The essential income tax in France

These are the highlights if you want to know more about the essential income tax in France. This entry was drafted by PECH DE LACLAUSE, BATHMANABANE & ASSOCIÉS. Link to E-Iure network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case PECH DE LACLAUSE, BATHMANABANE & ASSOCIÉS is an excellent option in France.

 

Income Taxes 

 

France has four categories of income tax: corporation income tax, individual income tax, social contributions and payroll taxes.

This section mainly focuses on corporation tax.

 

Corporation Income Tax (CIT)

 

CIT is an annual tax on the total profits made in France (not worldwide revenues) by companies and other corporate entities.

Certain entities are liable to CIT due to their corporate status (i.e. notably the société anonyme, the société par actions simplifiée and the société à responsabilité limitée depending on their shareholding). CIT also applies to other corporate entities according to the nature of their business. Civil companies for instance (société civile), which are non-commercial companies by status, and even not for profit organizations, which carry out notably an industrial or a commercial activity are liable to pay CIT.

Partnerships, whose profits and losses are included in the income of the partners in proportion of their shares in the profits, may in certain cases elect to be liable to CIT.

Corporate bodies may be subject to CIT at the standard rate for all their activities, or for some of the corporate bodies at reduced rates.

The standard rate of CIT is 33.33 % but specific rates are applicable depending on the size of business, from a 15% rate for small businesses to 37.7% for large businesses which turnover or annual CIT exceeds specific thresholds.

However, the standard rate of CIT is expected to be lowered to 28% in 2020 due to recent proposed legislation.

CIT is not deductible.

Tax losses may be carried forward with no time limit, subject however to the absence of change of the core activity of the company.

Interest incurred by a company for the purchase of the shares of a subsidiary are fully deductible from the CIT basis, subject however to specific rules in relation with thin capitalization and deductible rate limitations applicable within groups of companies.

A French participation exemption regime is available when a holding company has held at least 10% of the share capital of the subsidiary which shares are transferred for a minimum period of two years. The capital gain realized is taxable at an effective CIT rate of 4%.

Dividend distributions are taxable at an effective CIT rate of 1.67% provided the shares of the distributing entity are held or will be held for more than two years, and the receiving company holds at least 5% of the share capital of the distributing entity.

Tax grouping (“integration fiscale”) is available when 95% or more of the share capital of the subsidiaries is held directly or indirectly by the head of the tax group. The tax grouping election notably allows the matching of profits and losses derived by the companies which are members of the same tax group, and allows avoiding CIT taxation, notably for intra-group distributions and subsidies.

CIT neutral regimes are available for corporate reorganizations such as mergers, business or shares contributions, spin-offs and most cross-border EU reorganizations. Pre-operations tax rulings can be sought for non-EU cross-border reorganizations.

As far as CIT incentives are concerned, France is well known for some attractive CIT credits such as:

  • CIT credit for research expenses (where up to 40% of the eligible research costs incurred entitle the company to a CIT credit, which can even be refunded after a certain period);
  • CIT credit applicable in the gaming, movie and music industries.

 

Individual income taxation

 

For French tax residents, personal income tax is levied on the total worldwide income (subject to tax treaty provisions). The tax is computed on a civil year period.

The personal income tax is a scheduler tax. The main schedules are: business profits (i.e. business activity directly performed by individuals), non-commercial activities (i.e. deemed intellectual civil activities derived by doctors and lawyers for instance, together with income which does not fall within the scope of another schedule), agricultural income, real property income, salaries and pensions, fixed and non-fixed income from financial instruments (mostly dividends and interest) and capital gains. Each schedule has its own income determination and computation rules.

For a single person, the tax brackets and rates for 2017 are the followings:

 

Amount of income (€):Tax rates (%):
below 9,7100
between 9,710 and 26,81814
between 26,818 and 71,89830
Between 71,898 and 152,26041
Above 152,26045

Specific expatriates and “impatriates” (i.e. individuals transferring their tax residence to France) regimes offer notably attractive income tax exemption regimes.

 

Social Contributions

 

In most cases, non-French tax residents are not liable for social contributions.

When applicable (to residents or non-residents), their rate vary from 8% to 15.5%, depending on the nature of the income derived (business income or capital income).

 

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