Tax rules in France have traditionally been designed to favor corporate investment, regional development and international expansion. Measures thus include accelerated depreciation, exemptions and loss carry forwards. France's commitment to equitable tax treatment is also well illustrated by rules applying to groups of companies.
France has tax treaties with over one hundred countries, and thus offers foreign investors outstanding protection against double taxation.
Corporate income tax
Foreign company taxation in France
As soon as a foreign company conducts profitable business in France, the said profit is taxed in France. This rule applies regardless of the type of company:
Subsidiary
Branch
Permanent establishment
In the case of a branch or a permanent establishment with no separate legal status, the proceeds of the business conducted in France is derived from the accounts of the foreign company.
Tax treaties signed between France and over one hundred countries generally help avoid double profit taxation in France and in the foreign country of origin.
The concept of permanent plant is defined in each individual tax treaty.
Determination of taxable profit
Taxable profit is calculated on income minus deductible expenses. Income encompasses all proceeds from business, sales, or services. Only expenses incurred as part of the business conducted can be deducted.
Deductible expenses:
Depreciation of tangible and intangible assets (excluding goodwill)
Reserves
Building and equipment rents paid
Salaries
Social security charges
Goods purchased
Energy consumption
Advertising costs
Financial expenses
Some deductions are limited
The deductibility of certain categories of expenditures is limited in order to prevent abuse. This is in particular the case with so-called "extravagant expenditures", such as the use of private vehicles: in that case, the deductible depreciation and rent expenses are capped at 18,300 euros incl. VAT.
The amounts billed by a parent company to its French subsidiary are deductible
The management expenses, red interest, and fees, to name just a few, are deductible. However, the company must be able to prove that the relevant services have actually been performed and that the amounts charged are in line with common market practices.
Depreciation
Depreciation rules are particularly favorable.
Fixed assets are depreciated according to the straight-line method, based on their likely life span.
Acceleration multiples ranging from 1.25 to 2.25 are applied to the straight-line depreciation rates, according to the normal useful life span of the assets concerned.
This provision applies to all production goods, except those that were purchased second hand.
Software depreciates over 12 months.
Reserves
Reserves for depreciation are allowed, providing that they can be justified and affect clearly identified accounts, inventories, values, or tangible assets. However, reserves for layoffs are not deductible, and nor are those for future or expected losses on long-term contracts in progress.
Rates
Excluding temporary additional contributions, applicable rates are as follows:
Standard rate of 33.33%,
Reduced rate of 19% in a limited number of cases. Capital gains on non-voting shares, fund or venture capital organization shares (venture mutual funds, venture capital companies), and patent royalties.
Smaller companies (1) are subject to a rate of 15% for the portion of profit below 38,112 euros, and to the standard rate beyond.
(1) Companies in which individuals own at least 75% of equity and which report annual revenues of less than FRF 50 million.
Loss carry forwards
Ordinary losses may be carried forward over the five following years or charged to the three previous years.
Losses resulting from depreciation may be carried forward indefinitely.
Long-term net capital losses can be charged against similar capital gains for 10 years.
Groups of companies
The French tax incorporation system is particularly attractive. It enables groups of companies to compensate for the profits and losses of their French operations within the consolidation scope, and makes transactions easier between companies that belong to the same group. It applies optionally if a French parent company holds at least 95% of the shares of the incorporated group.
This system must have been adopted expressly for a period of five years before the first day of the financial year for incorporated companies.
Repatriation of profits
Repatriation of profits generally takes three forms:
transfer or distribution of the net income of the branch or subsidiary
interest charged on loans and advances granted by the foreign parent company;
royalties or management fees.
No fiscal obstacle to billings for interest, royalties or management fees
Amounts must be justified and in line with the rates applied in the context of normal management between independent companies. French authorities may require evidence that prices applied are realistic.
Withholding tax
Applicable rates of withholding tax are defined in tax treaties between France and the countries concerned. No withholding tax is charged on dividends or earnings of branches paid to European parent companies or the head offices of European companies.
The tax treaty with the US sets withholding tax at 5% of dividends, branch earnings and management fees.
This rises to 15% for dividends distributed to US residents individually owning less than 10% of the equity of the French company. In general, no withholding tax is charged on interest payments for loans within the same group of companies.
Generous exemptions for dividend flows through holding companies
Holding companies based in France, and which have interests in French or foreign companies, may redistribute the dividends received from companies in which they have interests exceeding 5% to shareholders abroad:
without any tax, if the parent company of the holding company is based in an EU member state
subject only to withholding tax, as per tax treaties, if it is based outside the EU.
However, a distinction should be made between holding companies for which foreign equity interests represent over two-thirds of total interests and those with French equity interests, since the former are subject to special exemptions and deductions.
Value-added tax and customs duty de douane
Value-added tax (VAT) is a tax on the consumption of goods and services, and is paid by the consumer.
Businesses are only charged with collecting the tax on sales, and deduct the VAT they have paid on purchases and investments from the amount collected. If VAT paid on purchases exceeds VAT collected on sales, the resulting VAT credit is reimbursed to the business on application.
Goods exported outside the EU are totally exempt from VAT.
Rate
The standard rate on sales of goods and services is 19.6%, but reduced rates apply to a number of cases. Thus, 5.5% is the rate that applies to foods, certain farm products, drugs (5.5% or 2.1%), books, hotels, public transportation, newspapers and magazines, certain leisure activities, etc.
Uniform customs duty throughout the European Union
Goods circulate freely within the EU and duty is charged on imports only once, even when they are shipped on from one member state to another. Goods arriving in France for re-export to another EU country can be received in France without payment of duty or VAT.
Local tax
Business tax
Business tax is levied by local communities. It is determined each year in the district where the premises and the establishments of the taxpayer are located.
The tax base is made of the sum of the three following values:
rental value of premises allocated to the business activities
16% of the value of fixed assets at the disposal of the business and which it uses in connection with its operations
Tax is then charged on 84% of the total of these three values at a rate set by local communities each year.
Other local taxes are property tax (taxe foncière), charged to owners of land and buildings, and housing tax (taxe d'habitation), charged to occupants of non-professional premises, whether owners or tenants. They are assessed on the basis of the rental value of the property.
Fiscal incentives for investors
Tax measures have been adopted to encourage companies that invest in difficult areas or take over ailing companies.
Tax credits - Research and training
In order to promote research and training, tax credits are provided on expenses devoted to these two areas. These expenses may be entirely deducted from the corporate tax due. If they are not deducted, they are paid back.
Temporary business tax (taxe professionnelle) exemptions
In certain areas, the local communities (municipalities, departments, regions, and groupings of local communities that have their own tax system) are allowed to grant temporary total or partial business tax exemptions to companies that settle, expand, or take over ailing companies.
Under no circumstances may the exemption exceed 5 years. It may, on the other hand, last less.
Temporary corporate tax exemption
New companies
Newly-created companies settled in certain parts of the country may, under certain conditions, benefit from a temporary and digressive corporate tax exemption. The exemption amounts to 100% during the first 24 months. Profits are subject to taxation for one quarter, one half or three quarters of their amount depending on whether they have been achieved during the first, second, or third 12-month periods following the exemption period, respectively. The exempted profit is limited to 225,000 euros per 36-month period. This measure is limited to companies where other companies hold no more than 50% of capital stock.
Besides, companies that benefit from the corporate tax exemption can benefit from a 2-year exemption from the business tax and the property tax (providing that local communities have had deliberations to that effect).
Ailing company takeover
Companies set up to take over ailing industrial organizations (legal recovery procedures, etc.) may, under certain conditions, benefit from a 24-month corporate tax exemption.
The buyers must not have held, either directly or indirectly, more than half of the troubled company's capital stock during the year preceding the takeover.
They may also, subject to the deliberations of local communities, benefit from business tax and property tax exemptions.
If business and jobs are not maintained for at least 3 years, all tax benefits are cancelled.
Rules of special interest to foreign companies
Headquarters and logistics centers
Like other countries in Europe, France has a special system for taxing headquarters and logistics centers. These centers have a specific purpose: they are created to provide specialized services, with headquarters allowed to handle only management, administrative, coordination and control functions, and logistics centers limited to packaging, labeling and distribution. Services must be provided only to companies within the same group. Such an approach, based on prior determination of margin, rules out the risk of reassessment that might otherwise exist for such activities, assuming that earnings might be repatriated.Taxation is calculated on the basis of a fixed rate of margin based on their operating costs and which is the object of a ruling negotiated with tax authorities. In general, it is between 6% and 10% of total ordinary operating expense for headquarters, and 4% to 7% of that same total for logistics centers.
The centers are subject to business tax (taxe professionnelle) as provided by French law and thus may benefit from a two-year exemption for newly-created businesses. Headquarters can also enjoy exemptions linked to the regional planning priorities mentioned above.
Finally, under tax rules offsetting the cost of expatriation, both headquarters and logistics centers may pay special compensation that is partly or fully exempt from income tax to their expatriate employees. To qualify, they must file a request with the tax authorities
The Hong Kong businessmen attending the fair pointed out that although a lot of overseas Chinese are from Wuxi, investors nowadays have become very rational about investment. Preferential policies are no longer the best attraction for foreign investors, who are looking for better investment environment, especially the investment "software". According to these attendees, they are most impressed by the support given by the Wuxi government departments, which pay great attention to investors, carefully identify projects for Hong Kong SMEs, customise projects for Hong Kong investors, and provide good investment software for investors.