1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
There is a single corporate tax regime.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
A corporate entity is subject to corporate income tax at the standard rate of 31% for 2019 and 28% for 2020. This standard rate is expected to increase to 25% by 2022.
Corporate income tax is applicable at a rate of 10% to income received as consideration for the use (licences or sub-licences) or the sale (capital gains) of industrial property rights under certain conditions (please see question 2.5).
Corporate entities are also subject to a local economic contribution (ie, a local business tax) (CET), comprising the corporate property contribution (CFE) and the business value-added contribution (CVAE). The CFE contribution is payable only by corporate entities whose income is higher than €152,500. It is based on the rental value of any real estate that is subject to property tax and used by corporate entities for business purposes. The CVAE contribution is payable only by corporate entities whose income is €500,000 or more. The rate ranges from 0% to 1.5%, depending on the value added generated by the corporate entity. The CET contribution is capped at 3% of the value added generated by the corporate entity. This contribution is deductible from the corporate tax base.
The corporate social solidarity contribution is applicable to companies whose revenues exceed €19 million. The rate is 0.16% of any revenues above this amount. The corporate social solidarity contribution is deductible from the tax base of the corporate entity for corporate income tax purposes.
All property owners are subject to property tax. The value of this tax varies according to the property's location and is based on the land registry rental value of the land on which the building stands, minus a 50% fixed rebate for costs. Property tax is deductible from the tax base of the corporate entity for corporate income tax purposes.
Transfer taxes are also applicable to various transfers made by corporate entities – for example:
- 5.09% or 5.8% (in most French regions) of the price for the acquisition of land or buildings located in France; and
- 3% or 5% of the price for the acquisition of goodwill.
Other taxes also apply to corporate entities, such as:
- payroll taxes on employees' remuneration, which is payable by corporate entities subject to VAT less than 90% of their turnover in the year before the payment of remuneration;
- a tax on company cars;
- a tax on polluting activities; and
- excise duty on certain products sold by corporate entities, such as gas, alcoholic beverages and tobacco products.
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
The corporate tax base comprises the earnings generated by companies operating in France after the deduction of all deductible expenses, as booked in the profit and loss statement. Fixed assets are depreciated on a straight-line basis over their expected operating life. However, some expenses may be depreciated on an accelerated basis. Certain types of provisions are also permitted (eg, for depreciation, risks, renovations, price increases). All business expenses are in principle deductible, except where French tax law provides otherwise. For example, there are some limitations to the deductibility of financial expenses. The deductibility of certain expenses is expressly forbidden, such as the tax on company cars and provisions for retirement indemnities.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
Yes – 5% of the gross amount of dividends which are eligible for the parent-subsidiary tax regime is included in the corporate entity's tax base (ie, effective taxation between 1.55% and 1.72%). However, distributions from corporate income tax exempted companies, such as real estate investment trusts, are in principle excluded from the participation exemption regime.
Only 1% of the gross amount of dividends is included in a corporate entity's taxable result where the dividends are:
- distributed within a tax consolidated group; or
- paid by a subsidiary held at 95% or more established in another EU member state, or in Iceland, Norway or Liechtenstein, and which is liable to pay an equivalent of the French corporate tax (ie, effective taxation between 0.31% and 0.34%).
Only 12% of the gross amount of capital gains eligible for the tax exemption regime (ie, the transfer of share capital from a minimum shareholding of 5% held for a minimum holding period of two years – the shares of real estate companies are excluded from the participation exemption regime) is included in the corporate entity's tax base (ie, effective taxation between 3.72% and 4.13%).
1.5 Is the regime a worldwide or territorial regime, or a mixture?
The corporate income tax is a territorial regime under which only profits made by corporate entities operating in France are liable to corporate income tax, regardless of nationality. The term ‘operating in France' refers to a corporate entity which carries on a regular business in France – whether from a fixed base or, if there is no fixed base, through representatives without independent professional status or as part of operations forming a complete business cycle.
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
Tax losses recorded by a company in France, including start-up losses, can be carried forward or back. Tax losses can be carried forward indefinitely, provided that there is no change in the activity generating the tax losses. In each financial year, companies may offset tax losses of up to €1 million + 50% of profits exceeding €1 million. The tax losses can be offset against the previous year's earnings up to €1 million (‘carried-back losses'), creating a corporate income tax receivable. After a five-year period, the balance of the corporate income tax receivable not used to pay the corporate income tax can be reimbursed to the company upon request. The corporate entity can also decide to transform it into cash through a financial institution.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
Only the named or legal owner of the income is taxed, except where the foreign-controlled company rules apply (Article 209B of the French Tax Code – please see question 5.3). In practice, the concept of beneficial owner is used by the French Tax Administration to deny the application of a double tax treaty provision where it is applicable or included in anti-abuse provisions.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
Yes – a 15% corporate income tax rate applies to certain small and medium-sized enterprises (SMEs) (ie, corporate entities which have a turnover below €7.63 million and where 75% of the voting rights and financial rights are held by natural persons on a continuous basis and/or by other SMEs), on that part of their profits that falls below the €38,120 threshold.
The corporate income tax rate is currently 28% on earnings up to €500,000 and 31% above this threshold (except for companies with a turnover equal to or higher than €250 million, in which case the corporate income tax rate remains at 33.33% for 2019).
As from 2020, there will be only the 15% reduced rate (up to €38,120) for SMEs and the 28% standard corporate income tax rate for all other corporate entities.
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
Civil partnerships which conduct commercial activities are automatically liable for corporate income tax. They can also be liable for other corporate taxes (as described in question 1.2).
The following entities (barring exceptions) can opt for corporate tax:
- partnerships, notably general partnerships;
- civil law corporations (except for civil construction-sale companies);
- limited partnerships;
- joint ventures; and
- limited companies and private limited farm companies, where the sole shareholder is a physical person.
This possibility has also been extended to limited liability sole proprietorships. The option must be explicit and is irrevocable unless it is waived before the end of the fifth financial year following exercise of this option.
In general, any entity which is considered to conduct economic activities can be liable for corporate taxes (as described in question 2.1).
2 Special regimes
2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
A specific corporate tax exemption exists for certain listed real estate companies (sociétés d'investissement immobilier cotées (SIICs)) and their 95% owned subsidiaries (which opt for the SIIC tax regime), as long as they comply with the relevant distribution obligations (ie, distribution of 95% of their rental income, 60% of their capital gains and 100% of the dividends they receive where such income is derived from the exempt tax sector).
An SIIC and its subsidiaries can have a taxable sector (comprising ineligible assets and activities), provided that this represents less than 20% of their assets. Real estate mutual funds (approved by the Financial Markets Authority) are also eligible for a corporate tax exemption, as long as they comply with the relevant distribution obligations (85% of net income from real estate assets, 50% of net capital gains on disposals of assets and 100% of dividends from unlisted companies subject to the SIIC tax regime).
In specific regional assistance zones, small and medium-sized enterprises newly created (before 1 January 2021) are eligible for a five-year corporate income tax exemption. However, the total amount of income so exempted cannot exceed €50,000 in any 12-month period (this previously stood at €100,000 for businesses set up before 1 January 2015), increased by €5,000 per employee living in the eligible area hired as from 1 January 2015. This five-year period is followed by a three-year partial corporate tax exemption (ie, a 75%, 50% and 25% corporate tax exemption, respectively).
Under certain conditions, innovative start-ups or university start-ups established on or before 31 December 2019 are eligible for a full corporate income tax exemption in the first year they make a profit (this may not be longer than 12 months) and a 50% corporate income tax exemption in the following year. They may also be exempted from the local economic contribution and property tax for seven years, pursuant to a decision made by the local communities.
Relief from local direct taxation (local economic contribution, property tax) may also be available in certain areas of France, particularly for the establishment or expansion of industrial businesses.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
Transfer tax relief is available in the event of an equity share transfer through an intra-group transaction:
- between companies that are members of a group and that comply with the requirements of Article L233-3 of the Commercial Code (ie, control of at least 40% of the voting rights);
- between companies that comply with the requirements of Article 223A of the French Tax Code (ie, 95% owned subsidiaries or mutual banking groups that qualify for the tax consolidation regime); or
- during a merger, acquisition or partial transfer of assets that complying with the conditions ruled by Article 210A or 210B of the French tax rules.
However, this is not applicable to share transfers of real estate companies (which are subject to a 5% transfer tax).
A special corporate income tax consolidation regime is also available for groups of companies. A French parent company and its 95% owned subsidiaries may elect to be treated as a group, so that corporate income tax is imposed on the total profits and losses of group members. For equity share transfers effected before 31 December 2018, capital gains on intra-group equity share transfers were excluded when calculating the tax base of the tax consolidated group. In exchange, the 12% taxable portion of the capital gain was added to the tax base of the tax consolidated group if the share equities were transferred outside the group or the transferee and/or owner of the equity shares exited the group. This relief is no longer applicable as from 1 January 2019. However, capital gains on asset transfers (other than equity shares eligible for the tax exemption regime) are still excluded when calculating the tax base.
There is also a participation exemption regime for dividends (please see question 1.4).
Upon the request of the absorbing company, and under certain conditions, a neutral corporate income tax treatment is available in the case of mergers, split-ups or partial contributions of assets that comply with the requirements of Article 210A of the French Tax Code. This mainly results in the deferral of capital gains and provisions taxation (unless provisions are no longer required) at the level of the absorbed company, provided that some declaration requirements are met. Capital gains arising from the cancellation of the absorbing company's interest in the absorbed company as a result of a merger are tax exempt. Tax losses in the absorbed company can be retained under a specific tax ruling.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
A taxpayer can elect for the ‘micro-enterprise' scheme, which has the advantages of simplified registration formalities and simplified calculation and payment of income tax.
In order to opt for the micro-enterprise scheme, the taxpayer's turnover should not exceed a certain threshold, depending on the nature of the activities:
- €170,000 per year maximum for the sale of goods, objects, supplies of food to take away, or accommodation such as hotels, bed and breakfast, rural lodgings and furnished houses or flats; or
- €70,000 maximum per year for services such as crafts or independent professional services.
The thresholds are updated every three years and the next update will be on 1 January 2020.
Under the micro-enterprise scheme, the French Tax Administration will determine the taxpayer's taxable profits by applying a standard tax deduction to the taxpayer's turnover. This flat rate allowance varies according to the nature of the activity:
- 71% for purchase-resale activities and furnished accommodation rental;
- 50% for commercial services; and
- 34% for other services (ie, independent professional services or non-commercial activity).
In addition, taxpayers eligible for the micro-enterprise scheme are exempt from value added tax (VAT) on their turnover, unless they opt for VAT. The VAT-free regime threshold is:
- €82,800 per year for the sale of goods, objects, supplies of food to take away or accommodation such as hotels, bed and breakfast, rural lodgings and furnished houses or flats; and
- €33,200 per year for services such as crafts or independent professional services.
Output VAT cannot be deducted.
In general, business profits earned by individual entrepreneurs include profits taxed in the category ruled by law (industrial or commercial profits, non-commercial profits or profits from agriculture). The rules for determining the tax base are in principle identical to those that apply with regard to corporate income tax. However, the territorial rule for corporate income tax does not apply to the profits of enterprises that are liable to personal income tax. Only entrepreneurs (earning non-commercial profits or commercial profits which are eligible for the simplified tax system) can record their revenues and expenses through the cash-based method, unless they opt for the accounts-based method.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
Corporate entities which have income, expenses, receivables and liabilities in foreign currency must book these in euros in their French accounts. Exchange gains and losses (ie, the difference between the local currency and euros) must be booked in separate accounts in the profit and loss account. Unrealised exchange gains or exchange losses on receivables and liabilities (booked in the balance sheet) are taxable or deductible from the tax base of the corporate entity for corporate income tax purposes.
2.5 How are intangibles taxed?
Some intangibles can be amortised.
At the option of the corporate entity, research and development expenses relating to intangibles can be immediately deducted or can be added to the intangible cost price and amortised.
Patents can be amortised on a straight-line basis over a minimum period of five years, provided that the same depreciation accounting is retained.
Development costs and software development costs must be amortised on a straight-line basis over a maximum period of five years.
The amortisation of goodwill is not allowed.
A new taxation regime for income generated from industrial property and software has been adopted as from 1 January 2019. Under the IP Box regime, income received as consideration for the use (licences or sub-licences) of patents and similar assets (mainly inventions for which patentability has been certified by the competent authority, industrial manufacturing processes and copyrighted software), and capital gains derived from the sale of patents and similar assets, may be taxed at a 10% corporate tax rate under certain conditions.
The taxpayer can opt for taxation either by type of intangible assets or by family of products or services.
The net income base that is subject to the 10% rate will take into account the research costs and a percentage determined from the ‘nexus' approach (ie, the ratio between the qualified costs and the total costs, including the purchase cost).
In order for a significant proportion of IP income to qualify for tax benefits, a significant proportion of the actual research and development (R&D) activities must have been undertaken by the qualifying taxpayer. Hence, this approach limits the application of the IP Box regime if R&D is outsourced to related parties.
As part of the first year of the option, a ‘capture' mechanism is available to take into account previously incurred research costs, the amount of which will vary depending on the option date. This new regime will also apply within tax consolidated groups.
In order to opt for the preferential tax regime, detailed documentation must be provided to the French Tax Administration on the first day of any tax audit; otherwise, a penalty corresponding to 5% of the income generated from the non-documented, intangible asset may be applied.
If they are not eligible for the new IP Box regime or if the corporate entity does not opt for this regime, capital gains resulting from intangible transfers are subject to corporate tax at a standard rate (31% or 33.33% for 2019 and 28% for 2020).
2.6 Are corporate-level deductions available for contributions to pensions?
A corporate entity's contributions to compulsory basic pension and supplementary pension schemes are deductible from its taxable income. Provisions for retiring allowance are not deductible for corporate income tax purposes.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
French corporate income tax rates and the surtax to corporate income tax do not depend on the sector of activity in which a corporate entity operates.
However, a wage tax applies for corporate employers established in France which are not liable to pay VAT or which are liable for tax on less than 90% of their turnover. The wage tax partly or wholly supersedes VAT in this situation. The payroll tax applies in particular to specific sectors in which corporate entities are VAT exempt on most of their turnover, such as banking, insurance and pure holding companies. The wage tax is based on the gross annual amount of all remuneration and benefits in kind paid by the employer. The tax is progressive (from 4.25% to 13.6%).
Excise duties are also levied on beverages (alcoholic and non-alcoholic), gasoline and tobacco.
A new 3% tax has just been introduced on revenues deemed to have been generated in France by digital companies, wherever they are established, which produce annual supplies of taxable services of more than €25 million in France and €750 million worldwide.
The digital service tax applies to revenue from digital platforms which enable users to interact with each other, including for the delivery of goods or services between users. It also applies to revenue from targeted advertising on digital platforms, including revenue from the transfer and management of personal data for advertising purposes. The first payment is due in November 2019.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
Companies whose turnover exceeds €7.63 million are subject to an additional social contribution at 3.3%, assessed on that part of the corporate tax exceeding €763,000, resulting in an overall corporate tax rate of 32.02% (or 34.43% for the largest companies for 2019). Small and medium-sized enterprises (as defined in question 1.8) are exempt from this additional corporate tax contribution.
2.9 Are there any deemed deductions against corporate tax for equity?
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
In principle, the tax treatment of capital assets follows the accounts, with some special treatment in certain circumstances. For example, the acquisition cost of shares can be booked as charges or capitalised on the balance sheet and amortised. From a tax perspective, the acquisition cost of shares must be written off over five years.
Capital assets are generally depreciable over the normal use period, at least up to the straight-line amount. Some capital assets (eg, telephones, vehicles) may be depreciable with a declining-balance method if this is consistent with their actual use.
To promote certain investments, several tax schemes provide accelerated depreciation allowances for certain new tangible assets over a 12-month period. Equipment designed to save energy and equipment for the production of renewable energy can benefit from accelerated depreciation.
3.2 Are there research and development credits or other tax incentives for investment?
Research and development (R&D) expenses allow for a tax credit (CIR) equivalent to 30% of the eligible expenses borne during the year, plus 5% of the R&D expenses above the threshold of €100 million.
Salaries for research staff are wholly integrated, plus 50% of R&D operating costs and 75% of investments in R&D operations.
All companies incurring R&D expenses are eligible, regardless of size, business sector and nationality.
Small and medium-sized enterprises (SMEs) can claim a refund of unused CIR. Large firms must carry forward the unused CIR over the following three years; any CIR remaining after this three-year period will be reimbursed to them.
Eligible companies can combine the benefits of the CIR with those of the Innovative New Companies scheme, which provides corporate tax, local tax and social security contribution incentives over an eight-year period, as well as with all other tax incentives for new businesses established before 31 December 2019. Such new businesses can benefit from a full exemption for the first financial year or the first period for which they are taxed on profits (this may not be longer than 12 months), followed by a 50% exemption for the next year in which they post a profit.
The local economic contribution and property tax for seven years following a decision by local government.
An innovation tax credit is also available for SMEs, which can obtain tax relief amounting to 20% of the expenses incurred in designing and/or making prototypes or pilots of new products, as defined in the tax regulations. Eligible expenses are capped at €400,000 per business per year. Expenses are declared using the same form and under the same terms and conditions as the research tax credit. Under certain conditions, SMEs can receive their innovation tax credit rebate upfront.
Corporate entities can depreciate over a five-year period those cash contributions made directly to innovative SMEs (until 3 September 2026) or made through French or European investment funds which invest in such entities.
3.3 Are inventories subject to special tax or valuation rules?
Inventories can be assessed from a tax and accounting perspective by using either:
- the weighted average cost method (ie, the cost of the units sold in any given year is the weighted average cost of all available inventories for sale that year); or
- the first in, first out method (ie, the first inventory item purchased is the first to be sold).
For corporate entities whose net income is determined under a simplified profit and loss tax regime, inventories can be assessed using a cost-plus method, to which they apply a deduction on the sale price corresponding to the margin applied for each category of goods.
There is a difference between the accounting definition of inventories (ie, assets that the corporate entity controls) and the tax definition (ie, assets which the corporate entity owns at the end of the financial year, even if the entity no longer controls them). As a consequence, an asset which is no longer in the accounts because it is no longer controlled by a corporate entity must be neutralised from a tax perspective if the entity is still the owner.
3.4 Are derivatives subject to any specific tax rules?
There are no specific tax rules on derivatives, except in relation to certain financial institutions. However, certain specificities may nonetheless apply – for example:
- unrealised gains and losses resulting from certain derivative instruments are fully taxable or tax deductible at the end of the financial year; and
- in the case of two deemed ‘symmetrical' positions, a loss on one position is not deductible until the gain on the other is taxed.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
Non-resident corporate entities can be liable to tax in France on both their French-source income and profits generated by business performed in France through a permanent establishment (eg, a fixed place of business, agent or complete operation cycle based in France), under the same rules as those applicable to resident corporate entities, unless a double tax treaty provides otherwise.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
As a general rule, dividends paid to non-residents are subject to a 12.8% withholding tax for individuals or a 30% withholding tax for companies. The withholding tax applicable to companies on dividend payments will be aligned with the French corporate tax rate as of 1 January 1 2020 (28%). French withholding tax may be reduced or eliminated by applicable tax treaties or EU directives. An increased withholding tax rate of 75% is levied on dividends, interest and royalties paid to a beneficiary or an account located in a non-cooperative state or territory.
A 30% branch tax is applicable to the French profits of a permanent establishment which are deemed to be distributed to the foreign entity, unless the permanent establishment is exempt from the branch tax under either domestic rules or a double tax treaty. The branch tax rate may also be reduced by an applicable double tax treaty.
Generally, no withholding tax is levied on French source interest, provided that it is at arm's length.
Unless an applicable double tax treaty provides otherwise, withholding tax may be levied, at the same rate as the standard corporate income tax rate, on:
- real estate capital gains;
- capital gains on a substantial participation in a French company; and
- service fees paid to non-residents.
4.3 Do double or multilateral tax treaties override domestic tax treatments?
Under Article 55 of the French Constitution, double or multilateral tax treaties and duly ratified or approved agreements override domestic tax provisions from the date of publication.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
Not unless an applicable tax treaty applies. Foreign taxes paid abroad cannot be deducted from the French corporate tax due on the same income. However, the foreign taxes may be deducted from the tax base.
There is one exception for Danish source income. Although there is no double tax treaty between France and Denmark, the French Tax Administration has stated that French tax residents can claim a tax credit on Danish source income (other than Danish source pensions) corresponding to the Danish tax paid on that income, provided that the Danish tax is comparable to the French tax.
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
Where a purchaser acquires the assets of a business in an asset deal, it receives a step-up in the asset basis. This means that the price it paid for the assets is the new tax basis in the property. Provided that depreciation is allowed, the assets are depreciable on the stepped-up basis.
Where a corporate entity that is liable to corporate income tax is acquired, the acquirer cannot obtain a step-up in the tax basis of the target's assets. As a consequence, the latent capital gains on the assets that are acquired will be taxable in the future on the sale of those assets. In addition, the acquirer cannot depreciate the assets based on their actual value when the target (holding such assets) was acquired.
There was previously a market practice under which the purchaser of a transparent company holding real estate could achieve a tax-free step-up in the underlying real estate asset basis by winding up the company shortly after the acquisition, due to the specific rules on the taxation of transparent entities as stated in Quemener (CE 16 February 2000 n°133296, 8e et 3e s.-s). This practice was ended by Lupa (CE 6 July 2016, min. c/ SARL Lupa Immobilière France et min. c/ SARL Lupa Patrimoine, n° 377904 and n°377906), in which the Supreme Court reversed the Quemener ruling. However, the Conseil d'Etat subsequently overturned this decision and validated the Quemener ruling on 24 April 2019 (CE 24 April 2019 SCI Fra n°412503). Its decision thus once again offers the possibility of a tax-free step-up strategy in the acquisition of transparent entities (especially real estate transparent entities).
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
In principle, latent capital gains on assets transferred upon a change in corporate headquarters or the migration of an establishment from France to another state are subject to corporate income tax in France. However, at the taxpayer's request, this tax may be paid in five annual instalments if the headquarters or the establishment is located in another EU member state or an eligible member state of the European Economic Area. Specific tax filing requirements and payments are then applicable.
Outstanding instalments become immediately payable if:
- an instalment is not paid when due;
- the transferred assets are sold to another party (whether related or not);
- the transferred assets are transferred to a non-EU/non-eligible European Economic Area member state; or
- the company is wound up.
By contrast, any transfer of headquarters from France to a third country entails immediate determination and payment of the corporate tax due on the latent capital gains relating to capital assets and on income not previously taxed, with no possibility to defer the tax payment.
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
Numerous anti-avoidance rules for corporate taxpayers are set out in both the French Tax Code and jurisprudence.
5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?
The ‘abuse of law' doctrine under Article L64 of the French Tax Procedure Book prevents taxpayers from using artificial schemes or a literal reading of the tax laws which is contrary to the intention of the legislature for the sole purpose of reducing taxation. A 40% or 80% tax surcharge may apply.
Article L64A of the French Tax Procedure Book, implemented by the 2019 Finance Act, allows the French Tax Administration to dismiss schemes established by the taxpayer with either the main purpose or a main (and not sole) purpose of benefiting from a tax advantage that is contrary to the aim of the applicable tax legislation. This ability to dismiss schemes applies to tax reassessments notified on or after 1 January 2021 concerning agreements concluded on or after 1 January 2020. The rule applies to all tax matters other than corporate income tax matters.
Likewise, Article 205A of the French Tax Code implemented by the 2019 Finance Act allows the French Tax Administration to dismiss schemes set up by a taxpayer with either the main purpose or a main (and not sole) purpose of benefiting from a tax advantage that is contrary to the aim of the applicable tax legislation. This ability to dismiss schemes applies to tax reassessments notified on or after 1 January 2019. The rule applies only to corporate income tax matters.
The scope of the anti-abuse procedure under Article 205A of the French Tax Code and Article L64A of the French Tax Procedure Book is wider than the scope of Article L64 of the French Tax Procedure Book. However, the 40% and 80% tax surcharges applicable for the standard anti-abuse procedure (exclusively tax motivated) will not be systematically applied to these new procedures.
The abnormal act of management doctrine developed by the courts allows the French Tax Administration to reassess companies with respect to management decisions that are contrary to the interests of the company. Where an abnormal act of management is considered to be a deliberate inaccuracy, a 40% tax surcharge may apply.
In addition, the French Tax Administration is required to forward to the public prosecutor cases that have been subject to a 40% (in the event of repetition within a six-year period), 80% or 100% penalty where the tax reassessment exceeds €100,000 (Article L228 of the French Tax Procedure Book).
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
The major anti-avoidance tax rules are as follows:
- The transfer pricing legislation prevents indirect transfers of profits among related companies. Under Article 57 of the French Tax Code, if it cannot be established that transactions between a French company and its related or controlled foreign companies have been carried out at arm's length, the French Tax Administration can determine the company's profits for corporate tax purposes, based on a comparison with independent comparable companies.
- The controlled foreign company provisions (Article 209B of the French Tax Code) allow for a tax consolidation of the profits and losses made by a foreign entity located in a tax haven where at least 50% of the shares, voting rights or financial rights are held directly or indirectly by a French company, unless the French company can demonstrate that the main purpose and effect of the transactions executed by the local entity are not to locate profits in a tax haven. This is an exception to the principle of territoriality that normally applies to French corporate income tax. The interest rate limitation for interest payments to related parties to the maximum rate set forth by Article 39-1-3 of the FTC.
- Under the anti-hybrid rule, interest on related-party loans is tax deductible only if the French borrower can prove that such interest is subject to income tax in the hands of the lender at a rate equal to at least to 25% of the French standard corporate income tax rate (ie, 7.75% to 8.6%, depending on the company's turnover and the additional contributions applicable under French law).
- Under the interest expense deduction limitation (transposition of the EU Anti-tax Avoidance Directive by the 2019 Finance Act), excess borrowing costs (eg, interest expenses, guarantee costs or foreign exchange losses on borrowings) are deductible only up to the greater of:
- 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBIDA), restated with tax-exempt income; or
- €3 million.
- This ceiling drops to 10% (or to €1 million, if higher) for deemed thinly capitalised companies (ie, companies for which the average amount of related-party debt exceeds 1.5 times their net equity). Any excess borrowing costs may be carried forward indefinitely and unused interest deduction capacity in any given fiscal year may be carried forward for up to five years. For tax consolidated groups, the above rules (ie, EBITDA tests, group safeguard clause) will apply at the group level. A general safeguard clause will apply for companies that are members of a consolidated group for financial accounting purposes. Under this clause, if a company can prove that its equity-to-assets ratio is at least equal to the ratio of its consolidated group, it may deduct 75% of the excess borrowing costs disallowed under the EBITDA test. The general safeguard clause will be denied if the company is thinly capitalised.
- The Charasse Amendment recaptures part of the financial expenses borne by a tax consolidated group where:
- a tax consolidated company acquires shares in another company from an entity that is not part of the French tax group, but which controls the acquirer or is under common control with the acquirer within the meaning of Article 223B of the French Tax Code; and
- the target joins the tax group.
- Under the anti-abuse rules applicable to royalty payments, a portion of the royalties paid to a related party under an IP licensing agreement will not be deductible where the related party is not subject to income tax or corporate income tax at a rate of at least 25% in the current year. The non-deductible portion is calculated by multiplying the amount of the royalties by the following formula: (25% – the effective tax rate applied to the royalties)/25%. This rule applies where the IP owner is not established in an EU or European Economic Area member state.
- Under the tax measures against non-cooperative states, as defined by Article 238-0A of the French Tax Code and listed by joint decree of the economy and budget ministers, a 75% withholding tax may be levied on payment of French-source income, unless the payer can prove:
- that the main purpose and effect of the transaction at hand were not to locate revenues in a non-cooperative state (in certain circumstances, there are presumptions of non-fiscal purpose and effect); and
- non-application of the participation exemption regime or the long-term capital gain regime.
- A limitation on the deductibility of interest, royalties and remuneration for services paid or due to persons located or established in a tax haven also applies where the difference between the foreign corporate income tax and the tax that would have been paid in France exceeds 50%. Such income will be tax deductible at the level of the French debtor company only if the latter can demonstrate:
- that these sums represent normal consideration for genuine transactions; and
- where paid in a state which is listed as a non-cooperative state under French law, that the main purpose and effect of the transactions were not to locate expenses in a non-cooperative state.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
Taxpayers have the opportunity to request an advance tax ruling for all taxes, levies and duties. The French Tax Administration is bound by the ruling it delivers to the taxpayer. Where a taxpayer submits a written request which is accurate, comprehensive and formulated in good faith, the French Tax Administration must, in principle, decide within three months. In numerous situations, a lack of response after this deadline does not equate to tacit approval. However, for certain ruling requests, the French Tax Administration is considered to have issued its tacit agreement if it does not respond within a specified period – for example:
- six months for a ruling confirming the non-application of the new anti-abuse legislation to a company's operations under Article 205A of the French Tax Code;
- three months for a ruling confirming the application of the favourable tax status available for young innovative enterprises;
- three months for a ruling confirming that a foreign company has no permanent establishment or fixed base in France; and
- three months for a ruling confirming whether research and development (R&D) expenses qualify for a tax credit.
5.5 Is there a transfer pricing regime?
An arm's-length principle applies to transactions between related companies (ie, legal majority control or de facto control). In order to avoid transfer pricing adjustments, corporate entities may apply for an advance pricing agreement to the French Tax Administration regarding the compatibility of the applied transfer pricing methods with the relevant legislation.
Transfer pricing documentation is required in France for companies that meet at least one of the following conditions:
- French companies with a gross annual turnover or gross assets equal to or exceeding €400 million;
- French subsidiaries where more than 50% of the share capital or voting rights are held, directly or indirectly, by French or foreign entities meeting the €400 million threshold;
- French parent companies that directly or indirectly hold at least 50% of companies meeting the €400 million threshold; or
- French companies of a tax consolidated group where at least one entity of the group meets the €400 million threshold.
The scope of this documentation also covers French branches of foreign entities where the condition relating to the amount of turnover or gross assets is met either at the level of the branch or at the level of the foreign entity.
The master file must include:
- a description of the main service providers within the group, other than R&D services;
- information on related human capital, equipment, financial and logistic resources of the inter-company service providers; and
- a description of the transfer pricing policies applied to R&D activities.
The local file must include:
- the business objectives, and decisions concerning the allocation of resources, financing and risks assumed in order to achieve those objectives;
- information on payment terms and conditions by type of inter-company transaction; and
- the reconciliation of management accounts eventually used for transfer pricing purposes and of statutory accounts.
Failure to comply with the documentary obligations set out in Article L13 AA of the French Tax Code (ie, a master file at the level of the group parent company and local files within each country at the level of each subsidiary) will trigger the minimum penalty of €10,000 and can reach the higher of the following amounts:
- 0.5% of the value of the transactions to which the documentation which has not been presented to the French Tax Administration relates; or
- 5% of the recalculated taxable profits, based on Article 57 of the French Tax Code, generated by the transactions to which the documentation which has not been presented to the French Tax Administration relates.
According to Article 223quinquiesB of the French Tax Code, an annual transfer pricing declaration is required in France for companies that meet at least one of the following conditions:
- French companies with a gross annual turnover or gross assets equal to or exceeding €50 million
- French subsidiaries where more than 50% of the share capital or voting rights are held, directly or indirectly, by French or foreign entities meeting the €50 million threshold;
- French parent companies that directly or indirectly hold at least 50% of companies meeting the €50 million threshold; or
- French companies of a tax consolidated group where at least one entity of the group meets the €50 million threshold.
The transfer pricing declaration includes a presentation of the methods used to determine transfer pricing in relation to the arm's length principle (ie, a transfer price should be the same as if the two companies involved were two independents, not part of the same corporate structure). This information must indicate the main method used and any changes that occurred during the financial year.
Form 2257 must be filed every year, within six months of filing of the corporate income tax return.
Companies with a global and consolidated turnover of more than €750 million and that carry out activities in France must file a country-by-country declaration if another company in the group does not prepare such a declaration in its home country, setting out information on:
- the activities and locations of activity of group entities; and
- profit splitting among these entities.
Failure to produce such documentation triggers a penalty of up to €100,000.
5.6 Are there statutory limitation periods?
In principle, the limitation period during which the French Tax Administration may act expires at the end of the third year following that in which the tax is due (31/12/Y+3), as is the case for corporate tax, value added tax or local economic contributions. However, there are specific deadlines concerning local taxes (31/12/Y+1) and transfer tax (31/12/Y+3 or Y+6 if no declaration has been made for registration purposes). If the taxpayer undertakes undeclared activities, the limitation period is extended to 10 years.
The issuance of a tax reassessment notice suspends the limitation period and sets a new deadline to permit the recovery of taxes that have been avoided or not paid.
The French Tax Administration can pursue payment of the tax due for a maximum of four years.
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
Corporate entities must file their corporate tax return online.
The declaration (Form 2065-SD), together with its appendices, must be filed either:
- on the second business day following 1 May if the financial year is the same as the calendar year (in practice, the filing deadline is extended to mid-May for declarations filed online); or
- within three months of the financial year end, if different from 31 December.
Corporate tax must be spontaneously calculated and paid. Payment is made in instalments (Form 2571-SD) and balance (Form 2572-SD) statements that are filed electronically. Instalments of French corporate tax are payable on a quarterly basis (by 15 March, 15 June, 15 September and 15 December).
In the event of a tax audit, corporate entities must be able to provide the French Tax Administration with an e-file that complies with French accounting standards and the French chart of accounts issued by their accounting software.
Value added tax (VAT) returns must be filed electronically and VAT must be paid:
- monthly (for most corporate entities); or
- quarterly, if the annual VAT amount to be paid is less than €4,000.
Groups of companies which are managed by the tax office in charge of large companies can opt to constitute a VAT group under certain conditions. Once this option is in force, all VAT liabilities due and input VAT (VAT credit) held by group members are compensated within the group. However, each member must submit its own VAT return for information purposes. The parent company must file and pay the overall net VAT by the 24th of the following month at the latest.
Corporate entities must file a return for the corporate property contribution (CFE) on the second business day following 1 May if there is any change in the CFE tax base. The CFE is due on the deadline stated in the tax notice sent by the French Tax Administration.
The business value-added contribution (CVAE) form must be filed by the second business day following 1 May. An initial 50% instalment of the CVAE (Form 1329 AC) must be paid spontaneously by 15 June at the latest and a second 50% instalment by 15 September at the latest if the corporate entity was liable for CVAE exceeding €3,000 the preceding year. The balance (if any) must be paid the following year on the second business day following 1 May at the latest (Form 1329-DEF).
Transfer tax is generally payable in the month following that of the transfer.
6.2 What penalties exist for non-compliance, at corporate and executive level?
In the event of a tax audit, failure to comply with the filing obligations triggers a fine of €5,000 per audited year or a 10% penalty based on the tax reassessments at the end of the tax audit, if higher. Moreover, the French Tax Administration may consider either that there was opposition to submitting the tax return or that the books are not compliant with French accounting standards. In either case the books will be rejected and the French Tax Administration may reassess the corporate entity's profits and turnover itself. In such case, a 100% penalty will be added to the tax reassessment. The corporate entity will then bear the burden of proving that the tax reassessment is incorrect.
Corporate entities that do not comply with the obligation to issue an invoice are liable to a tax penalty of 50% of the amount of the transaction (which may be reduced to 5% in certain circumstances). Any omission or inaccuracy found in invoices required for the purposes of value added tax (VAT) deductions give rise to the application of a fine of €15 (without exceeding 25% of the invoiced amount for each invoice or document).
Late filings of returns (corporate tax, VAT, transfer tax) will trigger:
- a 10% penalty on the tax due;
- a 40% penalty in the event of non-compliance 30 days after receipt of the filing request; and
- an 80% penalty in the event of the discovery of a hidden activity.
In addition, if the return filed by the corporate entity is inaccurate, the French Tax Administration may apply a 40% penalty on the reassessed tax (in case of bad faith) or an 80% penalty if the French Tax Administration concludes that there has been fraudulent behaviour or an abuse of the law.
A late payment of tax triggers late payment interest at 0.2% per month. In addition, a 5% penalty is applicable on the corporate income tax, CVAE contribution, VAT or transfer tax due.
Non-compliance with the requirements on electronic filings or the electronic payment of taxes is sanctioned by a 0.2% increase in the tax due.
The directors of corporate entities can be declared jointly liable for company taxes and penalties if their fraudulent behaviour or serious and repeated failure to observe tax obligations has made it impossible to recover taxes and penalties from the company. They can also be fined for failure to prepare the annual accounts and the management report.
Some penalties can be very high. Corporate entities should file a specific tax return for each beneficiary (individual or legal person) that receives passive income from them, such as interest, dividends, directors' fees, advances, any instalments and loans. Any failure to declare, delay, omissions or inaccurate information will trigger the application of financial penalties, which could be significant – for example, a fine of up to 50% of the non-reported amount or, in the event of late filing, a €150 fine per late return.
Since the publication of Law 2018-727, in certain situations, if a corporate entity has not spontaneously regularised its situation, the French Tax Administration will invite it to do so within a specified timeframe before it imposes a penalty. This procedure is limited to the first involuntary infringement of the applicable rules and for mistakes that may be regularised.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
In accordance with Action 13 of the Base Erosion and Profit Shifting initiative led by the Organisation for Economic Cooperation and Development, companies that carry out activities in France and whose global and consolidated turnover is more than €750 million must file a country-by country declaration, setting out information on:
- the activities and location of activity of group entities; and
- profit splitting among these entities.
Since 2017, a reporting requirement on the automatic exchange of financial account information in tax matters has applied pursuant to the application of the Directive on Administrative Cooperation, which made the exchange of information mandatory for all EU member states. If the clients of financial institutions are tax resident in a foreign jurisdiction that has agreed to the automatic exchange of information, certain information must be reported to the tax authority of the country in which the account is maintained, which will transmit this information to the tax authority of the account holder's country of tax residence. Financial institutions must report the following information:
- account balances;
- revenue from financial assets; and
- gross proceeds from the sale of financial assets.
This reporting requirement applies to depositary accounts, custodial accounts, cash value insurance contracts, annuity contracts and equity and debt interests in financial institutions.
Financial institutions are prohibited from contracting with clients that have not provided a self-certification specifying their tax residence and tax identification number.
They are also required to report to the French Tax Administration a list of clients that failed to provide information on their tax residence and their tax identification number (where those clients were required to provide a self-certification) within 30 days of the French financial institution sending a second request for information under the US Foreign Account Tax Compliance Act.
Financial institutions must keep all information and documentation supporting identification due diligence regarding accounts and payments until the end of the fifth year following that in which the reporting is submitted to the French Tax Administration.
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
A French parent company and its 95% owned French subsidiaries which are liable for corporate tax can opt for a tax consolidation tax regime to combine their profits and losses and pay corporate income tax on the consolidated result. A French parent company that indirectly owns at least 95% of its French affiliates through one or more foreign companies based in the European Union, Iceland, Norway or Liechtenstein (‘intermediate companies') can also form a tax consolidated group. Similarly, it is possible to set up a tax group between sister companies with the parent company established in the European Union, Iceland, Norway or Liechtenstein.
This mechanism makes it possible to offset the tax profits and tax losses made by the various subsidiaries within the tax consolidated group, as well as to neutralise certain intra-group transactions.
The head of the tax consolidated group can pay corporate income tax for all companies within the scope of the group.
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Value added tax (VAT) is also applicable to corporate entities. Corporate entities collect VAT from their customers and pay it to the government after deducting the input VAT where they are allowed to do so. The standard VAT rate is 20%. A reduced rate of 10% applies to certain transactions, such as those in the restaurant trade. A reduced rate of 5.5% applies to food, gas and electricity, renewable energy and books. A further reduced rate of 2.1% applies to medicines, performing arts and the written press. Numerous types of transactions are exempt from VAT, including banking and financial transactions, insurance and reinsurance transactions, and some cases the rental of empty buildings (for which it is still possible to opt for VAT).
Corporate entities may be liable for customs duty when goods enter the French territory (from outside the European Union). Goods circulate freely within the European Union.
Excise taxes are also levied on specific consumer goods (eg, alcohol, tobacco).
A tax is levied on corporate entities' activities or products which are considered polluting, such as waste, harmful emissions, oils and fossil fuels, detergents and extractive resources. Any business that manufactures, imports or introduces polluting products is likely to be liable for this tax in France. Its amount and the applicable rate vary according to the categories of activity and product.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
A transfer tax is due in relation to the transfer of interests in corporate entities at the following rates:
- 0.1% of the purchase price for transfers of shares in a non-listed company;
- 3% of the purchase price for transfers of shares in a company whose capital of which is not divided into shares of stock; and
- 5% of the purchase price for transfers of shares in companies whose assets consist principally of real estate.
A French financial transaction tax of 0.3% is also due on the acquisition of equity securities listed on a regulated market (Article 235terZD of the French Tax Code). This tax is due on transfers of equity securities (ie, shares and other securities that give, or may give, access to capital or voting rights, such as warrants or preferential subscription rights) in French-listed companies with a market capitalisation of more than €1 billion on 1 December of the year preceding that in which the transfer occurs. A list is published every year in the French Tax Administration guidelines.
Some exemptions from the financial transactions tax apply, such as:
- acquisitions made in the context of the issuance of equity securities (primary market);
- transactions operated by a clearing house/central securities depositary in the course of its clearing activities;
- acquisitions by French or foreign financial institutions and investment service providers in the course of their market-making activities; and
- transfers between companies that are members of the same group or during a merger, acquisition or partial transfer of assets that complies with the conditions set out in Article 210A or 210B of the French Tax Code.
Two other taxes also apply to financial transactions:
- a tax on high-frequency trading (Article 235terZDbis of the French Tax Code); and
- a tax on naked sovereign credit default swaps (Article 235terZDter of the French Tax Code).
9 Trends and predictions
9.1 How would you describe the current tax landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In the current tax landscape, the French Tax Administration is redoubling its efforts to fight tax avoidance.
The 2019 Finance Act introduced:
- new anti-avoidance measures to implement the Anti-tax Avoidance Directive rules limiting the deduction of financial expenses;
- amendments to the French tax consolidated group regime to comply with European case law; and
- measures to implement the new anti-abuse procedure based on the main purpose test.
The French government also decided to speed up the introduction of a new digital tax, applicable to the biggest digital and internet companies, given the failure of EU member states to agree to a common tax on such activities. The French government aims to adapt the French corporate tax regime to businesses which have no physical presence in France, but which do conduct business activities in France.
The gilets jaunes (‘yellow vests') movement in France has also had an impact on corporate taxation, with the postponement of a corporate tax rate deduction for the biggest companies. The draft law on the new digital tax also provides that French companies and tax consolidated groups with revenues exceeding €250 million should not benefit from a 31% reduced rate, as initially expected, but should continue to be subject to the former 33.33% rate for all taxable income exceeding €500,000.
The French government also needs to balance its budget. During a debate on public finances in the context of the 2020 Finance Bill on 11 July 2019, the Ministry of Economy and Finance said that it was contemplating revising the tax credit for research and development. Cuts would be made on the basis of the tax credit. Further to the recommendations of the Court of Auditors, the operating expenses taken into account in calculating the tax credit would be reduced to:
- between 40% and 46%, instead of 50%, of the staff costs relating to researchers and technicians (increased to 100% for young PhDs); and
- 75% of the depreciation of equipment used for research operations.
The ministry stated: "The rate will be 43% and will generate a return of €200M from 2021."
Another option mentioned by Joel Giraud, the budget rapporteur in the National Assembly, would involve the calculation of the €100 million threshold beyond which expenses are subsidised at 5% instead of 30% at the group level, rather than at the individual level as at present.
10 Tips and traps
10.1 What are your top tips for navigating the tax regime and what potential sticking points would you highlight?
Given the complexity of the French tax system, the main tip is to work with a tax expert to safely navigate its complexities and to anticipate any potential discussions with the French Tax Administration. There are so many exceptions to the general rules that it is difficult to contemplate the best tax options without expert assistance.
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.