Corporations - Doing business - Other taxes

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. 

 Local taxes
 Registration duties
 Company car tax (TVS)

 Local taxes

UPDATE : BUSINESS TAX REFORM

Description

There are 4 main local taxes:

- business tax
- resident tax
- real property tax on developed real property
- real property tax on undeveloped land Business tax will be the only one examined.

Business tax is paid to local communities.

The basis is assessed as follows:

- rental value for real property used by the enterprise
- 16% of the rental value of physical assets used by the enterprise. The tax is based on taxable elements of the year before the last: for example, a business tax due for FY 2003 is based on taxable elements from FY 2001.

A minimum tax is due in case the business tax does not exceed a certain amount.

Business tax may be capped depending on the overall added value of the enterprise. For the business tax establishes with reference to 2004 onwards, French tax authorities have indicated that, for most taxpayers, the fixed production is partially or totally excluded from the added value for the computation of the alternative minimum business tax and for the computation of the limit of the business tax.

Business tax paid in 2007 will be capped on the overall added value of the taxpayer calculated on the basis of 3.5% of the added value only, whatever the turnover of the company. This capping will be computed by comparing the amount of 3.5% of the added value with the hypothetical business tax of the taxable year and no longer to the "Cotisation de référence". Reimbursement of the tax can not exceed 76.25 millions euros.

According to the current rules, 2 options are available to book the business tax relief derived from the overall added value: either book the net amount of business tax after capping the year of payment or book the gross amount of the business the year of payment and the business tax relief when granted i.e. the subsequent year. As of the tax year closed on December 31, 2005, the only option is the booking of the net amount of business tax after capping, the year of payment.

The French Supreme Administrative Court recently judged that the Value Added used for capping the business tax must be calculated by reference to the French statutory GAAP rules.

Business tax is due in December of the FY where the tax is due. An installment payment is payable in June.
 
Tangible assets used by a person who is not the owner, the lessee, of the sub-lessee are taxable in the hands of the owner, the lessee or the sub-lessee when subject to "TP" and in the hands of the user if the owner, the lessee or the sub-lessee is not subject to "TP"(e.g. non French tax resident). This new provision applies to "TP" assessments for 2004 onwards and backwards to pending cases.

What is not taxable:
- Pure holdings
- Company having as sole activity the leasing of an unequipped fixed property
- Company without any activity as of January 1st of the taxable year
- Intangible assets (Patents, trademarks, software's, etc...) => Check if rental and/or leasing fees do not include the use of services and/or intangibles
- Lines, cables, pipes, poles etc... for electricity, gas, heating, telephone ect... outside establishment.

Business tax – Post merger tax basis of assets

French Supreme Administrative Court held that assets acquired by merger for their net book value keep this value for business tax purpose and not their gross value in the book of the merged company as required by French tax authorities.

RENTAL VALUE IN CASE OF MERGER OR ACQUISITION

Taxations established with respect of 2006 and before:

The rental value of assets transferred in a contribution, spin-off , merger of sale cannot be less than 80% of the rental value they had before the reorganization (Article 1518 B of the French General Tax Code) or 90 % when the reorganization is between companies belonging to the same tax consolidation (Finance Bill for 2006).

The cost price of an asset sold to a related party is not changed when the asset remains within the same place before and after the sale (art. 1469-3° quater CGI). This rule applies to assets sold after January 1st, 2004. French tax authorities regulations made clear that article 1469-3°-quarter should apply before article 1518 B. However, this position of the French tax authorities as explained in answer Masson (Sénat 2 mars 2006 et instruction 6 E-5-05 du 11 juillet 2005 n° 23)  may be challenged.

Taxations established with respect of 2007 onward:

Wording of article 1518 B is modified in order to validate the position of the French tax authorities. Now article 1469 3°quarter supersedes article 1518 B.

 New investments for production benefiting from the declining balance depreciation acquired or leased between 1/1/2004 et le 06/30/2005, should benefit of a local business tax exemption with respect of fiscal year 2006 and 2007.

IMPORTANT: Law to promote growth and investments published on August 11, 2004 provides that temporary exemption in respect of new investments made between January 1st, 2004 and December 31, 2005 (Finance law for 2005). Investments are eligible when they may benefit from the declining balance depreciation even if the company use the linear depreciation regime and/or is not the legal owner. The exemption will therefore apply for the first time in 2005 (Newly created location) or 2006 (Existing locations). Qualifying sales of goodwill may also be exempt of registration duties.
 
As of January 1st, 2006 this new investments tax relief "DIN" is made permanent. This incentive applies to assets acquired or manufactured as from January 1st, 2006 and eligible to declining balance depreciation. The first year, 100% of the business tax rental value of the new assets will not be deductible from the tax basis, the second year 2/3 of the business tax rental value and the third year 1/3 of the business tax rental value.
Transitional rules with the current rules apply.

Rental of furnished accommodations by NON professionals

French administrative Supreme Court judged that business tax applies to the rental of furnished accommodations by non professionals except when there is an exemption (Premises part of the personnel house of the taxpayer as "Gîte rural" or "Meublé de tourisme").

Depreciation period– Convergence of French GAAP with IFRS

For assets not subject to property tax (equipments and movable assets), the rental value subject to business tax was related to the depreciation period. When the depreciation period was less than 30 years, the rental value was equal to 16 % of the cost price. When the depreciation period was at least 30 years, the rental value was equal to 8 % of the cost price.

For tax year opened as from 01/01/2005, according to new French GAAP rules (Article 322-1 of the French GAAP code), the depreciation period for accounting purposes is the useful life of the asset defined as asset’s expected utility to the entity. For the tax purpose the entity may use the customary economic useful life for non split-up assets and the structure of these assets, (art. 39-1-2° of the French tax code).

 Rules applicable to assets used at closing of the last tax year open before January st, 2005:

Depreciation periods and tax base for the computation of value added are frozen

For the assets used before the application of the French new accounting rules, the depreciation period for business tax purposes is not modified for the 30 years period test with respect of the assets used by the company at closing fo the last tax year open before January 1st, 2005. For such assets, the depreciation period is the one previously used according to article 39-1-2° CGI. This depreciation period must be appreciated globally and not component by component.

 Rules applicable to assets used by company at closing of tax years open as of January 1st, 2005 onwards:

For business tax purposes, new article 1469 2° of the FGTC provides that the 30 years test is performed by reference to the economic useful life as provided by the article 39-1-2° of the French tax code.

Replacement components and safety components - Convergence of French GAAP with IFRS

Replacement components and safety components are not included in the taxable basis for business tax even when booked as assets. As before, only specific replacement components with a useful life higher than one year are included in the business tax basis.

Value added - Major inspections and maintenance services - Convergence of French GAAP with IFRS

Major inspections and maintenance services expenses are deductible from the added value for business tax purposes even when such expenses are booked as assets.
 
 

Business Tax relief applicable to new investments

Capital goods and personal estate acquired or made between October 23, 2008 and December 31, 2009 benefit of a permanent business tax (Taxe Professionnelle or TP) exemption. Exemption also applies to Chamber of commerce and industry taxes.

When a company benefits both of this permanent exemption and of the TP value added cap, it may claim an additional reimbursement equal to the minimum depreciation allowance of the related assets per the applicable TP cap rate.

Due to the 2 years time lag between the investment and the payment of the TP, this new provision will apply first in 2011.

 Registration duties

For example, following events are subject to registration duties
(this list is not exhaustive):

- sale of goodwill or clientele are taxable at a rate of 4,80%
- Private Limited companies shares disposal are taxable at a rate of 4,80%;
- Other shares disposal are taxable at a rate of 1% capped at 3 049 € Registration duties are due by the acquirer.
To know more about the subject see Facts and figures.

News rate will be apply from January 1st 2006:
- transfer of shares is 1, 10 % (1% until 12/31/2005) up to 4 000 € (3 049 € until 31/12/2005)
- transfer of shares in partnership is 5 % (4,80% until 31/12/2005).
(Law of 30/12/2004 art 95.)

IMPORTANT: Law to promote growth and investments published on August 11, 2004 provides that the capital gain on the sale of goodwill made between July 16, 2004 and December 31, 2005 are exempt of registration duties if the buyer commits himself to maintain the same activity for at least 5 years. Departments and Municipalities with more than 5000 inhabitants may also decide to exempt these transactions. Qualifying sales of goodwill may also be exempt of capital gain tax. 

Share equity – Reduction

When not motivated by losses the reduction of the share equity of corporations benefits of a lump 375€ or 500€ registration duty.
The following operations benefit of this provision:

-   Reduction of authorized capital following a cancelation of shares or a reduction of the nominal    of   the shares;
-   Reduction of authorized capital following a shares by-back with distribution of corporate assets to shareholders, even when a written agreement(s) exist.

Registration duties are due when corporate distribution in kind benefit to shareholder which is not the shareholder who made initially this contribution in kind and that this initial shareholder benefit of a favorable tax regime applicable to CIT liable corporation (CGI, art. 810-III) when he transferred this asset. 
 
 
 

 Company car tax (TVS)

Finance law for 2006 introduced a progressive company car tax on manager's or employee's owned vehicles benefiting from their employer of a reimbursement of a mileage over 5000 kilometres per year. On May 5, 2006 the ministry of budget announced that the new company car tax will only apply over 15 000 kilometres per year with an exemption of 15 000 euros. In addition only 1/3 of the total tax will be payable in 2006 and 2/3 in 2007. Full tax will apply only as of 2008.

Amendment law for 2006 introduces a 15 000 € rebate on the amount of the tax on company cars "TVS" due on employee's owned vehicles benefiting from of a reimbursement from their employer for a mileage over 15 000 kilometers per year. (Measure linked to the level of CO2 emission).

 TVS on employees owned vehicles will apply progressively over 3 years:
- For the period 01/10/2005 to 30/09/2006, the TVS due is reduced by 2/3
- For the period 01/10/2006 to 30/09/2007, the TVS due is reduced by 1/3

In addition the amendment law for 2006 also implements the following rules:

 TVS exemption extended to vehicles using super ethanol
 As from 01/01/2007, TVS exemption on green cars will be limited to 8 civil quarters.