In review: corporate tax planning developments in France

All questions

Local developments

i Entity selection and business operations

The taxation of French companies and their shareholders depends on the companies’ form and the eventual options formulated.

Entity forms

Broadly speaking, there are two main groups of companies: limited companies and general partnerships.

Limited companies mentioned under Article 206 of the French Tax Code (FTC) are by principle subject to CIT. It concerns, among other things, socits par actions simplifies simplified limited liability companies (SAS),⁸ socits responsabilit limite private limited liability companies (SARL),⁹ socits anonymes public limited companies (SA) and socit d’exercice liberal professional corporations (SEL).¹⁰

However, family-owned SARL and small SA, SARL or SAS,¹¹ with an industrial, commercial, artisanal, agricultural or liberal activity, formed less than five years ago can opt for the application of the partnership tax regime.

In the event of dividend distributions made by a limited company to its shareholders, French residents individuals will be liable to the flat tax of 30 per cent,¹² while French resident companies will be subject to CIT at a rate of 25 per cent or 1.25 per cent (in application of the French participation exemption regime and subject to conditions).

General socits en nom collectif and socits civiles partnerships are pass-through entities (partnership tax regime). By exception, civil companies conducting a trading activity may be subject to CIT.

Under the partnership tax regime, the tax due is calculated at the level of the company but it is effectively paid by the shareholders. The profit share held by companies subject to CIT will be determined following CIT rules and taxed at CIT rate while the profit share held by individuals will be determined according to the activity of the individuals and will be subject to income tax (and eventually social contributions).

Companies subject to the partnership tax regime can also opt for the application of CIT.

Moreover, French tax law provides some CIT exclusions and exemptions for some entities. As an example, non-profit organisations and foundations are not be liable to CIT insofar as they do not conduct a trading activity. Furthermore, socits d’investissements immobiliers cotes real estate investment trusts (SIIC),¹³ socits de capital-risque venture capital investment companies (SCR) and young innovative enterprises¹⁴ are exempt from CIT.

Domestic corporate income tax

In France, pursuant to territoriality principle, only profits realised by enterprises conducting a business in France are liable to CIT. A reduced CIT rate of 15 per cent applies to the first 42.500 of profits made by small and medium-sized enterprises if certain conditions are fulfilled¹⁵ and, the CIT rate is 25 per cent above this threshold.

The taxable basis corresponds to accounting profits adjusted by tax rules. As a rule,¹⁶ only justified expenses incurred during the relevant tax year and incurred in the direct interests of the company can be tax-deductible. Specific thin capitalisation rules apply to interest payment. If tax losses are generated, they can be carried forward indefinitely subject to an amount limit or carry back against profits of the previous year.

Moreover, an additional social security surtax of 3.3 per cent calculated on the amount of CIT may be due by companies with a CIT exceeding 763,000.¹⁷

French companies are also subject to the territorial economic contribution, property tax and local taxes.

Legal entities, organisations, trusts or similar structures that directly or indirectly own French real estate assets or real estate rights on French properties as at 1 January of the tax year, are liable to an annual 3 per cent tax based on the market value of said property or rights. An exemption is offered if a specific form No. 2746 is filed each year before 15 May mentioning, for example, the name of the shareholders and their address.

Stamp duties are due on the transfer of shares and are payable by the buyer. Depending on the kind of shares sold, the applicable rate may vary from 0.1 per cent to 5 per cent (for real estate companies).

Finally, French tax law provides some environmental taxes and a temporary solidarity contribution on the excess profits of energy companies has been recently introduced.

International tax

French companies are subject to CIT when they receive passive foreign-source income such as dividend, interest or royalty. Usually, double taxation on foreign source income is avoided thanks to the granting of a tax credit resulting from the double tax treaty between France and the country of the paying company.

Moreover, subject to tax treaty provisions,¹⁸ French subsidiaries of foreign companies and French permanent establishments will be liable to CIT on their French-source revenues. Under French domestic law, a permanent establishment is recognised in France when an enterprise carries on a business activity in France whether through an autonomous establishment, because of a complete business cycle in France or though representatives in France who bind the foreign company.

Capitalisation requirements

In France, complex rules limiting the deductibility of interest payments made by a French borrower to its shareholder or any related party,¹⁹ apply.

Interest paid by a company to its direct shareholder is limited to the rate set forth under Article 39-1-3 of the FTC. For the last quarter of year 2022, the rate was 3.36 per cent.²⁰

For a loan provided by related parties, the above rate applies or a higher one if it may be showed that this higher rate is a market rate.

Companies subject to CIT and which do not belong to a French tax consolidation group may deduct their net financial expenses only up to 30 per cent of their earnings before interest, taxes, depreciation and amortisation (adjusted tax EBITDA) or 3 million per fiscal year if higher. When the company belongs to a tax consolidated group, it may benefit, under conditions, from an additional deduction.

Furthermore, except in some specific cases, the amount of deductible interest is capped if the company is thin capitalised.²¹ A company is considered to be thin-capitalised where the average amount of related-party debt exceeds 1.5 times the amount of its net equity.

In this case, the net financial expenses will be deductible:

1. up to 30 per cent of the tax EBIDTA (or 3 million if higher) for interest on non-related party debt; and
2. up to 10 per cent of the tax EBIDTA (or 1 million if higher) for interest on related party debt.

Specific limitations also apply to companies’ member of tax consolidated group (i.e., called Charasse limitation). Non-deductible interest may be carried forward indefinitely.

ii Common ownership: group structures and intercompany transactionsOwnership structure of related partiesTax grouping and loss sharing

French taw law provides the possibility to constitute, under option, a vertical or horizontal tax consolidation group. A tax consolidation group must be constituted between companies subject to CIT that open and close their financial year at the same dates. The parent company has to hold, directly or indirectly, 95 per cent of the share capital of the subsidiary, and the parent company must not be held, directly or indirectly, for a least 95 per cent by another company subject to CIT.

French sub-subsidiaries owned through foreign companies (or permanent establishments) established in the European Union can be included in a tax consolidation scope.

When the tax consolidated rules apply, it allows the offset of losses of one group corporation against the profits of a related corporation. CIT is levied on the aggregate income after certain adjustments have been made.

Controlled foreign corporations

French controlled foreign company legislation (the CFC rules) is codified under Article 209 B of the FTC. This provision aims at dissuading French companies from locating their profits in foreign subsidiaries benefiting from a privileged tax regime.

The French parent company must own, directly or indirectly, more than 50 per cent of the share capital or voting rights or financial rights of the foreign entity.

Foreign entities that are tax-exempt abroad or that benefit from an effective corporate tax rate 40 per cent lower than the effective French tax rate are deemed to benefit from a privileged tax regime.²²

In application of French CFC rules, the profits of the foreign entity are subject to French CIT even though they are not distributed. The French parent company is deemed to receive fully taxable dividends, from foreign subsidiaries, in proportion to its participation in the latter or, direct profits from the foreign branch or establishment.

A safe harbour provision applies to entities established in the EU; In this case, the FTA must prove that the foreign entity is an artificial scheme with a tax avoidance purpose.

When the entity is established outside the EU and benefit from a privileged tax regime, CFC rules will not apply if the French company is able to prove that the main purpose and effect of the establishment of the foreign entity is not to localise profits in a jurisdiction benefiting from a privileged tax regime.

Domestic intercompany transactionsIntragroup commercial and financial debts

Specific provisions are applicable regarding the tax deduction of commercial debt waivers and financial debt waivers (debt between a parent company and one of its subsidiaries).

Financial debt waivers are no more deductible. However, the law allows a partial deductibility of the debt waiver granted to a subsidiary under safeguarding proceedings, judicial restructuring or liquidation proceeding, and during a conciliation procedure (Law dated 29 December 2012).

Provided that the waiver corresponds to a normal management, a commercial debt waiver is taxable at the level of the beneficiary and deductible at the level of the mother company.

Participation exemption on dividends

A participation exemption regime applies to dividends distributed by subsidiaries held for at least 5 per cent by the parent company. Both the parent company and its subsidiary must be subject to CIT at standard rate, and the parent company must keep the shares of the distributing company for at least two years.²³

In this case, dividends are exempt from CIT, but a lump sum amount of 5 per cent²⁴ of the dividends distributed (foreign tax credit included) (or 1 per cent for companies part of a French tax consolidated group)²⁵ must be recaptured and is subject to standard CIT rate of 25 per cent. The effective CIT rate is therefore 1.25 per cent (or 0.25 per cent for companies belonging to a French tax consolidated group).

Substantial shareholding exemption

Favourable tax treatments exist for capital gains deriving from the disposal of substantial participations into subsidiaries (long-term capital gains).

The disposal of qualifying participation²⁶ is exempt from capital gains tax, but a lump sum of 12 per cent corresponding to costs and expenses has to be recaptured and taxed at a CIT rate of 25 per cent, conducting to an effective tax rate of 3 per cent. Net capital losses related to the disposal of qualifying participation cannot be deducted from standard taxable result.

Capital gains resulting from the disposal of shares of listed real estate companies that have been held for more than two years are subject to a 19 per cent tax rate. Some exemptions also exist regarding the sale of venture capital investment companies held for at least five years, and the disposal of certain intellectual rights can be taxed at a reduced rate of 10 per cent.

Moreover, specific rules of capital gain calculation (known as the ‘Quemener regime’²⁷) apply for the disposal of shares of companies subject to the partnership tax regime. The acquisition price will have to be adjusted from the previous gains or losses allocated, compensated, used or attributed by or to the shareholder.

International intercompany transactions

Specific deduction restrictions are applicable to interest, royalties or other remunerations paid to companies established in countries that benefit from a privilege tax regime or are listed as non-cooperative states of territories (NCSTs).²⁸ NCSTs generally refuse to comply with international standards of tax information exchange or have a legislation that favours tax evasion and optimisation.²⁹

Transfer pricing rules, based on the arm’s-length principle and following the OECD Guidelines, also apply in France. Article 57 of the FTC provides that profits indirectly transferred abroad to controlled companies must be incorporated to the French company’s results.

Pursuant to article L 13 AA of the French Tax Procedure Book, large companies must file transfer pricing documentation annually. Other (smaller) companies must prepare transfer pricing documentation in the event of a tax audit.

Outbound dividends

Dividends distributed by French companies to non-resident shareholders are, in principle, subject to a withholding tax in France at a rate of 12.8 per cent for individuals and 25 per cent for companies. This domestic withholding tax may be reduced according to the applicable double tax treaty.

Moreover, under the Parent-Subsidiary Directive,³⁰ dividends distributed to an EU parent company may be exempt from French withholding tax if the recipient is subject to CIT and holds or commits to hold at least 10 per cent³¹ of the subsidiary’s share capital for at least two years.

The French parentsubsidiary regime may be dismissed if it is used abusively (anti-abuse provisions).

The withholding tax rate is increased to 75 per cent for dividends paid to an entity established in a non-cooperative state or territory (NCST).

Outbound interest payments

Any interest payment made by a French company to a foreign entity is exempt from any withholding tax unless the lender is established in an NCSTs. In such a case, a 75 per cent withholding tax may apply.

Outbound royalty payments

Under French tax law, a withholding tax of 25 per cent may apply on outbound royalty payments.³² This domestic withholding tax may be reduced depending on the applicable double tax treaty signed between France and the recipient’s country. Moreover, royalties paid to companies established in a country that benefits from a privileged tax regime or in an NCST may be deducted under some conditions.

A 75 per cent withholding tax may apply to payment of royalties made to a company established in an NCST.

An anti-avoidance provision applies to royalties payments made to affiliated entities established outside the European Union if their corporate income tax rate is below 25 per cent.³³ In such a case, royalties payments may not be fully deductible.

iii Third-party transactionsSales of shares or assets for cash

The tax regime attached to the sale of shares and the favourable regime attached to it have been detailed above (see Section II.ii at ‘Substantial shareholding exemption’).

Capital gains made by companies subject to CIT on the disposal of assets are subject to a standard CIT rate of 25 per cent.

Regarding stamp duty, the sale of shares is generally more favourable tax wise than the sale of assets.

Tax-free or tax-deferred transactions

French tax law provides a special tax deferral regime (CIT and stamp duties) for mergers, split-off and partial contributions of assets.³⁴

The reorganisation may be considered as an intercalary operation and to this extent, capital gains and provisions may be tax-exempt at the time of this operation.

This favourable regime is optional and only applies if the beneficiary company (absorbing company or the company receiving the assets) complies with several accounting requirements allowing the exempt capital gains and provisions to be taxed in the future.

Specific provisions apply regarding the transfer of losses of the absorbed company, which may require the previous agreement of the FTA.

If the conditions to get the favourable tax regime are not met, mergers and similar operations will incur the tax consequences of a sale (taxation of capital gains and ordinary profits at standard CIT).

The favourable regime does not apply to operations that have tax evasion or tax avoidance as their main objective or as one of their main objectives.³⁵

International considerations

The European Directive 2009/133 of 19 October 2009 establishes the principle of tax neutrality of mergers and similar operations between companies of different Member States.

Specific provisions also exist for international reorganisations. Article 210-0 A of the FTC provides that mergers, spin offs and asset contributions made by a French company in favour of a foreign company may benefit from the favourable tax regime described above provided that the contributed items are effectively booked in the accounts of a French permanent establishment of the foreign legal entity. The beneficiary company will have to comply with specific reporting obligations.

This favourable tax regime will not apply to operations involving companies established in a state or territory that has not concluded a double tax treaty with France, including an administrative assistance clause to combat tax evasion and avoidance.

iv Indirect taxes

Valued added tax is the main indirect tax in France. Its rate varies from 2.1 per cent to 20 per cent. French law provides that any supply of goods and services made for consideration by a person who independently carries out an economic activity and is acting as such, is subject to VAT. Some operations are VAT exempted pursuant to special provisions (e.g., medical area, insurance and reinsurance operations, banking and financial transactions).

French tax law provides complex territoriality rules with exceptions depending on the type of services rendered. These rules mostly depend on whether the operation is conducted between businesses or between a business and a consumer.³⁶

As of 1 January 2022, a mandatory reverse charge mechanism applies to import VAT via the French importer’s VAT returns.

France has introduced a VAT group simplification³⁷ starting January 2023. It will allow, under options, to companies established in France and that are closely connected from a financial, economic and organisation standpoints to have a single taxable person regardless their sector of activity. These provisions are different from the VAT payment consolidation scheme limited to the collection of the VAT.

Moreover, some specific goods such as alcohol are subject to excise duties. Importation of goods may also be subject to custom duties in France.

Finally, France has also implemented a 3 per cent digital tax applicable to companies providing certain digital services in France with global annual revenue higher than 750 million and annual revenue in France higher than 25 million.