TAXATION

The way profits and the entrepreneur’s income are taxed, as well as taxation rates and brackets, vary depending on the business structure and also on the annual turnover.

Impôt sur le revenu (IR) or sur les sociétés (IS)

There are two main situations: Els, where profits are inextricably part of the entrepreneur’s personal income and thus subject to IR taxation, and companies, where the directors’ remuneration and dividends are also subject to IR taxation and taxed separately from company profits, subject to corporation (IS) taxation.

El profits are industrial and commercial profits (BIC), or noncommercial profits (BNC) for all other service and professional categories. Company profits – after the deduction of directors’ income – are subject to IS taxation at a basic rate of 34.33 per cent. A reduced rate of 15.45 per cent applies on profits up to the first 38,000€ provided that the business’ last turnover figures were below 7,630,000€ HT (exclusive of VAT) and that all the company capital was paid up initially with at least 75 per cent provided by individual people (personnesphysiques).

Although the legal structure usually determines how profits and entrepreneurs’ income will be taxed, in the case of an EURL or family SARL either IS or IR taxation is an option. The taxation choice must be written into the company’s articles of incorporation and communicated to the taxation authorities before the business starts, which is another reason why a business plan should be completed at this stage. It will be difficult to forecast profits otherwise. If a new business is likely to enjoy tax exemptions (see Zones franches urbaines in Chapter 7) it will be more interesting to choose IS as the exemption applies to the entire profits and directors’ earnings.

With EIs, actual business expenses are deducted when making tax returns which are classed as régime réel simplifié or régime réel normal, according to the type of business and annual turnover. Eh classed as a micro-entreprise have set business expenses tax allowances. The tax rate for all Eh corresponds to a sliding IR scale which varies depending on whether the entrepreneur has income from other sources and their family situation. A major reform simplifying the IR taxation system was recently voted and will be effective from 2007, applying to income in 2006. IR tax will be less onerous and more in line with neighbouring European countries. The highest IR tax band will be annual taxable income over 65,500€, subject to 40 per cent tax, whereas annual taxable income for 2005 over 48,748€ attracted 48 per cent tax. Annual taxable income between 24,433 and 65,500€ will be taxed at 30 per cent, annual taxable income between 11,001 and 24,332€ at 14 per cent, and annual taxable income between 5,515 to 11,000€ at 5.5 per cent. Up to 5,514€ taxable income there will be no taxation.

Régime réel simplifié

This applies to all Eh and companies with annual sales turnover between 76,300 and 763,000€ HT or between 27,000 and 230,000€ HT annual turnover if they provide a service.

Régime réel normal

This applies to all Els and companies with annual sales turnover over 763,0006 HT or over 230,000€ HT if they provide a service. Accounting obligations are more onerous than with the régime réel simplifié.

Micro-entreprise

This is a most advantageous form of taxation régime which applies to turnover and not profits, and many small businesses will find it suits them. Accounting obligations are limited to recording receipts and expenses in a Recettes Dépenses daybook and simply completing an IR tax return form annually. To qualify, businesses must have an annual sales turnover (and furnished accommodation rental income is included in this category) of less than 76,300€ HT or a turnover of less than 27,000€ HT if they provide a service. VAT cannot be included on invoices and the following must be stated on invoices: ’TVA non applicable, art. 293B du CGF. The fixed business expenses tax allowances which apply, regardless of actual expenses incurred, are 72 per cent off the higher (sales turnover) category, 52 per cent for service businesses subject to BIC taxation, and 37 per cent for BNC service businesses. IR taxation is applied to the resulting net figures.

Déclaration contrôlée or régime du bénéfice réel

This régime applies to BNC service businesses which invoice VAT (TVA) and have an annual turnover above the micro-entreprise limit of 27,000€ HT. Profits are taxed directly with no set business expense allowances.

The table opposite will help non-salaried entrepreneurs decide which taxation system to choose.

	Turnover threshold	How to calculate profits	VAT	Accounting obligations	Deficits taken into account on household income for tax purposes	20 % allowance on taxable profits if member of CGA/AGA accounting organisation	Cost of CGA/AGA offset against tax
Micro Entreprises	Under 27,000€ (BIC) services	Turnover, less 52%	No	Simplified. No balance sheet or annual accounts necessary	No	No	No
	Under 76,300€ others (excl. VAT)	Turnover, less 72%	No
Micro Entreprise (BNC)	Receipts under 27,000€ (excl. VAT)	Receipts, less 37%	No	Simplified tax returns	No	No	No
Régime réel (BIC)	Over 27,000€ services Over 76,300€ others	Costs deducted from sales	Paid on sales. VAT paid on costs is paid back.	Complex: balance sheet, annual accounts, detailed tax return.	Yes	Yes	Yes
Déclaration contrôlée (BNC)	Receipts over 27,000€ (excl. VAT)	Costs deducted from receipts	Paid on sales. VAT paid on costs is paid back.	Complex: balance sheet, annual accounts, detailed tax return.	Yes	Yes	Yes

Imposition forfaitaire annuelle (IFA)

All IS taxation businesses must pay this annual turnover tax before the 15th March each year unless their turnover is below 76,000€ inclusive of VAT. There is a sliding tax bracket scale calculated on turnover, regardless of whether the business has made a profit or loss, with a maximum IFA bracket for turnover of at least 76,000€. The current (2006) taxes for businesses with turnover between 76,000 and 149,000€ and between 150,000 and 299,000€ are 750€ and 1,125€ respectively. Companies in development areas which are exempt temporarily from IS tax and companies with at least half of their capital as cash do not pay IFA.

VAT (TVA)

TVA (taxe sur la valeur ajoutée) at the rate of 19.6 per cent applies to the great majority of goods and services, with the notable exception of food, books, transport, officially-rated tourist hotels, country gîtes, camp sites and home improvement work (to properties over two years old), where the rate is 5.5 per cent. There is a strong movement for a reduction to 5.5 per cent for restaurant meals. Although at the end of 2005 France was once again unsuccessful in obtaining European Union agreement to this. Newspapers and those medicines which are reimbursed by the health service are subject to a reduced rate of 2.1 per cent. All export transactions are zero rated.

• New businesses pay TVA as they go – monthly during the first 12 months.
• Businesses subject to régime réel simplifié taxation subsequently pay TVA in three quarterly advance instalments (April, July, October) which are each 25 per cent of the previous 12 months’ TVA, with a final quarterly (December) instalment of 20 per cent. They can, however, ask to transfer to the régime réel normal, just for TVA monthly payments, provided this is officially notified within 3 months of starting the business to the appropriate CFE or tax authorities.
• Businesses subject to régime réel normal taxation continue to pay TVA monthly.

Taxe professionnelle

This local business tax is calculated on the value of fixed assets used for or by the business such as property and equipment and also on a small per centage of business revenue. The taxation rates can vary considerably between neighbouring communities. All non-salaried individual entrepreneurs and all companies are liable except certain types of artisans, farmers, writers and artists, and private schools. Designated development areas offer temporary or permanent exemption. Double-check with tax authorities that any amount due is correct. Don’t hesitate to put in a justifiable claim as considerable rebates are successfully obtained every year.

IS taxation and associations (Loi 1901)

Charitable organisations or leisure activities organisations must be registered as an association under this old law to account for the receipt and expenditure of annual subscriptions and contributions. However, an association can also be set up to test a business idea before deciding whether or not to proceed to a business structure. It will be subject to IS taxation on any profits. Payments received from the sale of goods and services must not exceed 38,000€ and any after-tax profits must be ploughed back into the association.

WHY NOT REGISTER AS A UK COMPANY?

Registering as a UK limited company is a great deal simpler than registering a company in France. International consultants (look under conseils en organisation, gestion ... in the Page Jaune directory) such as Ernst and Young, have bilingual experts who can advise you if your business is appropriate. Basically, the business must be able to show a regular amount of business coming from the UK. From a commercial point of view, if the main market is French, customers may be discouraged from dealing with a ‘Ltd.’ company. Plus any potential future French employees will be unhappy if they are not offered the advantages that contribution to the French social security system provides.