CONTRACT
SI2.ICNPROCE009493100
IMPLEMENTED BY FOR
DEMOLIN, BRULARD, BARTHELEMY COMMISSION EUROPEENNE
- HOCHE - - DG ENTREPRISE AND INDUSTRY -
Study on Effects of Tax Systems on the Retention
of Earnings and the Increase of Own Equity
Jean ALBERT
Team Leader
- ANNEX 10 -
- FRANCE -
- COUNTRY REPORT -
Submitted by Serge CASTILLON/Isabelle COURBI�RE
Country Expert
February 15, 2008
France Country Report 1
February 2008
FRANCE
Mazars & Gu�rard
Serge Castillon/Isabelle CourbiŁre
Exaltis
61 rue Henri Regnault
F  92075 Paris La D�fense Cedex
France
Tel [phone]
INTRODUCTION
At the current time, there are no particular obstacles for the retention of earnings in
France, unless thin-capitalization regime. Then distributions of earnings appear more
favourable.
Possible solutions to promote retained earnings in order to strengthen the capital
base of enterprises, especially small enterprises could be:
- to introduce a dual income tax system, which would split the tax base for profits
into two components. Those components would be taxed at different rates with one
lower rate based on the equity invested into the Undertaking. Such a tax treatment
did exist in France before 2001, but its effects were too limited because of the "avoir
fiscal" tax credit.
- concomitantly, to increase the level off which SMEs could benefit of the reduce
corporate tax rate of 15 %; as Ź 38,120 of profits seems to be unsufficient.
France Country Report 2
February 2008
PART 1  GENERAL QUESTIONS
1. What are the main characteristics of the tax systems applicable on enterprises
and business owners in your Country (corporate income tax, income tax,
capital gains tax, other profit based taxes, capital based taxes, other taxes)?
Corporate income tax
Rates (see "Code General des Imp�ts" i.e French Tax Code, in art 219 I, b).
Corporate Income Tax (CIT) rate: 33 1/3 %.
Reduced rate of 15 % on the portion of company s profits less than Ź 38,120 if
certain conditions are met, including the turnover of the company (less than Ź
7,630,000) and the shareholding of the company (at least 75 % of the company is
owned by individuals or by companies that are at least 75 %- owned directly by
individuals)
Additional tax (social security surtax  CGI, art 235 ter ZC) at the rate of 3.3 % is
imposed on the portion of corporate tax due exceeding Ź 763,000 and if the
turnover exceed Ź 7,630,000 and if the shares aren t owned at least 75 % by
individuals (or by a company owned directly owned at least 75 % by individuals).
Taxation of branch: as well as French companies
Net losses
- Carry back: previous three fiscal year
- Carry forward: unlimited
Scope
- Taxable entity
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February 2008
Legal entity according to their legal form or according to their activities.
- Registration
French companies are those registered in France, regardless the nationality of
the shareholders or where the company are managed and controlled.
- Territoriality
French tax system is based on a territorial principle. The income raised from
businesses carrying on out of French will not be taxed in French, excepted if
activities are located in a tax haven (anti-fraud tax measures).
Determination of the corporate income
Taxable income is a net income (gross income minus expenses related to
activities and allowed to deduct) based on an accurate account basis.
Certain adjustments apply to financial statement for obtaining the fiscal
statement according to prevailing law.
Capital gain tax
- Rates
Capital gains rate: 33 1/3 % (CGI, art 209-I and 219)
Two reduced rates: 15 % and 0 % (as from 2007). For 2006, 8 %
French system is based on the distinction short-term capital gain and long-term
capital gain (CGI, art 39 duodecies, 72 and 93 quater).
- Short-term capital gain
Gains are taxed as an ordinary income (rate : 33 1/3 %)
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February 2008
- Long-term capital gain
Taxation at a reduced rate: Company: 0 % (as from 2007, 8 % in 2006) or 15 %,
depending on the transferred assets
Administration
A tax return must be filed at least once a year
Minimum tax (Imposition forfaitaire annuelle) from CGI art 223 septies to
CGI, art 223 nonies
Taxable entities are subjected to a minimum tax which is based on the
turnover of the company.
Other significant taxes
- Business activity tax (taxe professionnelle)
Based on annual rental value of tangible assets
Rate determined locally
Limited to 3.5% of the value added by the business
Individual Income Tax
Rates
- Graduated tax range from 5.5 % to 40 % (CGI, art 197, I,1)
- Flat-rate withholding of 16 % for capital gains
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- Additional social contributions of 11%, applicable only for French residents.
Scope
- Taxable persons
Individuals who have their fiscal residence in France according to the French
law or a tax treaty
- Territoriality
Taxation based on worldwide incomes earned by individual
1.1. Corporate
1.1.1 What are the general principles for the computation of taxable
profits?
The taxation is based on a territorial principle (income raised from
businesses carrying on out of France will not be taxed in France,
excepted if activities are located or deemed located in a tax heaven)
Corporate income arises from all operations realized by the company,
included disposal of assets during the taxable year. As a result, profits
and losses, whatever is their source, are included in the tax result.
Likely accounting, taxable income is based upon an accrual basis. Debts
and liabilities are accounted for their face value.
Tax years are independent one from the others, debts and liabilities are
taken into account in the exercise from which they relate to.
The fiscal assessment is based on the financial statement prepared
according to generally accepted accounting principles, subject to
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February 2008
certain adjustments. The various adjustments are mentioned on a
special tax form.
Tax losses may be carried forward indefinitely. In addition, enterprises
subject to corporate income tax may carry back (elected option) losses
against undistributed profits for the three preceding years. The carry
back results in a credit equal to the loss multiplied by the current
corporate tax rate, but limited to the amount of corporate tax paid
during the prior three years. The credit may be used to reduce
corporate income tax payable during the following years.
A significant change in the company s activity may jeopardize the losses
carryover and carry back.
1.1.2 What are the main differences between the tax balance sheet and
commercial balance sheet?
Not applicable: under the French tax principles, there is only one type
of balance sheet which is the accounting balance sheet. The only
difference is the annexe.
1.1.3 What are the most important adjustments for the computation of
taxable profits/taxable gains on the base of accounting profits?
Reincorporation
External expenses
- Leasing of tourism motor vehicle: part of the royalty (included VAT)
equal to the no deductible depreciation calculated as if the company
was an owner.
- Lavish expenses provided by law : related to residence, yacht, hunting
and fishing
Taxes
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February 2008
- Corporate income tax
- Tax on tourism motor vehicle
- Solidarity contribution : provision on current turnover
- Running costs : director s fees exceeding legal amount allowed to
deduct
Financial expenses
- Interest paid on loans from direct shareholders (individuals):
o No manager: interest are deductible to the extent that the share
capital is fully paid up and the interest rate does not exceed the
average interest rate on loans with an initial duration of more than
two years granted by banks to French companies.
o Manager : double limitation :
Linked to the interest rate (as above)
Linked to the total amount paid : interest deductible to the
extent that they do not exceed 1.5 times the share capital
- Interest paid on loans from direct shareholders (corporate) or loans
granted by a related party
o Related party: entity that holds directly or indirectly more than 50 %
of the borrowing company's capital; entity that manages de facto the
borrowing company; entity that is held directly or indirectly by a third
entity that itself also controls, directly or indirectly the borrowing
company.
o To be excluded
Limitation does not apply if the interest expenses paid to
shareholders are lower than Ź 150,000
Bank
Under conditions, interest paid by a treasury pool under a
treasury agreement
Interest-bearing accounts payable
o Limited rate: higher of the following:
Average interest rate on loans with an initial duration of more
than two years granted by banks to French companies.
Rate which could be obtained from independent financial
establishments
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February 2008
o Reincorporation if three cumulative limitations are exceeded
The company s debt owed to all related parties exceeds 1.5
times its equity
Interest expenses exceed 25 % of net income exclusive of tax
and before the interest paid to related parties, depreciations
and quota of leasing
Interest expenses exceed interest collected from related
parties.
o Tax treatment: non-deductible interest of one fiscal year may be
deducted in the following fiscal year, if the above limitations are
respected. The amount of deductible interest expenses which may be
carried forward is reduced by 5 % each year.
Exceptional expenses
- Gifts and liberality (limitation 5 p. Mille of annual turnover and tax
reduction of 60 %)
Capital allowances (depreciation)
- Tourism motor vehicles : fiscal basis : Ź 18,300 or Ź 9,900 if pollutant
motor vehicle, as from 1st January 2006
- Equipments rented or placed at the disposal of a company s member:
limited to the difference between the received rent and the paid
expenses related to the equipment.
- Certain provisions (Decrease in the value of participation, retirement,
risk of change, mass dismissals)
 Participation des salaries : based on the current tax year
Financial income
- Parent-subsidiary regime: 5 % portion of gross dividend income deemed
to cover the costs incurred by the dividend distribution. This amount
can be lower if the company establish the exact amount of the costs
incurred
Exceptional income
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February 2008
- Net long-term depreciation
Deduction
Taxes
- Solidarity contribution: provision recorded the precedent year
- Losses carried back
- Research & development credit
Financial income
- Parent-subsidiary regime : net dividend income received from subsidiary
(French subsidiary or foreign subsidiary)
- Net long-term capital gain
1.2. Income
1.2.1. What are the general principles of income taxation of business
owners on business income, wages, distributed earnings, interest on
loans and capital gain (sale of shares)?
One-man business / sole proprietorship
Business income is taxed under the personal income tax. (CGI, art 8)
In determining the taxable income subjected to graduated tax, rules
concerning corporate income are generally applicable.
The main difference between the two regimes regards the long-term
capital gain.
Wages
Personal income tax
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February 2008
Distributed earnings
As from 2006, dividend incomes are subjected to personal income tax
after a 40 % reduction on the gross basis and an additional annual fixed
allowance (Ź 1,525 / Ź 3,050, respectively either unmarried or married)
A final 50 % tax credit calculated on the gross dividend incomes before
the two reductions above is granted. Its amount is limited to Ź 115 / Ź
230, respectively either unmarried or married
1.2.2. Is there a different tax treatment for income from different income
sources?
Yes,
Foreign income may be treated differently for tax purpose. Tax
treatment may depend to the provisions of the tax treaty between
France and the State from which the income arises (tax credit & )
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February 2008
1.3. Capital
1.3.1. Is there a different tax treatment between distributions of earnings
and capital gains realised by the sale of the business or the shares
in the undertaking?
Parent-subsidiary regime (CGI, art 145 and 216)
As from 1st January 2007, tax treatment is a participation-exemption.
- Capital gains: exemption excepted on 5 % of the capital gain value
taxed at the standard rate of 33 1/3%
- Dividend incomes: exemption excepted on 5 % of the gross dividend
income (amount could be lower if the company can establish the exact
amount of the costs incurred) imposed at the standard rate of 33 1/3%
Portfolio investment
- Capital gains: 33 1/3 %
- Dividend incomes:
o From French company: 33 1/3% on the income value (no longer tax
credit)
o From foreign company: 33 1/3% on the income value including foreign
tax credit if provided with tax treaty
Individuals
- Dividend incomes: reduction of 40 %, than graduated tax from 5.5 % to
40 % + additional social contributions of 11 %
- Capital gains : flat-rate 16 % + additional social contribution of 11 %
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February 2008
1.3.2. Are there different tax treatments for long-term capital gains and
short-term capital gains?
Partnership
The scope of long-term capital gains includes all fixed assets.
The long-term regime applies to the disposal of fixed asset retained
more than two years by the enterprise.
Kind of assets Capital gains Capital losses
Duration of detention
Less than 2 years More than 2 years Less than 2 years More than 2 years
Amortizable Short term Short term to the Short term Short term
asset extent of the
deductible
depreciation
Long term
beyond
Unamortizable Short term Long term Short term Long term
asset
Net long-term
- Capital gains: reduced rate of 16 % (additional rate of 11 % applies for
French one-man business only)
- Capital losses can be offset against the net long-term capital gains
realized the following ten financial years
Net short-term
- Capital gain: business income subjected to graduated tax
- Capital loss: deductible expense, may be offset against ordinary income
and carried forward (following six years)
Real estate gain
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As from 1st January 2006, 10% allowance per year of detention beyond
fifth year
Special rules for small business
Exemption related to the turnover
Activity Full exemption Part exemption
Selling of goods < Ź 250,000 Ź 250,000< turnover < Ź
Housing 350,000
Exempted gain = gain x
(350,000  turnover)/
100,000
Services < Ź 90,000 Ź 90,000< turnover < Ź
126,000
Exempted gain = gain x
(126,000  turnover)/
36,000
Exemption linked to the value of the sold assets
As from 1st January 2006, transfer of branch of activity or transfer of
one-man business may be exempted (condition of duration of activity:
five years)
Real estate gains are excluded
Full exemption: value of transferred assets used for registration duties
is less than Ź 300,000
Declining exemption if the value range from Ź 300,000 to Ź 500,000
Exempted gain = Gain x (500,000  value of transferred assets) / 200,000
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February 2008
Company
Short-term capital gain
Scope
Fixed assets, excepted shareholding qualifying for the parent-subsidiary
regime
Taxation
- Net short-term capital gains: taxed as an ordinary operating income at
the standard rate 33 1/3%
- Net short-term capital losses can be offset against ordinary income
Long-term capital gains:
Scope
Participations eligible for the parent-subsidiary regime and income
derived from the licensing of patents or patentable rights
Taxation
Capital gains are subjected to a reduced rate
As from 2007, 0%: capital gains derived by parent companies from
disposals of qualified shareholding. A 5% portion on the value of the
capital gain is taxed at the rate of 331/3%
Special rules for small companies
Exemption regime related to the value of transferred assets is also
applicable
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February 2008
1.3.3. Are there different tax treatments for capital gain from SME
business stock and capital gain from larger companies business
stock?
No.
Capital gain from business stock is taxed at the standard rate 33 1/3%
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February 2008
Country &
France RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES
FOR CORPORATIONS (distinguish specific tax rates for SMEs)
2002 2003 2004 2005 2006
Corporate
tax
1. Tax rate
1/3
Standard 33 33 1/3 CIT: 33 1/3 CIT: 33 1/3 CIT: 33 1/3
Additional Additional Social security Social security Social security
tax: 3 % on tax: 3 % surtax: 3.3 % surtax: 3.3 % surtax: 3.3 %
gross on gross assessed on assessed on assessed on
corporate corporate corporate tax corporate tax corporate tax
income tax income exceeding Ź exceeding Ź exceeding Ź
tax 763,000 763,000 763,000
Additional tax: Additional tax: Additional tax has
3 % on gross 1.5 % on gross CIT been abolished
corporate
income tax
Reduced 15 % to Ź 15 % to Ź 15 % to Ź 15 % to Ź 38,120 of 15 % to Ź 38,120 of
38,120 of 38,120 of 38,120 of SME s SME s profits (same SME s profits (same
SME s SME s profits (same conditions) conditions)
profits profits conditions)
(turnover (same
less than Ź conditions
7,630,000 )
and at least
75% of the
enterprise
is owned by
individuals
or by
enterprises
which are
at least
France Country Report 17
February 2008
75%-owned
by
individuals)
15 %: 15 %: 15 %: licensing 15 %: licensing of 15 %: licensing of
licensing of licensing of patents and patents and patents and
patents and of patents patentable patentable rights patentable rights
patentable and rights
rights patentabl
e rights
Minimum Based on the turnover of the company included VAT Based on the
Tax Creditable against CIT due for the current year and the following turnover of the
two years company, exclusive
of VAT.
Levied if turnover
up to Ź 300,000
Range from Ź 1,300
to Ź 110,000
Deductible expense
from financial
statement
Special 19 % 19 % 19 % 15% 8%: dividend paid
Rates by subsidiary
eligible to parent-
subsidiary regime
Dividends paid by
qualifying
participation for
accounting purpose
15 %
Non profit Business activity tax ( taxe professionnelle ):
tax (local On annual rental value of tangible assets; rate determined locally (limited to 3.5 % of
tax on the value added by business)
corporation
s, energy
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February 2008
tax& )
2. Tax
accounting Accrual accounting basis
rules
3.
Depreciatio
n
Basis Cost price
Methods Straight-line method (In general). Declining-balance method (qualifying industrial
assets).
Accelerated-depreciation method (certain specified assets
Rates Commercial buildings: range from 2 to 5 %
Industrial buildings: 5 %
Office equipments: range from 10 to 20 %
Motor vehicles: range from 20 to 25 %
Plant and machinery: range from 5 to 10 %
Accounting Depreciation must be recorded
Intangibles In limited circumstances.
Goodwill not depreciable in general
Non Land
depreciabl Goodwill
e assets Shares
4.
Provisions
Risks and Deductible
futures
expenses
Bad debts Deductible
Pensions Not deductible
Repairs Not deductible
5. Losses
Carry 5 years 5 years Unlimited
forward
Carry back Previous three fiscal years
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February 2008
Transfer of Group relief:
losses transfer to the
head of group
Merger with tax
administration
agreement
6.
Inventories
Valuation Cost price or market cost, if lower
rules Weighted-average cost price method is also allowed
Allocation FIFO
methods LIFO is not permitted
Personal
Income tax
Interest Graduated tax or flate-rate withholding tax (16 % + 11 % social contributions for
Income French residents only)
Dividends Subjected Subjected Subjected to Subjected to Subjected to
to personal to personal personal income personal income
income tax personal income tax tax after a 50 % tax after a 40 %
including income including credit reduction on the reduction on the
credit tax tax tax (avoir gross basis and an gross basis and an
(avoir including fiscal) on the additional annual additional annual
fiscal) on credit tax gross basis and fixed allowance (Ź 1 fixed allowance
the gross (avoir an additional 220/ Ź 2 440, (Ź 1 525/ Ź 3 050,
basis and an fiscal) on annual fixed respectively either respectively either
additional the gross allowance unmarried or unmarried or
annual fixed basis and A final tax married) married)
allowance an credit (33 1/3 % A final 50 % tax A final 50 % tax
A final tax additional of the gross credit calculated credit calculated
credit (33 annual dividend on the gross on the gross
1/3 % of the fixed incomes dividend incomes dividend incomes
gross allowance without before the two before the two
dividend A final tax limitations) was reductions. Amount reductions. Amount
incomes credit (33 deducted from limited to Ź 115 / limited to Ź 115 / Ź
without 1/3 % of the income tax Ź 230, respectively 230, respectively
France Country Report 20
February 2008
limitations) the gross either unmarried either unmarried
was dividend or married or married
deducted incomes
from the without
income tax limitation
s) was
deducted
from the
income
tax
Employmen Graduated taxation Graduated taxation Graduated taxation
t income up to 48 % on net up to 40 % on net
income income
Capital
gains tax
Sale of Short-term regime
fixed
assets
Timing N/A
rules
Accounting Selling price  book value
rules
Inflation N/A
Rates Short-term Short- Short-term Short-term regime: Short-term regime:
regime: 33 term regime: 33 1/3 % 33 1/3 % 33 1/3 %
1/3
% regime: Long-term Long-term regime: Long-term regime:
Long-term 33 1/3 % regime: 19 % 15% 8 % or 15 %
regime: Long-term
19 % regime:
19 %
Exemptions Exemption regime Exemption regime
for small for small
companies companies
depending on the depending on the
value of value of
transferred assets transferred assets
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February 2008
Sale of Participatio Participati Participation Participation Participation
shares n eligible to on eligible eligible to eligible to parent- eligible to parent-
parent- to parent- parent- subsidiary regime subsidiary regime
subsidiary subsidiary subsidiary or as recorded for or as recorded for
regime or as regime or regime or as accounting purpose accounting
recorded as recorded for and purpose: 8%
for recorded accounting Company with real Company with real
accounting for purpose and estate predominant estate
purpose and accountin Company with : 15 % predominant: 15%
Company g purpose real estate Others, qualifying Others: short-term
with real and predominant : portfolio regime
estate Company 19 % investment: short-
predominan with real Others, term regime
t : 19 % estate qualifying
Others, predomin portfolio
qualifying ant : 19 % investment:
portfolio Others, short-term
investment: qualifying regime
short-term portfolio
regime investmen
t: short-
term
regime
Capital
loss
Fixed Short-term losses may be offset against ordinary income
assets
Shares Carried forward 10 years to offset long-term capital gains Allocation:
Qualifying
participations: may
be offset against
long-term capital
gains taxed at the
8 % rate
Others: offset
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February 2008
against long-term
capital gains
taxable at the 15%
rate, and if any,
against long-term
capital gains at the
8% rate.
Wages
Average Brutto + Brutto + Brutto + Brutto + Brutto +
cost to the Social Social Social Social insurances Social insurances
Undertakin insurances insurances insurances 35% 35% to 45 % 35% to 45 %
g 35% to 45 % 35% to 45 to 45 %3
%
Average Brutto less Brutto Brutto less 18 % Brutto less 18 % to Brutto less 18 % to
cost to the 18 % to 23 % less 18 % to 23 % 23 % 23 %
employee to 23 %
Overall tax
on
distributed
earnings
or
Dividends
Timing
Tax credit
structure
N/A
Excluding
non profit
tax
Including
non profit
tax
Deduction
of
expenses
General In general, expenses are deductible if they are paid in interest s company and involve
rule a decrease of the net asset
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February 2008
Non- Leasing of tourism motor vehicle: part of the royalty (included VAT) equal to the no
deductibilit deductible depreciation calculated as if the company was an owner.
y of
expenses Lavish expenses provided by law : related to residence, yacht, hunting and fishing
Corporate income tax / Tax on tourism motor vehicle
Director s fees exceeding legal amount allowed to deduct
Net long-term depreciation
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February 2008
Thin Double limitation Interest paid on
capitalizati loans from direct
on Linked to the interest rate: interests are deductible to the shareholders
extent that the share capital is fully paid up and the interest (corporate) or
rate does not exceed the average interest rate on loans with an loans granted by a
initial duration of more than two years granted by banks to related party
French companies.
Limitation does not
Linked to the total amount paid : interest deductible to the apply if the
extent that they do not exceed 1.5 times the share capital interest expenses
paid to
shareholders are
lower than Ź
150,000
Limited rate:
higher of the
following:
Average interest
rate on loans with
an initial duration
of more than two
years granted by
banks to French
companies or
rate which could
be obtained from
independent
financial
establishments
Reincorporation if
three cumulative
limitations are
exceeded:
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February 2008
1) The company s
debt owed to all
related parties
exceeds 1.5 times
its equity;
2)Interest expenses
exceed 25 % of net
income exclusive
of tax and before
the interest paid to
related parties,
depreciations and
quota of leasing;
3) Interest
expenses exceed
interest collected
from related
parties.
Non-deductible
interest of one
fiscal year may be
deducted in the
following fiscal
year, if the above
limitations are
respected. The
amount of
deductible interest
expenses which
may be carried
forward is reduced
by 5 % each year.
Overall
corporate
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February 2008
tax on
retained
earnings
Excluding N/A N/A N/A N/A N/A
non profit
tax
Including N/A N/A N/A N/A N/A
non profit
tax
Debt
financing
Interest In general, interest payments are fully deductible
deductibilit Certain restrictions are imposed
y
Limits on Thin-capitalization rules
interest Non-deductible interest of one fiscal year may be deducted in the following fiscal
deductibilit year, if the above limitations are respected. The amount of deductible interest
y expenses which may be carried forward is reduced by 5% each year.
Interest
deductibilit
y on
business
owner loan
to
Undertakin
g
France Country Report 27
February 2008
Country & .
France RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES
FOR PARTNERSHIPS (distinguish specific rates for SMES)
2002 2003 2004 2005 2006
Tax
applicable to
partnerships
1. Tax rate
Tax transparent (IIT rules)  or Option for CIT (see above)
Standard Idem
Reduced Idem
Minimum Tax Idem
Special Rates Idem
Non profit Idem
tax (local tax
on Same as corporations
corporations,
energy tax& )
2. Tax Idem
accounting Same as corporations
rules
3. Idem
Same as corporations
Depreciation
Basis Idem Same as corporations
Methods Idem Same as corporations
Rates Idem Same as corporations
Accounting Idem Same as corporations
Intangibles Idem Same as corporations
Non Idem
depreciable Same as corporations
assets
4. Provisions Idem Same as corporations
Risks and Idem
Same as corporations
futures
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February 2008
expenses
Bad debts Idem Same as corporations
Pensions Idem Same as corporations
Repairs Idem Same as corporations
5. Losses Idem
Carry Idem NA  rules applicable according to the shareholders' quality
forward (corporation or individuals)
Carry back Idem NA  rules applicable according to the shareholders' quality
(corporation or individuals)
Transfer of Idem
NA  transfer to the shareholders of their quota of losses
losses
6.
Inventories
Valuation Idem
Same as corporations
rules
Allocation Idem
Same as corporations
methods
Personal
Income tax
Interest Idem Rules applicable according to the shareholders' quality
Income (corporation or individuals)
Dividends Idem
Employment Idem Rules of wages  see below
income
Capital gains
tax
Sale of fixed Idem Business gains : see above.
assets Private gains : 16 % + social contributions [11%]
Timing rules Idem Business gains : see above.
Private gains: no rules
Accounting Idem
Same as corporations
rules
Inflation Idem No
Rates Idem Business Business Business Business
gains : see gains : see gains : see gains : see
France Country Report 29
February 2008
above. above. above. above.
Private gains Private gains Private gains Private gains
> 15 000 Ź : > 15 000 Ź : > 15 000 Ź : > 15 000 Ź :
16 % + social 16 % + social 16 % + social 16 % + social
contributions contributions contributions contributions
[11 %] [11 %] [11 %] [11 %]
Exemptions Idem No unless 100 % sale by the business ownership if the
activity has been last for at least 5 years and the last
annual turnover is under certain limits
Sale of Idem Business Business Business Business
shares gains : see gains : see gains : see gains: see
above. above. above. above.
Private gains Private gains Private gains Private gains
> 15 000 Ź : > 15 000 Ź : > 15 000 Ź : > 15 000 Ź :
16 % + social 16 % + social 16 % + social 16 % + social
contributions contributions contributions contributions
[11 %] [11 %] [11 %] [11 %]
Capital loss
Fixed assets Idem Deductible or rules applicable according to the
shareholders' quality
Shares Idem Depends on the quality of the owner (CIT or IIT)
Wages
Average cost Idem Wage of the
to the business
Undertaking Wage of the business owner = non owner = non
deductible + Payroll taxes deductible +
Payroll taxes
[45 %]
Average cost Idem Same as
to the Same as corporations corporations:
employee 20 %
Dividends
Timing NA NA
Tax credit NA NA
structure
Deduction of
France Country Report 30
February 2008
expenses
General rule Idem Expenses in the interest of the company
Non- Idem
deductibility Others than in the interest of the company
of expenses
Thin Idem
Same as corporations
capitalization
Retained NA
NA
earnings
Debt
financing
Interest Idem If debts in the interest of the society
deductibility
Limits on No  Loans No  Loans No  Loans No  Loans
interest by business by business by business by business
deductibility Idem owners owners owners owners
limited [ see limited [ see limited [see limited [see
ż 34] ż 34] ż 34] ż 34]
Interest Idem Loans by Loans by Loans by Loans by
deductibility business business business business
on business owners owners owners owners
owner loan limited limited limited limited :
to (5.05 %): see (4.58 %): see (4.21 %): see (4.48 %) see
Undertaking ż 34 ż 34 ż 34 ż 34
2. What are the main types of business entities and the main differences in
(corporate) income taxation for sole traders, general partnerships, limited
partnerships and corporation and other business entities if relevant?
In France the business entities are the following: sole trader, general
partnership, limited partnership and corporation. The main difference is that
corporations can t be treated tax transparent.
France Country Report 31
February 2008
2.1. Are partnerships treated transparent for tax purposes?
Yes
2.2. Can partnerships opt for corporate income tax?
Yes (CGI, art 206-3 and 239)
2.3. Once they have opted for a regime is it easy to switch back?
It is impossible
2.4. Is there a difference in this respect between general and limited
partnerships?
No
2.5. Can corporations opt to be treated tax transparent?
No, unless "Family Limited Liability Company"
2.6. Once they have opted for a regime is it easy to switch back?
In general: impossible  Family Limited Liability Company can opt back
for CIT
2.7. Are there differences in this respect between the different types of
corporations?
France Country Report 32
February 2008
 In general: impossible  Family Limited Liability Company can opt back
for CIT
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT
CHANGES UP TO 2007
France General Limited Corporation Sole Trader
Partnership Partnership
Corporate
Option Option Yes Option
tax
Income tax General case: No
option.
Yes Yes Unless: "Family Yes
Limited Liability
Company"
Capital gains
Yes Yes Yes Yes
tax
&
Option for General case: No
Transparent Legal Legal option. Legal
treatment applicable applicable Unless: "Family applicable
regime regime Limited Liability regime
Company"
&
3. Are there any special tax regimes for SMEs for (corporate) income tax
purposes?
YES
- SME: Reduce tax rate: 15 % on benefits d" Ź 38,120 (CGI 219,I b)
France Country Report 33
February 2008
if SME: maximum annual turnover: Ź 7,630,000
capital fully paid up;
continuously held by individuals or corporations held by
individuals for at least 75 %;
minimum percentage of detention required: 75 %
- "micro-entreprises" regime (CGI 50-0, 1)
taxable income = turnover  standard deduction (68 % or 45 %); for sole
ownerships whose annual turnover d" Ź 76,300 or Ź 27,000 Ź (according to their
activities)
- "RSI" (simplified regime of taxation) (CGI ann. II, 267 sexies and septies C)
lighten accounting obligations and returns; for sole ownerships whose
annual turnover d" Ź 763,000 or Ź 270,000 but > Ź 76,300 or Ź 27,000 (according
to their activities)
3.1. What are the conditions to be fulfilled in order to benefit from
these special tax regimes?
if SME: maximum annual turnover: Ź 7,630,000
capital fully paid up;
continuously held by individuals or corporations held by
individuals for at least 75 %;
minimum percentage of detention required: 75 %
3.2. Are there limits on the length of time during which these special
tax regimes are available, or other limits?
No
4. Are there any special tax incentives, such as (re-)investment reserves or
provisions, special depreciations/capital allowances deductible for
(corporate) income tax purposes?
France Country Report 34
February 2008
a)- Reinvestment reserves or provisions: no;
b)- Special depreciations/capital allowances: no;
c)- Tax credit or tax reduction: yes, such as
" new societies created in certain geographical areas (AFR, ZRR, ZRU& )
" growth companies
" investments in new technologies.
These tax credits or reductions are very complicated, and above all this they
are levelled off (minimis regime).
4.1. Do these elements of internal financing represent an important
alternative to the financing by retained earnings?
NO
4.2. Are there any compulsory measures in relation to the retention of
earnings (e.g. legal constraints for the distribution of profits and
dividend policy)?
YES,
Compulsory appropriation of the legal reserve (5 %) - in the limit of 10 %
of the capital.
5. Are there any differences in the tax treatment of stock and cash
dividends1?
NO
1
For the Undertaking stock dividend means increased own equity. For the shareholder it
means additional shares in the Undertaking which may be untaxed until sold, unlike a cash
dividend.
France Country Report 35
February 2008
6. Have there been any changes in the tax regulation in recent years - since
2002  that have had an important effect on the retention of earnings, the
distribution earnings or the reinvestment of profits for a particular
purpose?
YES
The abolition of the "avoir fiscal" (tax credit) and of the "precompte" (tax
deduction at source) lead to retention of earnings.
The reduced rate of 15 % on the portion of company s profits less than Ź
38,120 if certain conditions are met, including the turnover of the company
(less than Ź 7,630,000) and the shareholding of the company (at least 75 % of
the company is owned by individuals or by companies that are at least 75 %-
owned directly by individuals) had the same consequences.
7. Are there any current plans for tax reforms that have as their object to
have an impact on the retention of earnings?
NO, because of the elections
France Country Report 36
February 2008
PART 2  TAX ASPECTS OF RETAINED EARNINGS VERSUS DISTRIBUTED PROFITS AND
WAGES
8. What is the tax treatment of retained earnings compared to distribution of
earnings on the level of the Undertaking and at a combined level of
Undertaking (corporate) and business owner (individual)?
Retained earnings: 33.1/3 % + sale of the share by the business owner: 16% +
social contributions [11 %]
Distribution of earnings: 33.1/3 % + Taxation of the business owner (40 %) +
social contributions [11 %]
8.1. Is there an economic double taxation of distribution of earnings (taxation
of Undertaking income and then taxation on the distribution of earnings
at the Undertaking level or at the business owner level)?
YES
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT
CHANGES UP TO 2007
Country & & Undertaking Individual Business owner
Corporate IIT: maxi 40 %
33.1/3 %
tax + social contributions (11 %)
Income tax IIT: maxi 40 %
+ social contributions (11 %)
Dividend tax IIT: maxi 40 %
+ social contributions (11 %)
Dividend - maxi 230 Ź
France Country Report 37
February 2008
credit
Capital gains 16 % 16 %
tax + social contributions (11 %) + social contributions (11 %)
If option for
Transparent
Not possible Not possible
treatment
chosen
9. Please described the differences in the tax treatment of distribution of
earnings realised as a capital gain in the context of a sale of the shares or
of the business compared to that (i) of retained earnings, (ii) of wages
salaries paid to the business owner and (iii) of a loan granted by the
Undertaking to the business owner?
Rate Dividends Wages Retained Gains (Sale
Profits of 100% of
the shares)
Corporate
Capital 100 000 100 000 100 000 100 000
Result before salaries 15 000 15 000 15 000 15 000
Gross salary -10 000
Payroll taxes 45% -4 500
Result after wages 15 000 500 15 000 15 000
CIT 33.33 -5 000 -167 -5 000 -5 000
%
Result after CIT 10 000 333 10 000 10 000
Distributed dividends 10 000 0 0 0
Sale of shares 110 000
Business owner / Shareholer
Payroll taxes 20% -2 000
France Country Report 38
February 2008
Received salary 8 000
Taxable wages 10% 7 200
Received dividends 10 000
Taxable dividends 60% 6 000
Gain received 10 000
Tax base 6 000 7 200 10 000
Tax to be paid 16% -1 600
IIT to be paid 40% -2 400 -2 880
Social contribution -1 100 -776 -1 100
(CSG)
Total tax -3 500 -3 656 -2 700
Net cash after tax 6 500 4 344 0 7 300
France Country Report 39
February 2008
and in a table form:
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT CHANGES
UP TO 2007
Country & Distributed Retained Profit Wages/Salaries Loan to business
France profits to business owner
owner
33.1/3 % 33.1/3 % Social taxes
Long Term: 0 %, Long Term: 0 %, Long Term: 0 %,
Sale of
15 % or 33.1/3 % 15 % or 33.1/3 % 15 % or 33.1/3 %
shares
Short Term: Short Term: Short Term:
33.1/3 % 33.1/3 % 33.1/3 %
Prohibited
33.1/3 % 33.1/3 % Social taxes
Long Term: 0 %, Long Term: 0 %, Long Term: 0 %,
Sale of
15 % or 33.1/3 % 15 % or 33.1/3 % 15 % or 33.1/3 %
business
Short Term: Short Term: Short Term:
33.1/3 % 33.1/3 % 33.1/3 %
10. Is the combination of wages (paid to the business owner by the
Undertaking), profit distributions and retained earnings a tax planning
issue that is anticipated and addressed by business owners in view of
minimising the overall tax burden of the business owner and the
Undertaking?
YES
11. In respect to the previous question, is the business owner more interested
in minimising his/her tax burden and then the Undertaking s or both
equally?
Psycologically, the business owner is more interested in minimising his tax
burden
France Country Report 40
February 2008
12. Are there instances in which minimising the tax burden of the business
owner would mean dramatically increasing the tax burden of the
Undertaking?
Yes, taxes on society vehicules (CGI, articles 1010).
13. For corporate income tax or capital gains tax purposes, are there any
incentives/disincentives to retain earnings rather than distribute them or
pay wages?
NO
13.1. Are there any limitations or ceilings for these incentives?
NA
13.2. Is there a risk that these incentives can be used more than one time
by the business owners by splitting up the business activities into
different legal entities?
NA, as there are no incentives
14. What is the tax treatment of declared loans granted by the Undertaking to
the business owner?
They are prohibited (commercial code). But see 34. for loans granted by the
business owner to the Undertaking
France Country Report 41
February 2008
14.1. Is there a minimum interest rate to be charged for tax purposes?
NA
14.2. How is the interest rate treated for tax purposes for the
Undertaking?
NA
14.3. How is the interest rate treated for tax purposes for the business
owner?
NA
14.4. What are the combined tax effects of such a loan compared to a
distribution of earnings equivalent in amount?
NA
15. Are there any other taxes (e.g. net worth tax) which are imposed or based
on the net equity of the Undertaking?
NO
16. Are there any other tax incentives for either the retention of earnings or
their distribution of profits?
NO
France Country Report 42
February 2008
PART 3  TAX ASPECTS OF RETAINED EARNINGS FINANCING VS DEBT FINANCING
17. In debt financing, what is the tax treatment of interest expenses paid or
accrued by the Undertaking?
Interests are deductible on a tax purpose if the loan is taken in the interest or
for the need of the company.
"Anti thin-capitalization" mechanism: in small groups, the deductibility of the
financial charges on intra-group loans has change. Since January, 1st, 2007,
interest paid to affiliated company are deductible in the limit of Ź 150,000.
17.1. Is there a different tax treatment to deductions on interest paid when
the lender is a resident or a non-resident for tax purposes?
Since, January, 1st, 2007.
17.2. Is there a different tax treatment on interest on long-term debt and
interest on short-term debt
No
18. Are there any tax benefits that are actionable based on specific amounts
of equity (e.g. notional interest expense based on the increase of own
equity or the total amount of equity)?
No
18.1. What is the exact calculation method used to implement this
incentive and to evaluate the benefits once this incentive is
implemented?
France Country Report 43
February 2008
NA
18.2. Are there any other tax provisions favouring increases in own equity?
NA
19. Is debt financing of an enterprise by the business owner himself of his/her
family recognised for tax purposes (ie. If the business owner or his/her
family lends money to the Undertaking are they treated differently than
other lenders for tax purposes)?
Yes, there are legal limitations of the amount of deductible interest:
" loans must be declared to the tax administration (formal obligation)
" the amount of deductible interest for the company is levelled off. (4.48 %
for 2006  this rate is published each year in the official journal)
" the total amount of the money lend to the undertaking by shareholders d"
1.5 x capital
19.1. If so, are there any incentives for the business owners to debt-finance
their enterprise instead of retained earnings financing or equity
financing?
Yes,
" Tax credit in case of cash taking up of the authorized capital,
" Tax credit in case of increase in capital.
20. Is there a general discrimination between retained earnings financing and
debt financing from a tax point of view?
YES, but it depends from which point of view (CIT or IIT) you consider the
problem.
France Country Report 44
February 2008
20.1. Is there a general discrimination between retained earnings financing
and equity financing from a tax point of view?
YES, as there is:
" a tax credit in case of increase in capital
" a possibility to deduce certain expenses
20.2. Is there a general discrimination between equity financing and debt
financing from a tax point of view?
YES, there is a general discrimination, because from a tax point of view
debts can be deductible charges.
21. Are there any debt to equity ratios limiting the deductibility of interest
expenses for tax purposes?
YES
"Anti thin-capitalization" mechanism: in small groups, the deductibility of the
financial charges on intra-group loans has change. Since January, 1st, 2007,
interest paid to affiliated company are deductible in the limit of Ź 150,000.
21.1. If so, does the limitation apply to loans granted by the business owner
and affiliated persons or does it include loans granted by third
parties?
Individuals: NO
Corporations: Yes
21.2. What are the consequences if the debt to equity ratio is not
respected?
France Country Report 45
February 2008
The interests are partially non deductibles.
22. Are there any tax provisions likely to impact the conversion of retained
earnings into share paid in capital (For example share buy-back)?
NO
23. Are there any other taxes that have as their object to affect or impact on
either Undertaking debt financing or retained earnings financing?
NO
France Country Report 46
February 2008
PART 4  TAX ASPECTS OF BUSINESS INCOME VERSUS PRIVATE INCOME
24. In respect to individual business owners, what is the general tax treatment
for private (ie: interest on passive investment) income compared to
business income (ie: income generated from your business activity)?
As business incomes are taxed directly in the hand of the business owner (see
part 1 question 2), the general tax treatment for private investment income
in France is the same as the business income. There were no changes since
2007.
INCLUDE RELEVANT TAX
PROVISIONS IN 2002 AND
SUBSEQUENT CHANGES UP
TO 2007
Country: France Private Business
Investment Income
Income
& IIT IIT
&
&
&
&
24.1. Are there different allowances or special treatments for private
investment income and business income?
YES, but there are no consequences on the tax level
France Country Report 47
February 2008
25. Is there a different tax treatment for interest income received in a private
investors capacity (ie: business owner investment return in another
Undertaking) and interest income earned through business activity (ie:
business owner investment return from the Undertaking)?
NO
26. Does the tax system encourage business owners to invest in private assets,
which are subsequently rented or leased to their enterprises?
NO
27. By opposition to Question 26, does the tax system encourage that assets
be acquired by the Undertaking and rented or leased to the business
owner?
YES
Rentals of goods to the business owners are controlled agreements. Such
advantages can be reputed as benefits in kind for the business owner.
28. Are capital gains from private assets taxed in the same way as capital gains
realised within the context of a business activity?
YES, basically capital gains from private assets and capital gains realised
within the context of a business activity are taxed at a rate of 16 % (+ social
taxes for a global rate of 11 %. That is an effective rate of 27 %).
But in the case of a retirement from a society which respond to the definition
of "Small and Medium Entreprise" (SME), capital gains realised within the
context of this business activity shall be tax exempted.
France Country Report 48
February 2008
28.1. If capital gains from private assets are taxed lower, does this
represent an important incentive for the business not to invest in
their own Undertaking?
NA
29. Are interest expenses incurred on private debts deductible for tax
purposes?
NO, except from individual business
30. Is there a tax advantage for the Undertaking in transferring debts from the
business owner to the Undertaking?
YES,
" the interests are deductible for the society;
" but they are not deductible for the business owner unless debts relative
to the share purchasing.
31. Is there a tax advantage for the business owner in transferring debts from
the business owner to the Undertaking?
YES, ISF (wealth tax) but the transfer must be done in accordance with the
interest of the company
32. Are there other taxes such as inheritance tax which have an important
impact on own equity and retention of earnings decisions?
YES, ISF (wealth tax)
France Country Report 49
February 2008