France: Personal Income Tax

Last Updated: 8 September 1996
In a recent Instruction, the French Tax Authorities comment the new rules regarding the offset of non-professional losses at the level of the global income. Indeed, losses resulting from industrial and commercial earnings may not longer be allocated on the global income when they result from non-professional activities, that is to say when these activities do not include personal, direct and continuous involvement of a member of the tax domicile. These losses can only be allocated on the profits withheld from activities with the same nature during the same year or the five following years.

Therefore the aim of the rule enacted by Article 156-1-1 bis of the French General Tax Code, coming from Article 72 of the Finance Law for 1996 is to cancel the use of some tax optimization schemes. It concerns in principle all losses or parts of losses of activities created, taken over, spread out or attached as of January 1st, 1996, as well as the part of the losses coming from new investments realized as of this date concerning pre-existing activities. However there may be two exceptions, on the one hand for losses coming from first agreed investments, realised overseas under the tax assistance regime (French General Tax Code, Art. 238 bis HA), and on the other hand for losses existing at opening of a winding-up procedure.

An administrative instruction dated August 1st, 1996 comments on the new pronouncement and specifies its modalities of application. The principal retained solutions are described herebelow.


1.1 Nature of the activity:

The regime of the non-professional losses "industrial and commercial earnings" applies to the whole of activities part of the category of industrial and commercial earnings, either by nature, or by determination of the law.

According to the Tax Authorities, the tax category should be taken into account and not the intrinsic nature of the activity. Therefore, the losses resulting from the following may be submitted to the new system:

  • agricultural or non-commercial activities secondary to an industrial or commercial activity (French General Tax Code, Art. 155);
  • the bare renting of buildings booked as assets of an industrial or commercial company;
  • an activity, whatever its nature, operated in a partnership the shares of which are in the assets of an industrial or commercial company.

1.2 Legal frame of the operation

The Tax Authorities confirm that the activity of the interposed companies the only purpose of which is to manage their personal estate assets is a civil one, which forbids, as of the publication of the instruction (that is to say August 14, 1996) any deduction of their own charges, especially the financial charges borne for the purchase of the shares of the operating company in a loss position. This rule is also applicable to investments realized as of January 1st, 1996. It specifies that when the interposed company is a family limited liability company, the option for the partnership regime is forbidden due to its civil purpose.

1.3 Non-professional nature of the activity

  • The activities leading to losses which cannot be allocated on the global income are defined, in opposition with professional activities, as activities not including personal, direct and continuous involvement of one of the members of the tax domicile for the realization of the necessary acts.
  • The Tax Authorities have specified that the assessment of the professional nature or not of the activity (a simple de facto question) must be performed with respect to the objective attributed to the new text by the legislator, that is to say, to put an end to some tax optimization schemes, the latter allowing, under cover of an activity part of the industrial and commercial earnings (hotel rooms, medical care residences ...), as the deduction of the losses global income comes actually from simple investments.
  • When the same company exercises several distinct activities, the nature of the involvement of the taxpayer must be assessed for each activity.
  • In the case of interposition of partnerships, the professional nature of the activity must be assessed at the level of the company exercising the loss activity.
  • The professional, personal, continuous and direct involvement of the taxpayer requires a regular attendance on the location of the activity and the full exercise of one of the functions necessary to the company (as the realization of isolated acts is not enough). But it is not compulsory that this activity be the only one of the taxpayer nor his main activity. The fact to know whether the execution of administrative and accounting tasks characterizes such an involvement depends, according to the Tax Authorities, on the size of the company and the complexity of its organization.
  • A simple involvement in the Management Board and the Shareholders' Meeting, or a subsequent audit of the management are not enough to characterize the exercise of a professional activity.
  • The Tax Authorities consider that the activities of leasing or renting of buildings with their operating means, may in no case, have a professional nature.


The profit and loss incomes of the involved non-professional activities of the tax domicile of a fixed year are submitted to a general offset. The possible surplus of the losses might be carried forward on the income of the activities involved of the five following years.

The losses carried forward borne during the oldest tax year are thus first allocated.

It should be noted that only the proper losses are involved, except long term capital losses and deemed deferred depreciations, which still have to be allocated at the level of the income of the non-professional activity under the usual conditions.


As a whole, but for limitative exceptions, this new law related to the non-professional losses "industrial and commercial earnings" applies to those coming from activities created or taken over as of January 1st, 1996 as well as to the part of the losses coming either from the spreading or attachment of activities, or from investments realized as of this date. The allocation on the global income remains however possible for some programs of investment in process on January 1st, 1996.

3.1 Creation of an activity:

It is deemed to be realized when the new company has at its disposal the fixed assets necessary to the exercise of its activity and realizes the first commercial operations. However, a transitional measure excludes from the system the losses borne by companies created after January 1st, 1996 and concerning tangible movable assets purchased before this date, provided that the activity starts within the six following months.

3.2 Take-over of an activity:

  • The take-over date is that of the application of the business or, in case of creation of a new company purchasing an existing activity, that of the repurchase or the contribution to the company.
  • The Tax Authorities compare to a take-over of activity, the acquisition or subscription of shares of a partnership operating an industrial or commercial activity and submits to the new rules the losses of these companies, whatever the date of beginning of the activity, for the part falling to associate taxpayers of the company since January 1st, 1996 and not exercising any professional activity.

3.3 Spreading and adjunction of an activity

Operations linked to new activities must be isolated from those resulting from the follow-up of the pre-existing activity(ies), which implies that these operations:

  • be likely to be operated independently (separate premises, especially own equipments);
  • be recorded in a separate accounting or identified in a sub-account distinct from the global accounting and be subject to a separate specific yearly return.

Failing that, the whole of losses coming from non-professional activities are submitted to specific rules of allocation.

3.4 New investments

All investments realized as of January 1st, 1996 for a non-professional activity existing at that date lead to the application of these new rules concerning a part of the loss of this activity. These investments may relate to new or second-hand goods, depreciable or not, purchased (or created or rented) in order to replace the existing assets or those aimed at increase the volume of activity of the company.

3.5 Investments in process on January 1st, 1996

  • The allocation on the global income remains possible for losses coming from the operation of buildings which have been subject to a declaration of opening of site, when the latter are acquired, directly or indirectly, by the taxpayer within the five years and that goods or rights acquired have not been held, directly or indirectly, by an individual. The latter condition is nevertheless not required in the three following situations:

                - the building has been built or operated by an
                  individual for an industrial and commercial 
                  activity at a professional level;

                - existence within the shareholders of a partnership 
                  company of an individual not owning more than 0.1%
                  of the capital;

                - subscription, in the context of an increase of 
                  capital, of new shares issued by the company 
                  exercising the activity at which the building was

  • The prior regime of allocation of the losses also remains applicable to the losses coming from the operation of tangible movable assets acquired in a new state, not yet delivered on January 1st, 1996, when the latter have given rise, before this date, to an order with an instalment payment at least equal to 50% of their price.
  • As already mentioned, this measure also applies to losses borne by a company created as of January 1st, 1996 concerning the goods delivered before this date.
  • In case of payment of the instalments by bill of exchange, the payment time-limit of the latter must occur before January 1st, 1996.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.

For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/, Joel Fischer on 33/, or Laurent Borey on 33/(1)55 61 10 10 or enter text search: "Archibald Andersen Profile".

The members of Archibald Andersen Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.

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