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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
UPDATE : The VAT Package for 2010
The VAT package for 2010 introduces new rules, that adapt the European directives to French law, and thus fixes new territoriality rules for the taxation of services.
According to those new rules, applicable starting the 1st of January 2010, and codified under the new article 259 of the French Tax Code, the VAT liability for services rendered between two VAT liables is that of the client's place, whatever the provider’s place of establishment may be.
For clients that aren’t VAT liable, the principle remains the application of the previous rules, which implies that the VAT liability will be that of the provider’s place of establishment.
These principles suffer a large number of exemptions.
The taxpayers are subject to new obligations regarding their declarations. Following the hypothesis where the provider and VAT liable client are established in different member states, the services rendered will have to be declared by the provider on a recapitulative statement.
 How does VAT work
Rates
Transactions within EU
e-commerce
Export
Import
Self assessment – Inversion rule
VAT refunds
Meals and Entertainment expenses
EU VAT number
"Cascade" and "Profit on the Tresor"
VAT ratio (pro rata)
Business gifts
Empty business space
Deductibility of input VAT on expenses for the listing and issue of shares
Sublease - Election
Treatment of penalties under commercial agreement
Volume discounts and objective discounts
 How does VAT work
IMPORTANT: Amendment to the 6th directive - Simplification - Evasion - Avoidance
Council adopted Directive 2006/69/EC on July 24, 2006 amending the 6th VAT directive in order to simplify the procedure for charging VAT and prevent certain types of tax evasion/avoidance scheme. Main provisions are:
Option to not treat the transfers of going concerns as VAT taxable supply of goods and option for VAT group treatment must not create unjustifiable benefits or unjustified disadvantages for taxable persons.
Derogations made available to all EU Member States:
- Option to include the value of non VAT taxable investment gold provided by the customer in the taxable amount of services or supply of goods provided by the contractor.
- Option to extend the open-market value to specific transactions between connected parties.
- Adjustment of input VAT during the adjustment period formally extended to services not treated as current expenses.
- Extension of the scope of the optional reverse charge mechanism.
VAT is assessed on delivery of goods and/or services realized by a VAT-liable person i.e. individuals or enterprises engaged in an economic activity. The VAT-liable person is entitled to deduct input VAT on purchased goods and/or services necessary for the economic activity.
The VAT assessed on the deliveries of goods and services is finally borne by the final purchaser of the goods or services.
Every month or in some cases every trimester, the VAT-liable person must file a VAT return where are reported the amount of VAT collected from the clients on the deliveries of goods and/or services and the input VAT paid on the purchase of goods and services.
When the amount of VAT collected is higher than the VAT deductible, the VAT-liable person must pay the balance to the tax collector. When the input VAT is higher than the VAT collected, the VAT-liable person is entitled to claim a VAT refund should certain conditions be met.
(VAT refund).
Rates
There are two rates in France:
- the reduced rate of 5,5%
- the standard rate of 19,6% The reduced rate is applicable to listed goods and services e.g. food, goods derived from agriculture, medicines, water supply services etc.
IMPORTANT: As of June 29, 2005 French tax authorities agreed that the 5,5% VAT rate (Reduced rate) applies to unprocessed horticulture products. These products may be sold by unit, bunch or bouquet, with or without support or container to carry, protect or preserve them. However no decorative arrangement is allowed. The acquisition cost, pre VAT, of the non horticulture products must not exceed 25% of the acquisition cost, VAT excluded, of the horticulture products.
Reduced VAT rate for works on homes will expire on December 31, 2005. The permanent benefit of the reduced rate is subject to the agreement of the EU member States on the list of services benefiting of this rate. Would no agreement be reached by December 31, 2005, it is expected that France will ask the EU Commission to have the right to extend one more time temporarily this rate.
Transactions within EU
Transactions between enterprises located within the EU are regulated by European rules and are subject to specific VAT filing obligations. For VAT purposes, the EU is composed of 15 member States.
Enterprises must mention on their invoices their EU VAT number (attributed when the enterprise has been registered) and declare deliveries of goods in other member States in a specific return called "DEB" to the relevant customs office.
(EU VAT number).
When a business gift is offered by a company resident in France to customer resident in other EU Member State, it is not necessary to report the gift on the VAT exchange of goods return “DEB”.
IMPORTANT: As from 01/01/2007, in order to fight against VAT, fraud within EU, deductibility of input VAT may be denied when a purchaser participated by his purchase to an EC round VAT fraud. In addition, clients participating to a round VAT fraud are jointly liable for the payment of the VAT received.
Sale or purchase of goods
- When an enterprise located in a Member State sells goods to a French enterprise, French VAT applies and the purchaser is liable for VAT (this transaction is called "acquisition intracommunautaire").
- VAT due on the purchase of goods is deductible should the goods be used for the activity of the enterprise; When a French enterprise sells goods to an enterprises located in another Member State, no French VAT applies
(this transaction is called "livraison intracommunautaire").
Delivery or purchase of services
As a general rule, VAT is due on deliveries of services by the supplier of these services.
There are exceptions in the following cases:
- when services can be physically located;
- when services are immaterial (fro example, services of counselors);
- when services are related to EU transactions.
Softwares: European Court of Justice decided that the supply of a pre-existing software and its customization to the specific requirements of a customer is single supply of services subject to VAT in the customer's country. The fact that a price was charged for the pre-existing software and an other separate price for the customization services is irrelevant.
Advertising services are deemed located outside France even if the advertiser is established in France when the purchaser is established outside EU or when he is subject to VAT in another EU member country.
Now the French Supreme Court considers that “advertising services” are all “operations who ever are the authors and what ever its nature or form, which purpose is to inform the public of the existence or the qualities of a product or service in order to increase its sales, or as part of an advertising campaign, concurs to this information”.
According to the first level Court of Paris, “public” is the relevant public which is the target of the campaign even if he is not the final consumer.
As a general rule VAT on services is due when the price or remuneration is received. As of January 1st, 2004, taxpayers may elect to pay the VAT when the amounts charged are debited to the customers. The election must be communicated in writing to the local tax authorities managing their file. The option applies as of the first day of the month following the election. It is no longer necessary to receive a formal approval of the French tax authorities. Former approvals remain valid.
Advice: Given the complexity of the VAT mechanism in EU transactions, it is hightly recommended to seek the advice of a tax professional.
e-commerce
E-commerce within EU
Specific VAT rules apply to sales of goods through Internet and depend on who is the recipient and where he is located.
- When goods are purchased by individuals "B to C", the general rule is the taxation to French VAT except if the sales exceeds a ceiling (ceiling are different depending on the Member State).
- When goods are purchased by enterprises "B to C" which are VAT-liable, transactions are as a general rule, exempt from VAT. Transactions are called "livraison intracommunautaire".
E-commerce outside the EU
Deliveries of goods to enterprises or individuals located outside the EU are exports and VAT exempt. (exports).
Goods sold through Internet to individuals or enterprises located in France are subject to French VAT when imported.
As of July 1st 2003 and until December 31, 2006, VAT liable people who are not EU resident and who provide services via electronic means, including radio and television broadcasting services, to individuals resident in EU but not subject to VAT must file electronically each quarter a VAT return. All necessary formalities can be carried out on the official web site of the French tax authorities "TVA e-service"
http://www.pce.dgi.minefi.gouv.fr/avert.php
Flash news: On June 6 and 7 2006, ECOFIN agreed to extend the period of application of the VAT regime applicable to e-services, radio and television broadcasting services for 6 months i.e. until December 31, 2006. A Directive to that effect will be adopted soon.
Export
Goods delivered to customers located outside the EU are exempt from VAT. VAT regime applicable to delivery of services is more complex and depends on different criteria (type of services, location of the beneficiary of services, location of the services provider).
When conditions are met, an exporter can buy goods out of VAT when these goods are being re exported.
See Advertising services.
It is allowed to prove the exportation of goods outside EU with the unified EU customs clearance form “DAU” #1 stamped by the customs authorities but also by using the copy #2 and #3 even if not stamped as long as these copies mention the information existing on the form #1.
Import
As of 1/1/2005, companies may elect for the payment of import VAT on the 25th of the month following the import. As a result it will be possible to deduct this payment from the output VAT.
The 1/1000 customs duty will be gradually abolished between 7/1/2005 and 7/1/2007.
As of 1/1/2006 the guarantee on import VAT, currently experienced on a temporary basis, should be abolished.
Self assessment – Reverse charge mechanism
As of September 1 st, 2006 VAT tax payers registered in France are subject to a reverse charge mechanism on deliveries of goods and services by VAT taxpayers non established in France.
This new category of self assessment, which has a very wide range, comes in addition to all the existing categories (Intangible services, works and expertises on movables, supply of electricity and gas, etc...). Failure will suffer a penalty of 5% of the VAT amount which was not self assessed.
Until August 30, 2006 VAT self assessment on:
- Intangible services,
- Intra EC transport,
- Work and expertise on movables properties,
- Supply of electricity and gas,
- Etc…
As of September 1st, 2006, REVERSE CHARGE applies to all VAT tax payers registered in France :
- On all deliveries of goods (e.g. delivery after assembling or installing),
- On all services (e.g. culture, arts, sciences, related to a building...) subject to French VAT (French compagnies, EU, non EU, non VAT liable etc....) made to its profit by a supplier which is not established in France (EU or non EU)
French tax authorities accept VAT payment by the foreign supplier on behalf of the French client who remains the legal taxpayer. In such a case the foreign company must appoint a French VAT taxpayer, called "Répondant" who must be accredited by the French tax authorities.
These new provisions have numerous consequences both for the foreign supplier (Removal of VAT registrations, tax representatives, change of billing parameters, listing of client options, change of client accounts attributes, financing of VAT credits etc...) and the French VAT taxpayers (Change of the parameters of bill payment and purchase accounting, reverse charge mechanism for each supplier, litigation with "Répondant", etc...)
On simple request we are available for a more detailed in house presentation of this new VAT regime.
VAT refunds
When input VAT exceeds collected VAT, the enterprise may claim the refund of the balance.
The application for VAT refund must be filed to the relevant tax office and must meet certain formal conditions.
A VAT refund can be claimed at the end of each trimester or at the end of the civil year.
A specific VAT refund procedure has been set up for exporters.
Non EU resident enterprises are now entitled to apply for the reimbursement of the input VAT suffered in France since January 1st, 2004 even if not marketing products in France.
Meals and Entertainment expenses
VAT related to meals and entertainment and engaged for business purposes is now deductible upon justifications.
Enterprises have the right to deduct this VAT directly on their VAT return until December 31, 2003 for reception expenses borne between December 1, 2000 and November 30, 2001 and until December 31, 2004 for reception expenses borne between December 1, 2001 and April 30, 2004.
A VAT refund can also be claimed through a claim procedure.
Non EU resident enterprises are now entitled to apply for the reimbursement of the input VAT suffered in France since January 1st, 2004 even if not marketing products in France.
IMPORTANT: French tax authorities recently indicate that input VAT on meals, hotels and entertainments billed by travel agencies is now deductible by companies when the travel agency works as authorized agent of the company and provides a reporting.
EU VAT number
An EU VAT number is attributed to any VAT-liable enterprise at the time of its registration. This number should be indicated on invoices related to transactions occurring within the EU. This number should also be indicated on returns called "DEB" to be filed to the customs offices.
Decree 2003-632 dated 7-7-2003 on the invoicing rules applicable to the VAT liable people confirmed that the mention of the French VAT number of the customers for French domestic transactions is not required.
In addition this decree details the new rules for self invoicing, outsourcing of the invoicing, periodical invoicing and rebate. The new rules apply as of July 1st, 2003. However VAT liable people have the option to continue to use the former invoicing rules until December 31, 2003. New rules will apply to all companies as of January 1st, 2004 (Answer Ramonet AN June 9, 2003).
IMPORTANT: Supreme French Tax Court judged that French tax authorities have the right to challenge the reality of EU deliveries even when the vendor provides the EU VAT number of the acquirer and documents supporting the shipment of goods in an other EU member country.
"Cascade" and "Profit sur le Tresor"
When during a tax audit part of the input VAT is considered as non deductible for VAT purposes (e.g. expenses bearing a non deductible VAT, "prorata" i.e. activity allowed to deduct only part of its input VAT, sales considered by mistake as non subject to VAT), this input VAT is considered as deductible for corporate income tax purposes. The mechanism called "cascade" (art. L77 LPF) allows a deduction from the taxable result of the tax year audited instead from the taxable result of the fiscal year during which the related tax bill is received.
The "cascade" applies automatically, however the tax payer can refuse it in writing during the 30 days period following the reception of the notice of assessments. This rejection may be considered in 2 situations:
- When the corporate income tax rate applicable to the year the tax bill is received is higher than the tax rate applicable to the year audited.
- When the tax year under audit is at loss and that this NOL's will expire before the year the tax bill is received.
When the VAT assessment is about an expense which would normally have been deduct for its amount without VAT (e.g. VAT collected but not paid to the tax collector, or VAT on assets for which input VAT is not deductible), the effect of the "cascade" is offset by the mechanism called "Profit sur le Trésor". According to this mechanism the company is required to book a corporate income tax profit equal to the corporate income tax deduction allowed by the "cascade".
VAT ratio (pro rata)
Businesses carrying out transactions which are in the scope of VAT but which performs both activities for which input VAT is fully deductible and and activities for which the deduction of input VAT is disallowed (Banks, insurances, real estate proceeds, financial proceeds, recycling.) are entitled to deduct the input VAT related to fixed assets, goods and/or services used together for both activities, only up to a ratio equal to the percentage of their yearly VAT taxable turnover over their yearly total turnover.
Significant cash consequences derive from this computation:
- Adjustment of the input VAT deducted the preceding fiscal year.
- Tentative percentage of deduction of the input VAT for the current fiscal year.
- Adjustment of the deduction percentage of the input VAT on fixed assets acquired the last 5 or 20 last years.
- Employers subject to VAT on less than 90% of their turnover in the preceding fiscal year must calculate the tax basis on which they will be eligible to the payroll tax during the current fiscal year.
WARNING: The calculation method of input VAT is deeply modified since January 1st, 2008 (Decree n° 2007-566 of April 16th, 2007). The new rules of deduction rely mainly on the principle of allocation of expenses and much less to the fixed method used until then.
Now, input VAT is derived from a deduction ratio based it self on three others factors: a " VAT liability factor" proportionate to the use of the good or the service for the production of VAT taxable operations, a " VAT taxation factor " based on input VAT on goods or services for which input VAT is deductible, and a "coefficient of admittance " which takes into account legal restrictions.
Two series of yearly and global regularizations address the changes in the use of the good or of the service and the materialization of specific events.
FLASH: Interest derived from loans granted to subsidiaries as well as investment into Treasury bonds or bank deposit certificates are VAT exempt financial operations. CJCE ruled that for purposes of the pro rata computation they must be considered incidental operations if they request the use of very limited goods or services for which the input VAT is deductible. The only fact that the income generated by these financial activities is higher than the income generated by the main activity is not sufficient by itself to consider that the financial activity is not an incidental operation. This decision condemns the French rule which considers that financial income is incidental only if it does not exceed 5% of the global sales.
Deduction of VAT on goods financed by subsidies
European Court of Justice held that the deductible VAT cannot be restricted by the inclusion of the subsidies received by the taxpayer, other than taxable "price subsidies", in the denominator of the pro rata fraction. Similarly, when purchased goods are financed by a subsidy, the right to deduct VAT cannot by made subject to the condition that the depreciation.
Business gifts
Input VAT on business gifts is recoverable only when the value of each gift does not exceed 31€, packaging and shipping included. However there is no requirement that the gifts must be specifically produced for advertising purpose.
When a business gift is offered by a company resident in France to a customer resident in other EU Member State, it is not necessary to report the gift on the VAT exchange of goods return “DEB”.
Input VAT on travels offered by companies, free services and free gift certificates may be recovered assuming conditions are met.
Corporate Income Tax regime.
Empty business space
It is possible to make a valid option for VAT on rental fees from empty business space even if not actually occupied as long as lessees are actively hunted and that the vacant spaces are limited. It is also possible to support that vacancy is due to economical circumstances over which the lessor’s will is of no effect.
Deductibility of input VAT on expenses for the listing and issue of shares
ECJ judged that companies have the right to recover input VAT incurred in connection with the listing and issue of shares when the related business in VAT taxable. This view goes against the current position taken by several EU tax authorities that VAT on costs relating to the issue of shares cannot be recovered. French tax authorities acknowledged this deductibility since 2001.
Sublease - Election
The rent received by a leaseholder of a building (Lease of lease-back of a building) from the sub-lease of the building is subject to VAT only when the leaseholder makes a formal election for the payment of VAT on the rent from the sub-lease. If no election is made, the French tax authorities will consider that the rent is not VAT taxable and therefore will refuse the deduction of the input VAT paid on the rent from the lease, while the VAT collected on the sub-lease will still have to be paid to the tax collector.
Treatment of penalties under commercial agreement
According to the new administrative guidelines 3 B-1-06 (French only) the penalties under commercial agreement are now treated as damage outside the scope of VAT. They are no longer considered as a discount on the initial price invoiced by the supplier which required the reduction of his VAT liability and an adjustment of the input tax deduction of the customer.
Volume discounts and objective discounts
In a guideline 3 B-4-06, French tax authorities clarify the conditions to be met by the volume discounts and the objective discounts granted by builders or its dealers to qualify as rebate and cannot be treated as a VAT taxable service.
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