: The Conseil d'Etat hears cases on direct taxes and VAT, and the Cour de Cassation has competency for registration duties and some other indirect taxes.

Administrative guidelines issued by tax authorities (instructions administratives) and answers given by the Minister of Economy and Finance to members of the parliament: Taxpayers are entitled to use such interpretations and answers whenever they are published Private rulings (agrements fiscaux): Except in certain limited areas, French tax authorities are not obliged to grant rulings requested by taxpayers.

Enactment of Tax Legislation
By September the annual finance bill is presented to parliament. It must be adopted as the Finance Act before the end of December. The act specifies the government's sources of revenue for the coming year and changes in the rules for assessing income of the preceding year.

During the year, special amending finance acts may be introduced to change the existing tax system.

Tax Administration
The tax authorities administer both direct and indirect taxes.

Filing Tax Returns
A corporate tax return generally must be filed within three months of an entity's year-end.

A resident individual must file an annual income tax return by 28 February. This return reports income and expenses incurred during the preceding calendar year. A non-resident individual taxpayer must also file a tax return with the French tax authorities. The filing date is between 30 April and 30 June, depending on the country of residence. If the tax authorities so require, a non-resident must name a tax representative in France.

Assessment and Appeal
In principle, major taxes are collected from companies and individuals through a self-assessment system.

When an assessment is received as a result of a tax audit, the appeal procedure is divided into two phases. The administrative phase begins when the taxpayer replies to the notice of assessment. If the taxpayer contests the assessment, but the tax inspector maintains his or her position by confirming it in writing, the file is forwarded to the tax collector who issues the tax bill. The matter may be brought before a special commission (Commission Departementale des Impots) if the dispute is over a question of fact, such as an interest or royalty rate or a transfer price. After receipt of the tax bill, the taxpayer may begin the legal phase by filing an appeal with the directeur des services fiscaux or le chef de centre des impôts. If the tax inspector's position is upheld, the taxpayer may bring an appeal before the administrative court and then the Supreme Tax Court.

When appealing, the taxpayer may ask for a suspension of payment, which is normally granted if a bank guarantee is provided. Except in special instances, however, the suspension does not apply to appeals before the Supreme Court.

An advanced payment system is used for both corporate and individual income taxes.

The corporate income tax is prepaid in four instalments, which are due on 15 March, 15 June, 15 September and 15 December. They are based on taxable profit, and the total is normally equal to the tax paid for the preceding year. The balance is due on the fifteenth day of the month following the date for filing the return. Companies ending their fiscal year on 31 December, for example, must pay the balance by 15 April. Newly formed companies are subject to special provisions.

A minimum tax is payable by 15 March, even for unprofitable companies. The amount varies depending on the company's annual turnover, as follows:

	Annual Turnover
Exceeding 	Not Exceeding 	Minimum Tax 
FF millions 	FF millions 	FF

_ 		1 		5,000

1		2		7,500

2		5 		10,500

5 		10 		14,500

10		50 		25,000

50		100		35,000

100		500 		50,000

500	 	_ 		100,000

The minimum tax is regarded as a prepayment of tax if the company has a greater tax liability. It may be used as a credit until 31 December of the second year after the year in which the payment was made.

Individual income tax is prepaid in two provisional instalments on 15 February and 15 May. Each prepayment is equal to one-third of the tax paid in the preceding year. The balance must be paid between September and December.

Individuals may elect to make monthly payments equal to one-tenth of the income tax of the preceding year. Individuals make these payments from January through October. Thereafter, the balance is paid in November up to the amount corresponding to a monthly payment and the remaining, if any, in December.

Tax Audits
Three different types of tax audit are conducted.

The office audit (controle sur pieces) is the most common type of audit for individuals. Businesses may also be subject to an office audit. A tax agent conducting this audit compares the taxpayer's declaration with information already in tax office files, such as prior declarations and informational returns. If the comparison shows a discrepancy, the tax inspector may ask for clarification. Moreover, the inspector may require documentation supporting deductions such as the number of dependants claimed. The taxpayer must respond within a specified time, which is a minimum of two months. If the taxpayer fails to respond, the administration can assess tax using the estimated tax procedure.

Verification of accounts (verification de comptabilite) is the usual form of a tax audit for a business. The procedure takes place at the enterprise's head office, where the inspector examines accounting documents and determines whether they accurately record the situation.

An in-depth audit for individuals (examen contradictoire de la situation fiscale personnelle) is a thorough assessment of the taxpayer's net worth and lifestyle. The tax inspector then drafts a balance sheet of the taxpayer's probable income, based on known expenditure.

Penalties and Interest
Taxpayers are subject to penalties and interest on the amount of tax paid late or declared late as well as on taxes attributable to understated income.

Taxes paid late are subject to:

- for taxes payable to tax collectors (corporate tax, minimum tax, individual income tax and local taxes), a 10% penalty.

- for other taxes, a 5% penalty is levied and an interest of 0,75% per month is charged.

Interest on a late declaration of tax is 0.75% a month. The penalty on a late declaration filed within 30 days following an initial official reminder is 10%. If the declaration is not filed within that time, the penalty is 40%. If a late declaration is not filed within 30 days of a second official reminder, the late penalty is 80%.

If an individual or a company understates its taxable income, a late payment penalty of 0.75% a month is due. If it is determined that a taxpayer acted in bad faith, however, an additional penalty of 40% is due. If the taxpayer has engaged in fraudulent behaviour or has abused the law, the penalty is increased to 80%.

Statute of Limitations
The statute of limitations on individual and corporate income taxes, VAT and business tax provides that only the three preceding calendar years and the current calendar year are open for examination. This limit is extended to include additional prior years that have an influence on open years because of loss carryovers. It may be extended by two years in cases of fraud.

The 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.