This country-specific Q&A provides an overview to tax laws and regulations that may occur in France.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax
How often is tax law amended and what are the processes for such amendments?
In theory, tax law is amended twice a year by two Finance laws adopted at the end of each year: (i) the Finance Bill which settles the budget of the following year and (ii) an Amending Finance Bill correcting the budget of the finishing year.
Tax law may also be, and in practice often is, amended by specific tax provisions contained in more general laws. For example, in 2013, the French Parliament voted a law against tax fraud and serious economic and financial crime (Law n°2013-1117 of 6 December 2013) which amended several provisions of the French Tax Code (“FTC”). More recently, in 2015, the law for business growth and equal opportunities (Law n°2015-990 of 6 August 2015 for business growth and equal opportunities) included specific tax provisions (for example, regarding the allotment of bonus shares). Finally, an additional amending finance bill may also be adopted during the year (often in spring) and this is always the case right after a general election to introduce the tax program of the new government (this will be the case this year after the general elections to take place in May and June).
Bills are not subject to systematic prior consultation with industry stakeholders. In France, companies or individuals do not have an official say in the law-making process and are not consulted either by the French government or the legislator. However, there are ongoing discussions about tax law between the French tax authorities (“FTA”) and taxpayers and there representative bodies, particularly the main bodies representing business (so called Medef and Afep) during the law making process.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Procedural obligations To be filed Corporate income tax return (Form 2065) Within 3 months of the end of each tax year
For companies closing their accounts on December 31st, it is to be filed by the second working day following May 1st of the following year
Transfer pricing return (Form 2257) includes general information about the group’s activities and intangible assets of and more specific information about the French subsidiary transactions with related entities Within 6 months of the filing of the corporate income tax return Country by country report (Form 2258) Within 12 months of the end of the tax year Value added tax returns (Form 3310) On a monthly basis Contribution on added value of enterprises return ("Cotisation sur la valeur ajoutée" - CVAE) By the second working day following May 1st of the year following the year in which CVAE is due Investment income (“Imprimé Fiscal Unique”, Forms 2561) concerning entities paying investment income (dividend and interest) By February 15th
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
France does not have a regulatory authority dedicated to tax issues. The French system is based on return-filing, which may lead to audit, then, as the case may be, to reassessment by specialized bodies such as the "Directorate of National and International Audits" (Direction des Vérifications Nationales et Internationales) for the largest companies, with whom companies may discuss during the audit process.
However, the FTA may issue rulings in specific matters such as transfer pricing (Article L 80 B of the Tax Procedure Code). These rulings provide the taxpayer with protection and legal certainty as the tax authorities take an official stance on a specific question.
Furthermore, the FTA have recently (since 2013) experienced the “enhanced relationship” (relation de confiance) with volunteer leading groups and small and medium-sized enterprises (“SME”). Basically, the company commits to involve the FTA when a tax issue arises and the FTA commit to promptly deliver a ruling on the matter and validate over a certain tax period the tax treatment chosen by the company in accordance with the ruling. The objective is both to prevent tax audits as well as initiate a close relationship between the taxpaying companies and the FTA. This is still on an experimental basis and will need to be confirmed.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Administrative courts have jurisdiction over most tax matters (to the exception of registration duties, for instance which are dealt with by the judicial courts). The first instance jurisdiction is the administrative court (“tribunal administratif”). Appeal lies with the administrative court of appeal (cour administrative d’appel). Finally, the Supreme Court (“Conseil d’Etat”) reviews the legal conformity of decisions by lower courts and doing so may, totally or partially, override a decision. The case is either settled by the Supreme Court (general case) or sent back for review by re-the administrative court of appeal.
As a general rule, it takes between 8 to 10 years to reach a settlement before the Supreme Court.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Further to a tax reassessment, and once he receives a tax collection notice (“Avis de mise en recouvrement”), a taxpayer must pay the whole amount of reassessed tax including penalties and interest for late payment.
If the taxpayer decides to go court, payment of the reassessed tax may be deferred until the end of the first level of the court proceedings provided that the taxpayer secures the payment and provides the FTA with financial guarantees.
If the court rules in favour of the taxpayer, the FTA will repay the amount paid initially by the taxpayer increased with a monthly 0.4% interest for late payment (4.8% per year) if the taxpayer choose to pay or have to refund the cost of the guarantees if the taxpayer asked for a deferral.
If the court rules in favour of the FTA, the payment of the reassessed tax including penalties and interest for late payment (same rate of 4.80% per year) becomes final and the taxpayer must proceed to payment if he asked for a deferral.
Please note that the mutual agreement procedure (“MAP”) that aims at eliminating double taxation and which is provided for in tax treaties and the EU arbitration convention cannot benefit of a deferral of payment (this is in contradiction with EU code of conduct on the arbitration convention of December 2009).
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
The FTA are required to keep confidential any kind of information they may be granted access to in the course of an audit, and do so in practice.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
France is a signatory of the multilateral Convention on Mutual Administrative Assistance in Tax Matters and has activated exchange relationships for the Common Reporting Standard information with 50 jurisdictions.
Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing has also been transposed in France. Companies are now required to disclose the identity of their beneficial owners –i.e. individuals owning, directly or indirectly, more than 25% of the company’s equity or voting rights.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
When the OECD issued the BEPS recommendations, France had already introduced several rules aiming at fighting tax fraud and evasion which have been reiterated in the BEPS action plan: CFC rules, transfer pricing rules, anti-hybrid provisions and specific provisions limiting the deductibility of interest expenses. So, even if there isn’t any formal plan regarding the introduction of the BEPS recommendations into French law, the FTA have always been committed to tackle the issue of tax fraud and evasion.
Is there a GAAR and, if so, how is it applied?
French tax law provides for a GAAR according to which the FTA may disregard any legal arrangements they consider to be either (i) fictitious or, (ii) by seeking a literal application of legal provisions and decisions which contradicts the objective set forth by the French legislator, motivated by the exclusive purpose of avoiding or reducing the tax burden. If such "abuse of law" is identified, a specific 80% tax penalty based on the amount of avoided tax is applicable.
If such a procedure is undertaken by the FTA, the taxpayer is entitled to consult the Abuse of Law Committee (“Comité d’abus de droit”) which only gives advisory opinions that do not bind the tax administration.
In practice, especially in recent years, this general anti-avoidance rule has often been enforced by both the FTA and the courts.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
The French tax system does follow the recognized OECD Model and provides for the taxation of the following:
a. Taxation of business profits
The standard rate of corporate income tax (“CIT”) is 33.1/3%.
Additional contributions may also be due: a 3.3% social contribution based on the income tax in excess of EUR 763,000 and a 3% additional social contribution. The effective corporate income tax rate is 34.43%.
SMEs are entitled to a 15% reduced rate up to EUR 38,120 taxable profits.
The Finance Bill for 2017 provides for a progressive decrease of the standard corporate tax rate: from 33.1/3% to 28% in 2020 (the 3.3% social contribution will remain applicable so the effective tax rate will be decreased from 34.43% to 28.924%).
This progressive decrease will first apply to SMEs which will benefit from a progressive CIT rate on their 2017 taxable profits:(i) 15% up to EUR 38,120 (ii); 28% between EUR 38,120 and EUR 75,000 and (iii) 33.1/3% over EUR 75,000.
For fiscal years starting as of January 1st, 2018, all French companies will benefit from a 28% CIT rate on their 2018 taxable profits up to EUR 500,000 (the standard 33.1/3% CIT rate will remain applicable to taxable profits in excess of EUR 500,000).
For fiscal years starting as of January 1st, 2019, the 28% CIT rate will fully apply to all French companies which annual turnover does not exceed EUR 1 billion (this limit will be determined on a consolidated basis for tax consolidated groups).
For fiscal years starting as of January 1st, 2020, the 28% CIT rate will become the standard rate as it will apply to all French companies without distinction.
b. Taxation of employment income and pensions
French residents are taxed on a worldwide basis. Gross income from employment and pensions is subject to two specific social contributions: the generalized social contribution (CSG - “contribution sociale généralisée”) applied at a 7.5% rate and the social security debt contribution (CRDS - “contribution au remboursement de la dette sociale”) applied at a 0.5% rate.
Regarding income tax, employment income and pensions are taxed on a net basis according to a progressive schedule:
- 14% from EUR 9,710 up to EUR 26,818 ;
- 30% from EUR 26,819 up to EUR 71,898;
- 41% from EUR 71,898 up to EUR 152,260; and
- 45% over EUR 152,260.
Individuals earning more than EUR 250,000 are liable to an additional progressive contribution (“contribution sur les hauts revenus”):
- 3% from EUR 250,000 up to EUR 500,000 ; and
- 4% over EUR 500,000.
c. VAT (or other indirect tax)
The standard VAT rate is 20%. However, the FTC provides for two reduced rates applied to specifically listed goods and services:
- a 10% rate applied to, for instance, agricultural products, medicine and take-away food;
- a 5.5% rate applied to, for instance, essential food items, gas, electricity and energy-saving equipment and materials.
Some transactions may also be zero rated or VAT exempted, such as exports.
d. Taxation of savings income and royalties
Regarding companies, savings or investment income and royalties are in principle taxed at the standard 33.1/3% CIT rate. However, royalties from the license of patents or patentable inventions may be taxed at a 15% reduced rate (French IP box regime).
Regarding individuals, investment income and royalties are taxed according to the above-mentioned progressive schedule. Investment income is subject to a compulsory 24% withholding tax as an advance payment of income tax assessed under the progressive system (tax withheld in excess comes as a reduction of final income tax). Social contributions are to be added at a global 15.5% rate.
e. Taxation of income from land
Property is subject to taxation according to the income tax progressive schedule as far as individuals are concerned, and at the standard CIT rate as for companies.
f. Taxation of capital gains
Regarding companies, capital gains are in principle taxed at the standard CIT rate plus the additional contributions. However, gains derived from the sale of shares may be considered as long-term capital gains, and therefore partially CIT exempted, if the company has owned at least 5% of the shares for at least 2 years. If so, only 12% of the gross capital gain is taxed at the standard CIT rate, resulting in a 4% effective tax rate.
Yet, please note that long-term capital gains on the sale of shares in real estate companies are taxed at the standard CIT rate plus the additional contributions.
Regarding individuals, capital gains are taxed according to the income tax progressive schedule. Social contributions are to be added at a global 15.5% rate. However, rebates apply to capital gains on shares and on immovable properties depending on the time elapsed since the assets were acquired:
- For shares 50 % rebate after 2 years of holding and of 60 % after 8 years;
- For immovable property, a rebate applies after 5 years of holding which leads to an exemption after 22 years for income tax and 30 years for social contributions.
g. Stamp and/or Capital duties.
Some goods and deeds are subject to stamp duties.
- The sale of a business (“fonds de commerce”)- tangible and intangible assets included - is taxed according to progressive rates applied on the price paid:
- 3% from EUR 23,000 up to EUR 200,000; and
- 5% over EUR 200,000.
- With respect to the acquisition of real properties, it also triggers the payment of stamp duty where the construction has been completed for more than 5 years at the time of the acquisition. Stamp duty is assessed on the purchase price agreed upon by the parties, increased by any charge or liability of the seller transferred to or assumed by the buyer at the global rate of 5.80%. An additional tax of 0.6% applies in case of acquisition of commercial premises located in the Parisian area.
By exception, a reduced rate of 0.715% applies to (i) acquisition of building lots (terrains à bâtir), (ii) acquisitions of new buildings (i.e., completed or renovated within the last five years), (iii) acquisitions of new buildings purchased as part of an off-plan sale arrangement (vente en l'état futur d'achèvement - VEFA). In addition, the reduced rate also applies to acquisitions of property by a buyer liable to VAT who undertakes to re-sell the property within five years of the date of acquisition.
Finally, a fixed duty of €125 is payable for the acquisition of a property by a buyer liable to VAT where it undertakes to carry out work on the property in order for it to qualify as a new building or work required to complete an incomplete building within four years of the date of acquisition.
In any case, a real estate contribution (“contribution de sécurité immobilière”) at a 0.10% rate and notary fees at a 0.814% rate will apply to the transaction.
- Duties related to a transfer of a non-quoted company shares (société anonyme, société en commandite par actions or société par actions simplifiée) are subject to a single 0.1% rate.
- The transfer of shares of a company in which the capital is not divided into shares of stock (sociétés à responsabilité limitée, société civile, société en nom collectif) is subject to a 3% registration duty.
- The sale of shares in a real estate company –i.e. a company the assets of which are mostly immovable property or immovable property rights (50% or more) – gives rise to a 5% registration duty.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
The taxable base is first determined according to the accounting principles provided for in the General Accounting Standards (“Plan Comptable Général”). Then, the FTC provides for specific provisions to the application of which results in the taxable income to be increased (e.g. limitation of deductible interests, transfer pricing, CFC and GAAR rules) and/or decreased (e.g. accelerated depreciation, loss carry-forward, participation-exemption regime).
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
All entities carrying on a profit-making activity are taxable entities. Hence, partnerships are taxable entities, but income tax is paid by partners.
As a general rule, France tax law does not acknowledge transparent entities.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
French corporate income tax is not based on fiscal residence or registration but on the principle of territoriality: only profits derived from activities carried out in France are taxable in France. As a consequence, an entity, be it French or not, is to be considered to be carrying out activity in France if:
- it has an establishment in France: the notion of establishment provided for in the FTC is close to that of permanent establishment provided for in international tax treaties;
- it has in France a representative with a dependent professional status. This notion is also close to that of dependent agent provided for in international tax treaties; or
- it performs in France a complete cycle of business (“cycle commercial complet”) separate from the company’s other domestic business.
As the case may be, these criteria could be superseded by the stipulations of a tax treaty.
In addition, passive income (dividends, interest and royalties) received by a French entity are taxed in France.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
The FTC provides for several specific taxation regimes covering various fields such as research and development or starting businesses. However, the FTC does not provide for specific provisions regarding financial services.
Here is an overview of some of these specific regimes:
- Headquarters and centers of logistics of multinational companies: under prior agreement with the FTA, headquarters may determine their taxable profits according to their profit margin computed as follows: profit margin ratio applied to ordinary operating expenses;
- Regime of starting businesses: under certain conditions, such a business may enjoy a total exemption of CIT for the first 23 months following the month it was set up and, for the next three 12-month periods, only 75% (1st period), 50% (2nd period) and 25% (3rd period) of profits will be taxed;
- Young innovative business: SMEs engaged in significant research and development activities may be fully CIT exempted the first profitable year and, the following year or next profitable year, only half of the profits will be taxed; a tax credit for research and development may be granted which amounts to 30% of research and development expenses within the limit of EUR 100 million and 5% over this threshold.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Capital gains from the sale of patents, patentable inventions and industrial manufacturing processes attached to those patents and patentable inventions, as well as licensing income related to such intangible assets, are taxed at a 15% CIT rate (effective tax is 17.1%).
However, the French patent box regime may be an issue in the context of BEPS Action 5. According to the “nexus” approach chosen by the OECD, income derived from intangible assets may benefit from an IP regime only to the extent that it is generated by qualifying research and development expenditures. The French patent box regime was considered to be inconsistent with this approach. However, the French authorities consider that the patent fox regime is not constitutive of a harmful practice and are not currently planning to change the regime.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
The FTC provides for a tax consolidation regime that allows consolidation of profits and losses of individual group companies. The head of the group is solely liable for the payment of income tax on the aggregated taxable income on behalf of the whole group. Intragroup transactions are neutralized within the tax consolidated group.
To set up a tax group, a French company must not be 95% or more owned, directly or indirectly, by another French company and must own, directly or indirectly, at least 95% of one or more French affiliates that would join the tax group.
Is there a CFC or Thin Cap regime?
The FTC provides for a CFC rule that constitutes an exception to the above-mentioned territoriality principle. According to this rule, profits realized by an entity, which is, directly or indirectly, more than 50%, owned by a French company and which is located in a privileged tax regime country, are deemed to be received by the French company in due proportion of the shares owned and therefore, are to be taxed in France. An entity is considered to be located in a privileged tax regime country if the effective corporate tax rate applied in this country is at least 50% lower than France’s.
The French thin cap regime provides that the deductibility of interest paid by a French company to related parties is limited if the following criteria are cumulatively met:
- the overall indebtedness regarding loans granted by related parties exceeds 1.5 times the company’s net equity;
- the amount of interest paid to related parties exceeds 25% of the adjusted
- the amount of interest paid to related parties exceeds the amount of interest received from related parties.
The portion of interest paid which exceeds the highest of the three set criteria is not deductible.
French tax law provides for several other rules aiming at limiting the deductibility of interest:
- the rate applied to the inter-company loan must not exceed a specific tax rate (which is an average of the rates set for loans granted to companies by financial institutions). If so, the exceeding portion of interest paid is not deductible;
- “Carrez Amendment”, which provides that interest on loans raised for the purpose of acquiring shares is non-deductible if the decisions concerning the acquired shares are not actually made in France;
- “Charasse Amendment”, which provides for financial expenses paid on related-party acquisitions to be added back, to a certain extent, within the context of a French tax group; and
- a global limitation corresponding to 25% of interest expenses, known as the “Rabot”.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
The FTA applies the arm’s length principle: prices applied to transactions between related parties must be similar to prices that would have been agreed upon for transactions between independent companies. If not, the FTA may presume an indirect transfer of profits from the French company to its foreign affiliate and reassess its taxable income accordingly, that is to the extent of the amount deemed to have been unduly shifted. The burden of proof regarding an indirect transfer of profits lies with the tax authorities.
The FTC provides for the possibility of a bilateral advance pricing agreement between multinational companies and the tax authorities which would aim at fixing the transfer pricing method to be used in cross-border transactions.
The State Aid action has not dramatically changed the situation, but just increased the already thorough examination of the APA requests.
Are there any withholding taxes?
Dividends paid to a non-resident company are subject to a 30% withholding tax on the gross amount paid, unless provided otherwise by relevant tax treaties. If the dividends are paid to a company located in a non-cooperative jurisdiction, the rate is increased to 75%. As of April 8th, 2016, seven countries are considered non cooperative countries by French authorities: Botswana, Brunei, Guatemala, Marshall Islands, Nauru, Niue and Panama.
According to the EU Parent-Subsidiary Directive (2011/196), transposed into article 119 ter of the FTC, dividends paid by a French company to its parent located in another EU Member State are, under certain conditions, withholding tax exempted.
Interest paid to a non-resident company is generally not subject to any withholding tax, unless the payment is made to an entity located in a non-cooperative jurisdiction. If so, the 75% rate will also apply to the gross amount.
Royalties paid to a non-resident company are subject to a 33.1/3% withholding tax on the gross amount paid.
According to the EU Interest and Royalties Directive (2003/49/CE), transposed into article 119 quater of the FTC regarding interest and article 182 bis of the FTC regarding royalties, interests and royalties paid by a French company to its parent located in another EU Member State are, under certain conditions, withholding tax exempted.
Are there any recognised environmental taxes payable by businesses?
For the time being, France does not have enforced any significant Environmental Taxes which are payable by businesses.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
In theory, dividends received are taxed at the standard CIT rate.
However, the FTC provides for a participation-exemption regime. Dividends received by a qualifying parent company may be CIT exempted if the parent company has owned at least 5% of the French company for at least 2 years. In that case, only 5% of the amounts of dividends distributed remain taxable to CIT, leading to an effective taxation of 1.72% of dividends distributed (i.e., 34.43% x 5% = 1.72%).