France, as one of Europe’s leading economies, attracts significant foreign investment. Understanding the country’s tax and financial regulations is crucial for foreign investors looking to establish or expand their business presence in France. This comprehensive guide covers all essential aspects of the French tax system and financial regulations that foreign investors need to know.
Corporate Tax Regulations
The French corporate tax system applies to both domestic and foreign companies operating in French territory. Corporate tax (CI) is a direct tax, levied on the profits made by companies, whether they are commercial or not. The main purpose of corporate tax is to tax the income generated by companies, whether it comes from their operating activities or from other sources.
Current Tax Rates
From 2024, the standard corporate tax rate in France will be set at 25% for all businesses, regardless of their size or turnover. This rate represents the conclusion of a series of successive reductions aimed at boosting France’s competitiveness within the European Union.
However, a reduced rate of 15% will apply on the first €42,500 of profits for small businesses. To be eligible for this reduced rate, the company must meet the following criteria:
- A turnover of less than €10,000,000.
- A share capital released and held by individuals at 75 per cent.
Legal basis : Article 206 and 219 of General Tax Code
Tax Calculation Methods
Corporate tax is calculated based on the taxable income of businesses. Indeed, the tax base includes all types of income, whether commercial or not, realized by the company during the fiscal year :
- Operating income generated by business activities
- Passive income : It includes dividends, royalties or interest
- Capital gains realized on the disposal of assets
The calculation of the tax result is based on the change in the company’s net assets between the opening and closing of the accounting year. However, adjustments are regularly made to the tax base to counteract tax optimisations. It ensures that only real income from economic activities is taxed.
Legal basis : Article 205 and 209 of General Tax Code
Filing Requirements
Companies subject to corporation tax in France are required to file a tax return with the tax administration within three months of the end of their accounting year. This declaration must be made every year, even if the company does not make a profit, to justify its tax situation.
Form 2065 if done to report Corporate tax and to declare the following elements :
- Turnover
- Financial results (profit or loss),
- Elements necessary for the calculation of the tax
- Possible tax credits and exemptions
- Detailed information on financial accounts
Investment-Related Taxes
Foreign investors in France are subject to a series of specific taxes depending on the type of income generated by their activities. These include taxation of capital gains, dividends and income from real estate investments. French tax regulations also offer specific regimes, exemptions and reductions in some cases.
Capital Gains Tax
- Business Capital Gains Tax
Business capital gains relate exclusively to the company’s capital assets. A capital gain is taxed only if the property is actually removed (sold or disposed of) from the company’s assets. In other words, yet unrealized capital gains are not taxed.
Capital gains made on investments are subject to tax rates that vary depending on the duration of the holding :
- Short-term capital gains : The capital gain on a property held for less than two years is treated as a profit and taxed at the ordinary income tax rate.
- Long-term capital gains: The capital gains on property held for more than two years are subject to a flat rate of 30%
Legal basis : Article 39 duodecies of General Tax Code
- Specific Schemes
Certain categories of investments benefit from exemptions or reduced rates, including :
- Long-term of substantial shareholdings : The capital gains are taxed at a reduced effective rate of about 3%. In other words, there is an exemption of 88% of the net capital gains.
- Transfers of long term intellectual property rights : They are subject to a reduced rate of 10%.
- Real estate investments eligible for certain tax provisions : They are taxed at the overall rate of 36.2%.
- Professional buildings : A deduction of 10% per year of detention beyond the fifth year applies and a total exoneration after 15 years of detention.
For further information, you can refer to the French government website here.
Dividend Taxation
An income received by a non-resident company from a French source is taxable in France. However, the tax rate applicable to dividends depends on several factors, including the existence of a permanent establishment in France and the source of income.
- Existence of a Permanent Establishment
When a foreign company has a permanent establishment in France, it is considered an autonomous entity for tax purposes. In other words, fixed business facilities or dependent agents are treated as a separate entity.
- French Corporate Tax on the profits made by the permanent establishment
- Withholding Tax on the deemed profits distributed to the non-resident
However, this withholding at source can be neutralized in the following cases:
- If an international tax treaty removes this deduction.
- If the non-resident company is established in another EU Member State.
Legal basis : Article 115 quinquies of General Tax Code
- Non-existence of a Permanent Establishment
Where the non-resident company does not have a permanent establishment in France, solely a withholding tax of 25% is applied by category and type of French source income.
Legal basis : Article 164 B of General Tax Code
- Impact of International Tax Treaties
International tax treaties play a key role in the taxation of dividends since they often avoid double taxation by defining which state has the right to levy the tax. Moreover, the Parent-Subsidiary Directive may provide exemptions for EU-based parent companies.
Value Added Tax (VAT)
The Value Added Tax (VAT) is an indirect tax that applies to the majority of commercial transactions. VAT is levied at every step of the production and distribution chain, depending on the value added to a good or service. It is thus directly linked to the turnover of companies and impacts final consumption.
Registration Requirements
Foreign companies operating in France must comply with VAT registration obligations if they carry out taxable transactions in the territory. The thresholds and terms of registration vary depending on the nature of the activity:
- Sale of goods : the turnover threshold is set at €82 800.
- Provision of services : the turnover threshold is 33 200 €.
Companies that exceed these thresholds must apply for an intra-community VAT number from the French tax authorities. This allows VAT to be collected and declared on transactions made in France.
VAT Rates and Exemptions
In France, the VAT is subject to a different rate depending on the good or service :
- Standard rate : The standard VAT rate for most goods and services is 20%.
- Reduced rates : There is a list of sectors of activity that will be eligible for one of the reduced rates. The rate of VAT collected depends on the activity of the business.
- Reduced rates : 10% (hospitality, transport)
- Special reduced rate : 5.5% (essential goods)
- Super-reduced rate : 2.1% (medications)
The VAT collected is returned to the State. However, the business can deduct the VAT paid on its business purchases. This VAT mechanism reduces the cost for businesses, provided they comply with the registration and declaration procedures.
Legal basis : Articles 256 et seq. of General Tax Code and EU Directive on VAT
Tax Incentives for Foreign Investors
To stimulate foreign investment and boost its economic attractiveness, France is implementing a wide range of tax incentives. These measures aim to encourage innovation, encourage location in strategic areas and ease the tax burden on businesses.
Research and Development Credits
The Research Tax Credit (CIR) is one of the flagship measures to support research and development (R&D) activities of companies. This scheme is particularly attractive for foreign investors wishing to develop innovative projects in France.
- 30% tax credit on R&D expenses up to €100 million
- A reduced rate of 5% for expenses exceeding €100 million
The eligible expenditure includes researchers’ salary costs, expenditure related to R&D outsourcing (universities, approved laboratories), and the acquisition of specific patents or software.
Investment Zones Benefits
France offers specific tax incentives for companies setting up in priority economic development zones, also known as urban free zones (ZFU) or regional aid zones (AFR) :
- Temporary corporate tax (CI) exemptions : Up to 100% of the CI for the first five years, with a gradual reduction in subsequent years.
- Property tax reductions : Businesses can benefit from full property tax relief or exemptions on built properties.
- Reduction of employer charges for employees, in particular for small and medium-sized enterprises (SMEs).
Compliance and Reporting
Foreign investors operating in France are subject to strict tax compliance and reporting requirements, designed to ensure transparency, transaction traceability, and tax fairness. These obligations cover several aspects, including tax returns, accounting records, and compliance with transfer pricing rules.
Annual Obligations
Foreign companies operating in France must fill out several tax and financial returns on a regular basis :
- Annual corporate tax returns : Companies must file their annual corporate tax return (Form 2065) within three months of the end of their fiscal year. The return must include a detailed statement of income, deductions, and tax credits.
- Monthly or quarterly VAT declarations : These statements include the calculation of VAT collected on sales and VAT deductible on purchases.
- Transfer pricing documentation for large companies : These statements include the calculation of VAT collected on sales and VAT deductible on purchases.
Documentation Requirements
French legislation requires companies to maintain strict documentation to ensure the traceability of commercial and tax transactions :
- Accounting records in French GAAP format
- Supporting documents for all transactions
- Transfer pricing documentation when applicable
Conclusion
While France’s tax system is complex, it offers numerous advantages and incentives for foreign investors. Understanding and complying with these regulations is essential for successful business operations in France. We recommend consulting with qualified tax professionals to ensure full compliance and optimal tax efficiency for your investment in France.
For personalized guidance on French tax regulations, consider consulting with a qualified tax advisor or reaching out to the French tax authorities directly.
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