The tax system in France is a declaratory system founded on statutory laws.
The French tax law is mostly embodied in the General Tax Code (Code Général des Impôts) and the French Tax Procedure Code (Livre des procédures fiscales).
The government has, in recent years, permitted electronic tax declaration and payment procedures to speed up tax collection.
By doing so, the French tax authorities has access to more information than any other administration in the world. Indeed, companies supply not only their declarations, but also information on the wages they pay their employees. Financial institutions submit a statement of all sums they pay as well as the identity of the beneficiaries.
The French parliament recently adopted a new Anti-Tax Fraud Act (5 December 2013), which further increased the investigative powers of tax authorities and also raised the criminal penalties applicable in case of tax fraud.
Any tax strategy in France must therefore take into account the fact that the tax authorities will have access to all the information they need, and that they can, if necessary, requalify transactions to tax them in accordance with their true purpose.
Moreover, French tax revenue authority generally pays special attention to international transactions, which are often regarded as potential sources of tax evasion.
There are four categories of income tax in France:
- Corporation tax (impôt sur les sociétés, IS)
- Personal income tax
- Social levies
- Payroll taxes
And the main expenditure tax is the Value Added Tax (VAT).
PERSONAL INCOME TAX
The following seven categories of income are liable to personal income tax:
- Business profits
- Non-commercial profits
- Agricultural profits
- Income from property
- Wages, salaries, pensions and annuities
- Investment income
- Capital gains
Personal income tax is assessed annually on a tax household’s taxable income in a given calendar year, declared the following year.
1) Domicile for Tax Purposes – Tax Household Rules
Persons are deemed to be domiciled in France for tax purposes if:
- Their home is in France;
- Their main place of abode is in France;
- They carry on a professional activity in France, whether they receive a salary or not, unless they can prove that it is a secondary activity;
- The center of their economic interests is in France.
Personal income tax is assessed on the basis of the “tax household”, i.e. the family entity consisting of a single person, two partners in a civil union or spouses, whatever their marital property regime, and their children or other dependents.
The tax base therefore, is generally made up of the total income of the various members of the tax household.
2) Tax Treatment of Persons Domiciled in France
Regardless of their nationality, persons domiciled in France for tax purposes are taxable on their worldwide income.
3) Tax Treatment of Persons not Domiciled in France
Subject to the provisions of tax treaties for the avoidance of double taxation, regardless of their nationality, persons not domiciled in France are taxable in France on their income from French sources only.
4) Tax Rate
The tax rates for 2016 (for income earned in 2015) applicable to each ‘part’ in a household are set out below.
The rates are applied on a sliced basis so that each household ‘part’ of the income is charged on a progressive basis.
Thus, if a couple have a net income of € 30,000 in the year there are two ‘parts’ of €15,000, with each part taxed using the scale rates.
There are five tax rates, on net taxable income:
|INCOME SHARE||TAX RATE|
|Up to € 9,700||0%|
|Between € 9,701 – € 26,791||14%|
|Between € 26,792 – € 71,826||30%|
|Between €71,827 – € 152,108||41%|
|Above € 151,108||45%|
It is important to point out that these tables do not mean that if your income is, say, €30,000, it will all be charged at the rate of 30%. These rates apply to each fractional slice of income for each part of the household.
It is noteworthy that an exceptional contribution applies on the part of income:
|CIVIL STATUS||INCOME||TAX RATE|
|Single individuals||€ 250,000 and € 500,000||3 %|
|Married couples||€ 500,000 and € 1 M||3 %|
|Single individuals||Above € 500,000||4 %|
|Married couples||Above € 1 M||4 %|
Capital gains – Capital gains from the disposal of movable assets (e.g. securities, bonds) are taxed as ordinary income at progressive rates ranging from 0 % to 45 %. In addition, special social security surcharges do apply for French residents, amounting to approximately 15.5 %.
Capital gains from the disposal of immovable property are taxed at a special rate of 19 %, plus special security surcharges.
Deductions and Allowances – Various deductions and allowances are available, based primarily on family circumstances and related to certain type of investments or expenses incurred during the year.
Net Wealth Tax – Households pay wealth tax if the net worth exceeds € 1.3 M (per household, rather than per individual).
Some types of asset are exempt, and small deductions for dependents are allowed.
Non-residents must pay tax on their property in France, unless they are exempt under a tax treaty.
Rates are progressive, ranging from 0.5 % to 1.5 %.
Corporate tax is payable annually, on all profits generated in France by companies and other legal entities. About 1/3 of French companies is concerned.
Legal entities may be liable to corporation tax:
- Either at the standard rate of 33⅓ % for all their activities;
- Or at a reduced corporate tax rate of 15% applicable to the first € 38,120 of the profits of small and medium-sized enterprises, if certain conditions are met, including the following:
- The turnover of the company is less than €7,630,000.
- At least 75% of the company is owned by individuals or by companies that themselves satisfy this condition and the above conditions.
Corporation taxes also include capital duty tax, payroll tax, real property tax, stamp duty and transfer tax.
However they will not be discussed in this entry.
Generally, taking into account the social security surtax, the marginal effective rate of French corporate income tax is 34.43% (33.33% + 1.1%). If the temporary contribution also applies, this rate is increased to 38% (34.43% + 3.56%).
Social contributions: Corporations in France must also pay a social contribution. The amount of the social contribution on income is assessed according to the amount of corporate income tax paid.
The rate of this surtax is 3.3 %.
Small businesses (with turnover of less than 7 630 000 €) are exempt.
Solidarity contribution: Corporations also pay a solidarity contribution, which would be 0.13 % of the net turnover.
The corporate social solidarity contribution is levied according to the turnover of the corporation and has to be paid by May 15th of each year.
Small businesses, again, are exempt.
Tax credit for research and development (R&D): France actively supports companies who invest in R&D activities, mainly through the R&D tax credit. The R&D tax credit greatly reduces the cost of R&D activities in France.
According to several surveys, the cost of a researcher is diminished by 1/3, effectively placing the French researcher among the most efficient in the world. According to the OECD, France has one of the best R&D incentive in the world, ahead of the USA and Japan.
Thus, to boost investments in research and development (R&D), the tax credit for R&D expenditure equals to 30% of qualifying expenses related to operations of R&D, up to € 100 M, and 5% for such expenses above € 100 M.
The rate is increased to 40% for the first year and to 35% for the following year for companies applying for the tax credit for the first time or those that did not benefit from the regime for 5 years preceding their request.
Withholding tax: Dividends paid by a French corporation to a non-resident shareholder are subject to 30% withholding tax, unless a tax treaty provides a lower rate or the EU directive parent-subsidiary is applicable.
Under the directive, dividends paid by a French corporation to a qualifying parent EU company are exempt from withholding tax.
Foreign Tax Credit: It is noteworthy that France has signed a number of Double Tax Treaties and Non-Treaties regarding taxation of dividends, interests, royalties and other related payments.
TAXABLE PERIOD AND TAX BASE
Taxable period: In France the taxable period is the calendar year. Thus the tax year ends on December 31st.
Tax base: The basis of taxation is the income earned by the corporation during the calendar year.
Provisions of corporation tax law must be taken into account. Losses may be carried forward with no time limit. On certain conditions, losses may be carried back three years.
The whole French tax framework is obviously too large to be covered in this entry alone. If you have any specific questions not dealt with here, please do not hesitate to contact Enter France.
As a business strategist incubator, we will advise you on the fiscal effects of your business set-up in France. We will design the most efficient corporate vehicle and strategy for your business and together will make it a success.