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DOING BUSINESS IN FRANCE

TYPES OF BUSINESS ORGANISATION

Principal forms of doing business

The company form most frequently used by large companies in France is the joint-stock company (société anonyme—SA); indeed, it is compulsory for companies in finance or insurance. Smaller firms, particularly sales subsidiaries, often use the limited-liability form (société à responsabilité limitée—SARL). An SARL with a sole shareholder is known as an entreprise unipersonnelle à responsabilité limitée (EURL). A subsidiary SA or an SARL is the usual form of business organisation for a foreign investment. There is no minimum capital requirement for an SARL or EURL.

Requirements of a joint-stock company (société anonyme—SA)
Capital. Minimum €225,000 if publicly owned; otherwise, €37,000. Only 50% needs to be fully paid up. If capital falls below the minimum, the company must restore it to that level within one year. Otherwise, it may be placed in liquidation. Capital must be fully paid up within five years. Companies must set aside 5% of annual distributable profits in a legal reserve until the reserve equals 10% of capital.

Contributions in kind (tangible or intangible assets) must be valuated by a court-appointed assessor and approved by a founders’ assembly for a publicly listed firm; for non-public firms, each founder must approve the valuation of the court-appointed assessor. Contributions in kind do not carry voting rights in listed companies but can in other companies.

The formalities of creating a privately owned company have been eased since January 2003. In particular, it is no longer necessary to deposit the byelaws with the commercial court or to publish them, but they must be deposited with the tax office, and publication of the fact of setting up the company is mandatory.

Founders, shareholders. Minimum seven. No restrictions on nationality or residence.

Board of directors, management. There are two approaches: a conventional board to which management reports; or a two-tiered structure of a supervisory board and a management committee. The board must have a minimum of three and a maximum of 18 members. At least three of the board members must be shareholders. There are no restrictions on nationality or residence. No more than one-third of the board may be older than age 70. No person may be a member of more than five boards. This does not apply (except for the chairman) to the boards of group companies not listed on the stock exchange.

For a conventional board structure, the board must elect a chairman and a general manager. It may also elect up to five general-manager delegates. A single general manager is sufficient if the company’s capital is less than €150,000. No one person may be the general manager of more than one company. The general manager has full powers to run day-to-day business and to represent the company.

Where there is a supervisory board and a management committee, the supervisory board appoints the members of the management committee. They may not be members of the supervisory board and do not need to be shareholders. A non-European Economic Area (EEA) or OECD national who serves as the board chairman or general manager of an SA needs recognition of this status by the local prefect.

The personnel are entitled to board representation (of up to two members) where they hold more than 3% of the company’s shares either directly or indirectly (for example, through the pension fund). The company has the option to include up to four board members representing staff (five for a listed company). The byelaws should specify whether this is planned. They have non-voting status and are in addition to the board membership. Their number may not exceed one-third of the membership of the board. Where there are two or more staff representatives, one must represent managers. Apart from these representatives, no more than one-third of the board may be company employees.

Labour representation in management. In companies with more than 50 employees, workers elect a works council, which has comprehensive rights to be kept up to date on company operations. Companies may choose to allow staff representation on the board.

Disclosure. All SAs must publish annual financial data and deposit two copies of the approved balance sheet and profit-and-loss (P&L) statement with the local commercial court within seven months of the end of the financial year and within one month of approval of the accounts. The cost of the deposit is €37.92. The accounts are accessible online for third parties to consult within two to three weeks.

A listed SA must publish its annual balance sheet, P&L statement, quarterly sales figures for each branch of activity and semi-annual provisional balance sheet. Subsidiaries of these companies with assets of €3m or more, or portfolios of €300,000 or more, are also individually subject to these disclosure requirements.

All SAs must have at least one statutory auditor registered in France. Two statutory auditors are required for a company (listed or unlisted) with consolidated accounts or a company that solicits funds from the public. The auditor is appointed for a six-year term at a general shareholders’ meeting and may be reappointed. An auditor who is not put forward for reappointment has the right to be heard by the shareholders’ meeting. The local commercial court may appoint a special auditor to prepare reports on specific transactions (for example, non-cash contributions to a capital company or acquisition of a shareholder’s assets).

Taxes and fees. Contributions to start-up capital and capital increases may be taxable. They will not be taxed if they come from an entity subject to French corporate income tax that receives shares exactly corresponding to the value of the contribution. However, if the contributor is not subject to French corporate income tax (and regardless of whether it pays French personal tax), a registration tax is levied at 4.8% on amounts exceeding €23,000 unless the contributor commits to holding the shares for three years. If the contributor receives remuneration or a fee for the contribution, then a tax of 4.8% is due on contributions in the form of property or property rights. If the contribution takes the form of leasehold rights, business premises or customers, then the tax of 4.8% is levied on amounts exceeding €23,000. Notary fees based on the amount of capital are also payable.

Types of shares. Shares may take the form of registered or bearer shares, but ownership of bearer shares must be recorded. Non-residents may hold shares through nominee accounts. Shares must be registered if required in the company’s byelaws or if shares are not fully paid in or are held in reserve in exchange for convertible bonds. Non-voting shares are prohibited (except for preferred shares, which are subject to certain legal limits). But registered shares that are entirely paid up and have been held for more than two years may be granted double voting rights and limited to shareholders of EU nationality. There is no minimum nominal value. No par value shares are permitted.

Control. Shareholders representing 5% of the capital may sue in a commercial court for the removal of contested auditors, obtain written replies to their questions and propose board resolutions. The trigger threshold is lower for larger companies: 4% for companies with share capital of €750,000–4.5m; 3% for companies with share capital of €4.5m–7.5m; 2% for companies with share capital of €7.5m–15m; and 1% for companies with share capital exceeding €15m.

Requirements of a European Company (Societas Europaea—SE)
Since October 8th 2004 companies across the EU have been able to set up a European company or Societas Europaea (SE). This facilitates crossborder mergers, formation of holding companies by companies from more than one EU member state, creation of joint crossborder subsidiaries and transfer of a corporate head office. Existing companies can convert to the new statute. The empowering legislation takes the form of a regulation; it does not need transposition into national law, although France has provided clarification on tax rules through national legislation. Moreover, accompanying rules on worker consultation do need transposition, and France had yet to implement these as at June 2005.

An SE is automatically equated with a public limited-liability company in the member state in which it has its head office. An SE is subject to the tax laws of the country in which it is registered.

Capital. The minimum capital for an SE is €120,000 (or its equivalent in national currency) or any higher amount required by a member state for other types of company under its own company law. SE shareholders must be companies.

Registration. An SE must register in the country where it is set up and publicise registration through the Official Journal of the European Communities. An SE can move its registered office from one EU state to another without winding up the first company and setting up the second. An SE must be wound up only if the registered office is transferred outside the EU.

Management form. An SE may choose a single-tier or two-tier board system. In the two-tier system, board members may be part of the management or supervisory boards, but not both. Board approval is needed for major investment and disinvestment decisions, major lending and borrowing operations, and conclusion of large supply and performance contracts. The threshold to determine the size of transaction requiring a board decision is set by the company statutes. It may not be less than 5% of subscribed capital (or of turnover for supply and performance contracts) or more than 25%.

Disclosure. An SE must draw up annual accounts in accordance with the laws of the member state in which it has its registered office.

Employee participation. Employee participation is compulsory, but several approaches are possible. Agreement must be reached before the company statutes are approved by the first shareholders’ meeting. Special provisions apply to mergers.

Establishing a branch

Foreign companies sometimes use the branch form for headquarters operations or for start-up operations when they are not sure how business in France will develop. A branch is unlikely to be eligible for state aid and tax breaks, however, and the parent company has unlimited liability for the debts of the branch office. Branches are taxed on their French income even if their income is also taxed as part of the parent’s worldwide corporate income.

To form a branch in France, two copies of the articles of association (byelaws) and the statutes of the parent company must be submitted to the commercial court in whose jurisdiction the branch will be located, together with proof of their having been published in an official gazette or equivalent publication in the home country. The manager of the branch must certify that these are the actual byelaws. Translations of the documents must be attached and the branch manager must certify their accuracy. The branch manager may not have been resident in France for more than three months at the time the branch is set up. A copy of the office lease must also be attached.

These documents are filed with the Enterprise Formalities Centre (Centre de Formalités des Entreprises), along with the other documents required for company formation. This agency then handles the formalities, including notifying the tax authorities. All documents must be filed within 15 days of the branch’s opening. A foreigner’s business permit is required for most non-OECD nationals. The registration charge varies slightly from region to region. In Paris it is €76.19.

Another means of testing the business environment is through a liaison office. It may hire staff but may not engage in commercial activity. The parent company must issue and pay all invoices. It is not liable for tax since it has no income, but it must pay payroll taxes (social security) for local staff. A declaration of existence must be filed with the Enterprise Formalities Centre.

Setting up a company

A société anonyme (SA) must have at least seven shareholders; there is no maximum. A société à responsabilité limitée (SARL) must have at least two shareholders but not more than 100. An SARL may not issue securities to the public but can issue bearer bonds. Transfers of their shares are limited.

A new company form is the Societas Europaea (SE), or European Company, introduced in EU Regulation 2157/2001 of October 2001 and effective from October 8th 2004. Companies from two or more EU member states will be able to merge to form an SE or to create an SE holding company or branch. A company can convert an existing firm to SE status without liquidating. One advantage of the form is that an SE makes it possible to move headquarters to another EU member country with a minimum of formalities.

The société par actions simplifiée (SAS) form combines the legal status of a corporation with the flexibility of a partnership. Even one person may form an SAS (with capital of at least €37,000), but there is no limit on the total number of shareholders. As with an SA, the maximum life of an SAS is 99 years. An SAS may not issue debt or equity to the public. The basic registration procedures are essentially the same as for an SA.

France introduced new rules to make it easier for business “angels” to use an entreprise unipersonnelle à responsabilité limitée (EURL) structure in Article 91 of its 2004 Budget Law (2003/1311 of December 30th 2003), since the country now has few of these entrepreneurs compared with countries such as the UK and the US. The new company form is the SUIR (société unipersonnelle d’investissement à risque). An SUIR pays no profit tax for ten years providing the single shareholder is an individual who, with family members, holds no more than 25% of the capital of companies in which the SUIR holds stakes and who is not involved in running the company (including membership on the board). The companies in which an SUIR invests must be within the EU, may not be listed on regulated exchanges and must have been set up within the previous five years. They must be controlled by individual shareholders or by companies in the hands of individuals. An SUIR’s stake must be 5–20% of the target company.

Foreign businesspeople from most non-OECD countries (aside from those mostly former colonies with bilateral agreements) need a business permit (carte de commerçant). Nationals of OECD countries need only an authorisation from the prefect in the form of a mention on the residence permit that the person is a foreign businessperson (commerçant étranger—under Ordinance 2004/79 and an amendment to Article 121 of the Code of Commerce). The job categories requiring a permit or an authorisation are (1) the manager of a firm (or branch) operating in France; (2) the president of a French corporation; (3) the manager of a French limited-liability company; or (4) the principal in a partnership doing business in France.

Companies (even non-EU companies if the vehicle is a subsidiary in an EU country) that want to start working with a French company but do not want to commit to a formal joint venture may set up what is known as a European economic interest grouping (EEIG). The grouping functions much like a partnership in that the income is taxed in the hands of the member companies. At least two of the companies involved must be from different EU member states. An EEIG differs from other corporate forms in that it must be registered with the Tribunal of Commerce; all other company forms (and branches) are registered with the Enterprise Formalities Centre (Centre de formalités des entreprises).

For all existing company forms, including branches, directors must generally submit proof of identity and nationality, information on marital status and proof that the person has never been convicted of a crime. The exact requirements depend on the company type. It is generally possible to self-declare (in the past, the declaration had to be notarised).

Many of the formalities associated with setting up a company can now be carried out online.

BUSINESS TAXATION

Overview

The French corporate tax regime is comparable to those in other Western industrialised countries, although the deductions available are generous. The corporate tax rate for most companies is 33.33%. Only profits derived from long-term capital gains and earnings from licensing know-how are taxed at a lower rate of 15%. From 2006, this rate will be further reduced to 8% for long-term capital gains on participation shares. From 2007, the participation exemption regime currently applicable to dividends will be extended to long-term capital gains on participation shares, that is these gains will be exempt except for a 5% portion of the gain taxable at the standard corporate tax rate. Other income benefiting from the long-term capital gains rate will continue to be taxed at 15%.

A 1.5% tax surcharge applies on the basic standard and reduced rates for financial years ending on or after January 1st 2005. This surcharge will disappear from financial years ending on or after January 1st 2006.

A 3.3% social surcharge also applies when the global corporate income tax (CIT) charge exceeds €763,000.

The effective CIT rate is therefore 34.93% when the taxable basis at the normal rate exceeds €2,289,000, and will be lowered to 34.43% in 2006.

Companies with annual sales of less than €7.63m and 75%-owned by individual persons are exempt from this social surcharge.

A minimum tax, which ranges from zero for companies with turnover of less than €76,000 to €30,000 for companies with turnover exceeding €75m (the turnover, VAT included, includes financial income), is due by all companies except newly established ones. The minimum tax is offset against CIT due before the end of the second calendar year following the year of payment. It will be a definitive charge if no CIT is due over this two-year period.

Tax exemptions are available to companies set up in order to acquire an ailing firm. Acquirers may enjoy total exemption from corporate income tax for the first 24 months of operation if they have not held, directly or indirectly, more than one-half of the equity capital of the target company in the year prior to the acquisition. Access to these benefits is easier when the target company has applied for court protection from its creditors where it might otherwise have to go into bankruptcy (a Chapter 11-type judicial administration). Entrepreneurs must attempt to keep the company and its business in operation for the three years following the acquisition; otherwise, the tax savings must be repaid and late interest is due (0.75% per month). The buyer may also be exempt from the local business tax for two years in all parts of the country, by decision of the local authorities. This exemption may be reviewed, however, if the business is closed down within five years following the end of the period of the business tax exemption.

In determining the taxable basis at the standard CIT rate, the following items are taken into consideration:

Passive income, such as dividends, interest and royalties from foreign sources, must be declared as taxable income. Dividends received may be deducted under the parent-subsidiary regime. If foreign dividends and earnings received in France are further distributed in 2005, an exceptional levy equal to 25% of the net distributed dividend would apply. This exceptional tax is, however, not a definitive burden but constitutes a tax credit for the next three years. Each year, one-third of the credit will be reimbursed to the company if not set off against corporate income tax payable. No other distribution taxes will be applicable as of January 1st 2006.

Deductions may be taken for normal business expenses. These include the following: interest and royalties; management fees to a foreign parent; wages, salaries and holiday benefits for low-income employees; repairs and maintenance; most taxes (such as business, payroll, property and land taxes but not company-car tax); social security charges; sums paid into a company’s mandatory employee profit-sharing fund; consulting fees and research costs (within certain limits).

Expenses incurred in connection with the issuance of bonds, except brokers’ fees and advertising costs, are deductible in the taxable year during which they are incurred. Brokers’ fees and advertising costs, however, are deductible only in equal amounts over the duration of the bond.

Also deductible are matching contributions to an employee’s contributions to an optional savings or share-purchase plan. Deductions can be as high as €4,600, depending on the type of plan and the salary of the employee. Also deductible are provisions made for service due to customers, write-offs of machinery and inventories, but they must be rigorously justified.

Shareholder financing
Interest on borrowed capital is deductible, provided that it is charged at a commercial rate, is incurred in the interest of the company and is recorded in the financial statements. However, if the loan is from a shareholder, interest is not deductible:

* To the extent that the interest exceeds the rate permitted by the Tax Code. The deduction is limited to interest paid at a rate not exceeding the annual average rate of interest charged by financial institutions on variable interest rate loans to enterprises with a duration exceeding two years. (This average rate was 4.58% for companies ending a 12-month fiscal year on December 31st 2004.)

* If loans from controlling shareholders (associates holding more than 50% of the voting or capital stock of the payer company) exceed 150% of the company’s share capital, to the extent that it represents constructive dividend on that excess portion. This limitation does not apply to advances made by French parent companies (holding at least 5% of the share capital of the subsidiary) to their subsidiaries. Case law has expanded the exceptions to EU parent companies (Decision of the Supreme Administrative Court, December 30, 2003 SARL Coréal Gestion) and foreign companies protected by a non-discrimination clause in the relevant double-tax treaty signed with France (Decision of the Supreme Administrative Court, December 30, 2003 SA Andritz) and the FTA has decided to apply this position. However, the French tax authorities are currently considering amending the French thin-capitalisation rules, as provided for in Article 212 of the French tax code.

* If the issued share capital is not fully paid in. This could also be amended as part of the new French thin-capitalisation rules.

Loss relief
French companies and permanent establishments of foreign companies taxable in France are allowed to carry forward all tax losses without time limit. These changes in the tax law apply to (1) losses incurred during financial years starting on or after January 1st 2004; and to (2) losses remaining available to be carried forward at the end of the fiscal year preceding the first fiscal year opening as of January 1st 2004.

Long-term capital losses may be carried forward for ten years but may be offset only against long-term capital gains. Once long-term capital gains will be subject to participation exemption in France (that is as from January 1st 2007), the corresponding long-term capital losses will be lost.

Please note that losses and/or long-term capital losses available to be carried forward may be cancelled in case of a profound change of activity of the company.

With regard to a takeover or merger, losses may, as an exception, be transferred to the continuing company, when the merger is placed under the favourable tax regime (see “Mergers” below).

A loss may also be carried back and set off against a company’s profits of the three years preceding the loss-making year. This set-off does not result in a direct refund of the tax payable in earlier years. Instead, the company is granted a tax credit that can be set off against corporate income tax payable in the five years following the loss-making year; any balance is then refunded to the company.

Consolidation
World tax consolidation. French parent companies may request authorisation to consolidate their taxable income, taking into account all profits and losses, calculated in accordance with French rules and regulations of both French and foreign subsidiaries. This regime is granted for a period of five years and renewed by three-year periods. Credit is then given for foreign taxes comparable to French corporate income tax. The offsettable tax credit is ceiled according to specific rules. Only those subsidiaries in which the French parent’s holding is 50% or more are counted, but in some cases special exceptions are made for subsidiaries in which the French parent’s holding is slightly below 50%.

Mergers
Mergers may benefit from a favourable regime. The definition of mergers entitled to this regime includes dissolution without liquidation.

Under the favourable regime, the absorbed company will not be liable for CIT on capital gains deriving from the transfer of assets.

To benefit from the favourable tax regime, the absorbing company must (Art. 210A-3 CGI):

* Record all assets other than fixed assets at their value as registered in the absorbed company’s books. Alternatively, it may record them at their actual value subject to adding to its taxable results of the year of merger, a profit corresponding to the capital gains realised upon contribution of the assets by the absorbed company.

* Add back the deferred portion of capital gains on depreciable assets to income taxable at the normal rate over five years (15 years for constructions and associated rights).

* Substitute itself for the absorbed company in connection with the latter’s untaxed capital gains.

* Set up the provisions and special long-term capital gains reserve that were in the balance sheet of the absorbed company.

* Calculate any short- or long-term capital gains on the subsequent sale of any non-depreciable assets on the basis of their historic cost in the absorbed company’s books.

As a counterpart to these commitments, the merging company will be entitled to depreciate fixed assets on the merging value. In this respect, from January 1st 2005, the following valuation methods apply without any choice:

* Net book value must be used for transfers between related companies according to the accounting consolidation rules, ie companies under the same exclusive control as defined by Article L 233-16 of the Commercial Code; and

* Fair market value must be used for transfers between unrelated companies.

Losses of the merged company may be transferred to the merging company upon prior approval of the French tax authorities. However, the approval is automatic when:

* The merger is placed under a favourable tax regime;
* The purpose of the restructuring is other than tax-related; and
* The activity of the merged company is continued over three years.

As from January 1st 2005, the total amount of existing losses can be transferred without limitation (whereas the amount of losses that could be transferred was limited in the past).

Losses of the merging company remain, in principle, available for future use against profits, except when the merging company undergoes a deep change of activity.

Tax group
Under the tax-consolidation provisions (intégration fiscale), a group consisting of a French resident parent, which may be a subsidiary or a branch of a foreign company, and its French resident 95%-owned subsidiaries (or French branch of a 95%-owned foreign subsidiary) may consolidate its results for corporate income-tax purposes, thereby offsetting current profits and losses. The group assessment is made on the parent company as the only taxpayer liable for corporate income tax due on the consolidated results. Only the companies that have the same financial year-end and that have consented to fiscal integration and whose results are subject to corporate income tax may be members of the group. The option to be part of the group is valid for five financial years and renewed by tacit agreement at the end of the period.

The temporary ownership of 95% or more of the capital of the group’s parent company will not cause the immediate dissolution of the group if certain requirements are met.

The permanent ownership of 95% or more of the group’s parent company, or the merger of the parent company into a company not included in the group, will cause the dissolution of the group, with possibly the immediate setting up of a new tax group.

Parent-subsidiary regime
Under this regime, entities liable for corporate tax in France may deduct from their taxable basis dividends received from their 5%-owned subsidiary (or €22.8m value interest in some cases). The tax deduction amounts to the dividends received minus 5% of the gross dividends corresponding to the deemed share of expenses allocated to investment income.

Transfer of registered office out of France
Until the beginning of 2005, any company transferring its registered office outside of France was taxed on the unrealised capital gains on its assets at the time of transfer. It also had to pay income tax on its profits at the time of departure. Since the beginning of 2005, companies transferring their head office to another European Economic Area (EEA) country pay corporate income tax when it becomes due in the normal way and pay capital gains only on assets moved out of France. The change has brought France into line with EU rules on the European Company Statute.

Taxable income and rates

The standard corporate tax rate in France is 33.33%. A 1.5% tax surcharge applies to all companies, but this surcharge will disappear on January 1st 2006.

Large companies whose turnover exceeds €7.63m are subject to an additional social surcharge of 3.3% levied on that part of aggregate corporate tax that exceeds €763,000.

For companies with annual sales of less than €7.63m, the first €38,120 of profits is taxed at 15% if initial capital is fully paid up and 75% of the shares are in the hands of individuals rather than companies (or are in the hands of a company meeting that criterion). In addition, these companies are exempt from the 3.3% surcharge.

Companies extracting oil or gas in France are subject to a tax on production from onshore fields. This progressive tax can be as much as 12% on large oilfields and 5% on large gasfields. The levy is tax-deductible. Special local taxes are also payable. France does not take any royalties from licences. Oil and gas companies can place up to 23.5% of the value of sales from onshore fields in pre-tax reserves if the amount does not exceed 50% of profits and the money is used for further prospecting in France within two years.

Shipping companies can opt for flat-rate determination of profit, providing at least 75% of their turnover is from shipping. There are four tax bands depending on the tonnage, of which the lowest is the rate of €0.24 for ships of 25,000 tonnes or more.

A tax credit is available in the 2005, 2006 and 2007 tax years for companies moving jobs back to France from outside the European Economic Area (EEA). This credit is not automatic, however, because of the risk of abuse: application must be made to the tax authorities. The credit will be taken back if the job is not maintained in France for five years.

Taxable income defined
For both resident and non-resident companies, taxable income is defined as total income from normal business activities in France, including rents, interest and foreign-exchange gains.

For resident companies, foreign-source income is generally not subject to tax in France (and foreign-source losses may not be deducted unless applying for a specific regime).

R&D tax credit. A tax credit is available, upon election, for companies engaged in basic or applied research, or in making significant product improvements. Eligible expenses are defined by law, and companies may (but are not obliged to) obtain an advance ruling on whether their research and development (R&D) expenses will qualify. Official silence on advanced rulings requests is deemed to be consent after six months. The research does not have to be carried out in-house, but outsourced R&D is taken into consideration within a global ceiling of €2m per year if conducted by an agency recognised by the French government. Furthermore, expenses borne in other EU countries or by recognised agencies within the EU may now also be entitled to the French R&D tax credit.

The R&D tax credit for a given year is equal to (1) 5% of the expenses incurred during this year, and (2) 45% of the increase in qualifying R&D expenses incurred during this year over the average of expenses incurred during the two preceding years, augmented by the amount of the increase in the cost-of-living index. The tax credit available by the company cannot exceed €8m per year. It is offsettable against corporate income tax for that year and the following three years. Any credit remaining after this three-year period is reimbursed. For entirely new businesses, the R&D tax credit may (under limited conditions) be refunded immediately during their first year of creation and subsequent two years.

Other specific tax credits. Special tax breaks are available to companies operating in Corsica and France’s overseas departments (Réunion, Guadeloupe and Martinique).

Depreciation
Under French regulations, tangible fixed assets are, in principle, depreciable. Intangible assets are not generally depreciable, but patents may be written off over their useful lives. Goodwill is not depreciable. However, the Supreme Administrative Court decided that intangible assets dissociated from its clientele are depreciable. In limited circumstances, a provision for a permanent reduction in the value of goodwill may sometimes be deducted. Software development expenses may be written off as incurred or amortised over a maximum of five years, and software purchases may be amortised over their expected lives or in 12 equal monthly instalments starting from the date of purchase.

French tax law includes a strict definition of permissible depreciation practices. Straight-line depreciation is normally used; it is applied by dividing the expenditure by the estimated number of years of use for an asset.

Application of the declining-balance method is restricted to certain products purchased as new as opposed to second hand. These include machinery incorporated into industrial-maintenance equipment; water- and air-purification systems; security and safety equipment; medical or social installations; office machinery except typewriters; research equipment; hotels and hotel-related equipment; warehousing facilities; industrial buildings with a useful life of fewer than 15 years; and road vehicles used for mass transit.

The declining-balance method may not be employed for any product with a useful life of fewer than three years (such as small lorries, cars, purely commercial equipment, typewriters, telephone installations and office furniture). Computer software that costs less than €375 may be written off immediately.

Under the declining-balance method, applicable straight-line rates are multiplied by 1.25 if the useful life of the asset is three to four years; by 1.75 if it is five to six years; and by 2.25 if it is longer than six years. For energy-saving equipment and investment in renewable energy, the coefficients are 2, 2.5 and 3. The coefficients are 1.5, 2 and 2.5 for purchases for R&D purposes.

The annual depreciation charge may be applied until the last year of useful life, when the remaining depreciable value may be written off. Companies may switch between double-declining and straight-line depreciation at their own discretion until such time as depreciation by the former is equal to depreciation by the latter. From that date, companies must use the straight-line method. Whichever method is used, companies must take depreciation at least up to the amount that would be arrived at using the straight-line method.

The depreciable value is historical cost, no matter what the current replacement value might be.

Certain activities deemed particularly desirable are eligible for accelerated depreciation. Capital investments for research buildings may be written off in the first year. In addition, the full depreciable value of any assets financed by an incentive grant is subtracted from the value of the grant in the year received for corporate tax purposes. Some types of expenditure qualify for depreciation over 12 months. They include computer software; security equipment for firms with annual turnover of less than €7.63m; equipment for laboratories conducting medical research into infectious or rare diseases found in non-OECD countries, acquired between January 1st 2001 and December 31st 2005; and satellite dishes and ancillary equipment to obtain broadband Internet access bought between January 1st 2003 and December 31st 2006.

Recent changes in depreciation rules

The French accounting regulation authority (Comité de Réglementation Comptable) has issued new rules that substantially modify the French depreciation and amortisation accounting regimes.

The French General Accounting Plan has been amended to converge French rules towards the IFRS.

These new rules, which apply to the French statutory accounts of all French companies for fiscal years beginning as from January 1st 2005, could have tax implications.

Although the French Tax Authority (FTA) has not issued any new guidelines yet, it has unofficially set out its position in respect of certain provisions of the accounting regulations, with an aim of neutralising their tax effects to the extent possible.

Breaking down the assets into “components”. If one or several components of an asset have different periods of use, each of these components must be booked separately and amortised over their individual depreciation period.

Depreciation basis. The depreciation basis is now defined as the difference between the gross value of the asset and its residual value.

This residual value corresponds to the compensation that the company may obtain in case of a future resale of the asset. However, this will be limited to cases where the company effectively has the intention to resell the assets before the term of their effective useful life.

Depreciation period. The amortisation period to be used for accounting purposes is now the real period of use of each component.

However, from a tax standpoint, the FTA has indicated that the amortisation period used for tax purposes could still be its common period of use instead of its real period of use.

The FTA’s further comments are awaited in this respect.

Acquisition costs may still be accounted as expense immediately tax-deductible. The acquisition costs can be accounted as an asset, depreciated over a three- to five-year period or as an expense immediately tax-deductible. As a consequence, there is still a choice for their accounting method.

Capital gains taxation

Gains on the sale of securities are included in taxable income in France, but they are classified as long term or short term depending on whether the securities were held for more than two years.

Short-term gains are those realised on sales of non-controlling interest or controlling interest held fewer than two years (unless they are part of a portfolio that includes other assets of the same nature held for more than two years).

Net short-term capital gains are taxed at the standard corporate rate of 33.33%; long-term capital gains are taxed at 15% for financial years ending from January 1st 2005. The tax and social surcharges apply to both short- and long-term gains.

Before January 1st 2004 long-term capital gains subject to the reduced rate of tax had to be booked, for their net after-tax amount, to a “special long-term capital gains reserve”. Distribution of this reserve resulted in the imposition of corporate tax at the normal rate but a credit was given for tax already paid at a reduced rate. This booking obligation is abolished for gains realised during annual accounts closing on or after January 1st 2004. The reduced tax thus becomes final.

However, as a temporary measure, the special long-term capital gains reserves existing in the accounts on December 31st 2004 must be transferred to an ordinary reserve account before December 31st 2005. The transfer triggers a 2.5% exceptional tax, after allowing a €500,000 deduction from the taxable base. The tax will be payable in two instalments, one on March 15th 2006 and the other on March 15th 2007. If the obligation to transfer the special reserve to an ordinary reserve account before December 31st 2005 is not satisfied, the tax will be increased to 5% (instead of 2.5%). If the special reserve exceeds €200m, companies will have, until December 31st 2006, to opt for the full or partial transfer of the excess amounts. The exceptional tax of 2.5% will accordingly be due and payable in 2007.

Foreign income and tax treaties

France has tax treaties and tax-reducing conventions with many countries. Treaty provisions reduce or waive the French withholding tax applicable to dividends, interest and royalties.

Transfer pricing

Reasonable management fees and other intercompany charges are deductible. French subsidiaries of international companies may not reduce their taxable income via unjustified transfer-pricing arrangements. If a subsidiary suspected of such practices cannot prove they were a commercial necessity, the authorities will levy a tax based on a comparison with a similar company operating at arm’s length.

French tax authorities will therefore increase the taxable profits of the French company by the profits considered to have been transferred (Article 57 of the CGI). This practice applies, however, only if the tax authorities can prove that there is interdependence between the French company or branch and the foreign entity (unless the latter is located in a tax haven, in which case no such proof is required) and that the French company has given some unjustified advantage to the foreign entity.

Article L 13 B of the French Book of Fiscal Procedures allows French tax authorities, when carrying out a tax audit, to request the company concerned to provide all relevant information and documents regarding any transaction with affiliated companies situated abroad.

French tax authorities have also other grounds in order to challenge transfer of benefit, some of which relate to operations with tax-haven countries.

* Payments made to entities established in foreign countries that benefit from privileged tax regimes (that is, entities established in a low-tax jurisdiction) are disallowed for French tax purposes unless the payer can show that they were genuine commercial transactions (Article 238 A of the French tax code).

* The Finance Bill for 2005 provides for the repeal of France’s current CFC legislation and its replacement by a new set of rules. The aim is to make France’s CFC legislation EU- and treaty-compliant and more focused on certain types of intra-group arrangements. The CFC rules would take effect as from January 1st 2006.

* According to Article 209 B of the French Tax Code, entities liable for French corporate income tax that hold, directly or indirectly, at least 50% of a controlled foreign company (that is a P/E or a foreign entity), located in a low-tax jurisdiction would be taxed in France on the CFC’s profits, unless the safeguard conditions are met. Where realised by a foreign entity, the profits would be taxed as a deemed dividend. Henceforth, it will be possible to offset the profits of the CFC against the result of the French entity. However, the CFC’s entity losses, if any, would not be deducted in France.

* Within the EU territory, the CFC should not apply if the shareholding of the CFC by the French entity is not motivated by a tax reason. Outside the EU territory, the French CFC rules will not apply if the CFC operates an effective industrial and commercial activity in its territory.

However, such safeguard provisions would not apply where the profits of the foreign entity arise:

* For more than 20% from passive income; and

* For more than 50% from passive income, together with the intra-group services (including financial services).

The foreign entity would be considered as situated in a low-tax jurisdiction if the tax paid by such entity on its earnings is less than one-half of what would have been were the tax due in France on such profits (as opposed to one-third under the current regime).

Turnover and other indirect taxes and duties

French value-added tax (VAT) at a standard rate of 19.6% is payable on the sales value of a product each time it changes hands. The vendor deducts from its payment of the tax it has charged, the amount paid on its inputs, so that, in practice, tax is levied on the price increment at each stage in the chain.

VAT is payable by all manufacturers, wholesalers and retailers and by most service and transport businesses. VAT on goods must be declared and paid in the month following that in which the customer is billed and the goods delivered. VAT on services is due in the month following that in which payment is received. Downpayments are subject to the same rules. VAT is levied at the frontier on the customs value of imports, plus duties, and is refunded to exporters.

A reduced VAT rate of 5.5% applies to most food products for human consumption, hotel rooms, company restaurants, water services, certain entertainment, art works, daily newspapers, certain books and periodicals, and products used in agriculture (such as fertiliser). The 5.5% rate is also levied on approved medicines and many food and farm products and copyright. The 5.5% rate is levied as well on standing charges for gas and electricity, the selective collection and sorting of domestic refuse, some subsidised building works and the purchase of land for the construction of social housing. A preferential rate of 2.1% is payable on some periodicals and medicines reimbursed by the social security system.

Company insurance premiums are exempt from VAT but are subject to special levies, depending on the type of insurance. The tax on vehicle insurance is 15%, and on compulsory third-party liability insurance it is 33.1% (made up of three separate levies). There is a flat-rate levy on some forms of insurance that goes into a fund to provide compensation in the event of terrorist or similar attack.

In addition, a number of “industrial development” taxes are levied on imports from outside the EU; for example, a tax of 0.18% on imports of skins and hides from outside the European Economic Area (EEA), and of 0.20% on furniture. Similar taxes also apply to jewellery (0.20%) and clothing imports (0.07%). The money is paid over to industrial development funds for those sectors.

Excise taxes at various rates apply to sales of tobacco, alcoholic beverages and fuel.

Other taxes

Business tax
Local business tax (taxe professionnelle) adds to the tax burden, but this has been eased in recent years, as wages are no longer included in the business tax basis since 2003.

A number of industries are exempt from the tax, such as the media and some start-ups in depressed areas. This business tax is calculated by multiplying the rate set by the local authority by the imputed rental value of assets. Any research and development (R&D) investment made after January 1st 2003 is not included in the calculation if it was made to acquire a new asset or start a new programme. There is a flat-rate deduction of 16% of the tax base and a fixed maximum that can be levied. This maximum liability is computed on the basis of the value added created by the company and is equal to 3.5% of the value added for companies with turnover of less than €21.35m, 3.8% for companies with turnover of €21.35m–76.225m and 4% for companies with turnover exceeding €76.225m. Reform of the local business tax is under discussion. No proposals had yet been made in June 2005, but it is possible that changes, once they are announced, will apply to the 2005 income year.

A reduction in the local business tax applies to purchases of new equipment (other than cars) between January 1st 2004 and December 31st 2005. The reduction is a percentage of the imputed rental value of the assets equal to whichever is lower of the rate of local business tax for the 2003 tax year or the rate for the year for which the reduction is claimed.

A business tax credit applies from the 2005–11 income years for companies operating in 20 designated areas of high unemployment and high industrial employment. This is seen as a measure to prevent companies from relocating to low-cost jurisdictions. It is capped at €100,000 per employer every three years. It is available to industrial and service companies, management and consultancy companies, engineering and information technology (IT) companies, and companies carrying out scientific or technical research. The tax credit is €1,000 per employee for any employee on the payroll for at least one year as of January 1st of the relevant assessment year. The credit is guaranteed for three years even if the company is in an area that has graduated out of the scheme during that period.

Registration duties
Capital subscriptions are generally exempt from registration duties; a 4.8% (5% as from 2006) duty may be due on non-cash contributions from an entity not liable for corporate income tax.

Cash capital increases as well as incorporation of reserves are generally subject to a fixed duty of €230. The €230 fixed duty also applied on mergers and transfers of reserves or earnings to par-value capital. Share capital reductions are taxed at a fixed duty of €75 (€125 as from 2006) if the company is making a loss. Otherwise it is 1% (1.10% as from 2006). Upon dissolution, a company pays a flat rate of €230 (€375 or €500 if the company’s share capital amounts to more than €225,000 for 2006) plus 1% of net worth if the net worth is distributed pro rata to the shareholdings.

The transfer of real property (including leasehold rights) is subject to taxation at rates varying between 2.225% and 4.89% (2.425% and 5.09% as from 2006) paid by the purchaser. Other charges and notaries’ fees bring the cost of purchasing, for example, a building worth €10m in Paris to nearly 6%. The cost rises to more than 6.6% if the purchase is financed by a loan, because of a notary fee and a registration tax on mortgage.

Apprenticeship tax
The apprenticeship tax (taxe d’apprentissage) is levied at 0.5% on the amount of salaries and wages paid. The money goes to fund apprenticeships. Hence companies with apprentices pay less, since they can deduct training and examination costs for their own apprentices. Companies in the departments of Bas-Rhin, Haut-Rhin and Moselle pay at lower rates (0.2%). This tax is deductible for corporate income-tax purposes.

Salary tax
Corporations not subject to value-added tax (VAT) or with turnover at least 90% exempt from VAT in the preceding year must pay a salary tax, which is deductible for corporate income-tax purposes. Banks and insurance companies are the main groups affected. The rates are 4.25% on the part of the annual individual salaries up to €6,904, 8.5% on the part of the annual individual salaries between €6,904 and €13,793, and 13.6% on the part of the annual individual salaries exceeding €13,793.

Tax compliance and administration

All companies operating in France must make advance payments on their annual corporate taxes in quarterly instalments, due on March 15th, June 15th, September 15th and December 15th. An amount equivalent to 8.3% of the previous year’s earnings, taxed at the standard CIT rate plus 3.75% of the previous year’s earnings taxed at the reduced rate when applicable, is payable for each of the four advance payments. A 5% flat-rate surcharge is levied on late payments plus interest at 0.75% per month.

Firms that posted losses in the previous year are not liable for advance payments, and those forecasting lower profits may apply for a reduction or suspension of prepayments. New companies need not make advance payments in their first year of operation. Any excess payment regarding the final global corporate income tax (CIT) calculation will be refunded to the company within 30 days of receipt of the certificate of tax payment.

The final payment of corporate income tax must be made by the 15th of the fourth month following the close of the fiscal year. In other words, for a December 31st year-end calendar year taxpayers must make their payment by April 15th at the latest.

PERSONAL TAXATION

Taxable income and rates

French personal tax rates are high (up to 48.09%) on paper, particularly when the combined effect of tax and social security contributions is taken into account. Individual assets also are taxed. Special tax rules for expatriates were introduced in 2004 to lessen the effect of French tax.

The social security burden is exacerbated by the 7.5% social security surcharge (contribution sociale généralisée) and the 0.5% social security debt surcharge (contribution au remboursement de la dette sociale), both of which will continue until 2014. For those with earned income, the social security surcharge and the social security debt surcharge are levied at source together with other social security contributions. On unearned income taxed at the income-tax rate, the social security surcharge applies, but 5.1% may be claimed back the following year. On unearned income on which withholding tax is paid, a 2% social levy (prélèvement social) applies.

Individuals must pay social security contributions and surcharges. Both social security contributions and social security surcharges are deducted at source from salary payments. These make a significant difference to gross and net salary. The contributions go towards health, pension and work-accident insurance. Contributions vary depending on business size, geographic location, business type, sensitivity of the sector to industrial accidents, whether the 35-hour working week was introduced and whether employees have executive status.

The effect of these taxes and charges are mitigated for low-income families, with at least one member employed or about to return to work since they receive an employment credit. The objective is to improve incentives to work rather than to claim social security benefits. The government has also been cutting tax rates.

Individual income tax is payable in the year after the income was earned. It may be paid in three or ten instalments. All individual taxpayers in France must file an annual declaration of income by February/March for the previous year. Individuals must also declare any foreign bank accounts on their tax forms.

There are no special tax problems for foreign business personnel. Foreign executives working in France may receive special exemptions and different treatment of allowances granted to expatriates working in France is possible.

There were seven tax rates on personal income in 2004 (payable in 2005). The government normally adjusts deductions and credits each year in line with inflation. In addition, it reduced tax rates in the 2001, 2002 and 2003 income years. They were left unchanged for the 2004 income year. Officials may arbitrarily fix tax assessments for persons whose income is difficult to trace.

Determination of taxable income
Individuals domiciled in France are liable for taxes on worldwide wages, salaries, fees and other income received in the normal course of their regular occupations. Non-French residents are only taxed on their French-source income.

Income included. Except for some capital gains taxed at a special rate, all incomes are aggregated to determine an overall income to which a tax scale with progressive brackets is applied.

Tax is also due on unearned income, but a number of savings plans offer tax-free interest. Some forms of unearned income on interest-bearing securities or on income invested in savings plans are taxed at a flat rate at source—generally 15%. The rate may be higher if money is withdrawn within a few years of the investment. Dividends are subject to withholding tax at 25% in the 2005 assessment year and will be taxed as income in subsequent years. Until the 2004 assessment year, companies paid dividends from post-tax rather than pre-tax income and dividends received were grossed up by the amount of tax paid, but were also eligible for a tax credit.

Special tax rules apply to income from life insurance and with-profits bonds. The tax status depends on when they were first taken out and the period for which they have been held. Taxpayers can opt for a flat-rate 7.5% tax for policies written since 1997 and held for at least eight years.

Deductions allowed from taxable income. A number of deductions are allowed in calculating taxable income. All expenses connected with generating income are deductible unless reimbursed by the taxpayer’s employer or other sources. Taxpayers can opt to deduct all expenses they can document or to take a flat-rate deduction from gross taxable employment income for business expenses. This is 10% of income up to a maximum deduction of €12,862 (but not less than €382).

The first 20% of income from employment, after deduction of business expenses, is tax-free up to €23,580. Withholding tax is levied on the yield on fixed-income securities, money-market investments and some forms of officially encouraged savings. The rate rose from 15% to 16% on January 1st 2005. It is a final payment not subject to later tax calculations.

Tax assessed on a family basis. Personal income tax is assessed on family groups. Spouses always file jointly except in particular cases. Thus a tax return must normally include any income earned by both spouses and their dependent children, although the children’s income may be taxed separately if this is advantageous.

Tax relief is given to families by means of the income splitting or unit system rather than by personal deductions or allowances. Under this system, the total taxable income of the family group is divided into a number of units, and the tax applicable to a single unit is multiplied by the total number of units to yield the total amount of tax payable.

Tax deductions are available for various forms of retirement planning and for investment in local business start-ups and on borrowing to finance a new company, for interest on loans taken out to finance transfer of a family business to other family members and for the purchase or medium-term lease of an environmentally friendly car. There are deductions for school-age children, and it is also possible to deduct 25% of the cost of care for children younger than age six. Some types of expenses are also deductible, for instance, alimony and support for dependants (children and parents) and charitable donations (but not medical expenses, other than those for residence in a long-term care home).

Special personal income categories. Taxable capital gains include those from sales of movable property, land and buildings (but not bonds or the taxpayer’s principal residence).

Each taxpayer has an annual capital gains allowance, which varies according to the nature of the capital gain; it is €15,000 for capital gains on investment. For investment, capital gains issued from proceeds exceeding that amount are taxed at a flat rate of 16% plus social levies, leading to an effective rate of 26%. Each taxpayer can carry out transactions worth €15,000 annually without having to declare any capital gain. Above that level of transactions, all capital gains (including on the first €15,000) are taxable.

Real-estate rental losses (as well as mortgage interest payments) are generally deductible from overall taxable income, although there are various ceilings depending on the type of investment. Property investment in France can be tax-efficient, but the tax rules depend on when the property is built, when it is acquired, the region where it is located and the use to which it is put.

France imposes a withholding tax on amounts paid to non-French residents for professional activities performed in France. The tax is levied at a progressive rate, fixed at zero up to €10,177, at 15% on the portion between €10,177 and €29,528, and at 25% above that last amount. The tax administration will refund the withholding tax paid by non-residents when the tax paid exceeds the amount that would have been due under normal domestic rules, but taxpayers must file a claim to obtain this refund.

The tax authorities take a generous approach to deductions for expatriates because they want to make France attractive for foreign investment. Individuals and their employers can maximise use of the existing deductions, although the authorities may refuse to accept some of them if the individual remains in France longer than six years (headquarters regime).

When a specific regime is elected, compensation paid to expatriates by headquarters or logistical centres of foreign companies based in France is divided into three groups:

* Allowances exempt from taxation, such as moving expenses, temporary-stay hotel expenses for both the employee and his family; expatriates claiming such deductions may not claim the 10% flat-rate deduction for professional expenses but rather must deduct all these charges as documented expenses.

* Allowances exempt from individual income taxes, but liable to corporate income tax at the level of headquarters, such as school expenses and housing allowances.

* Allowances subject to individual income tax in the hands of the employee, such as car purchase allowance and overseas premiums.

Bonuses paid outside France may be tax-exempt.

Residency

Individuals liable for income tax include anyone who is domiciled in France or earns income from a French source. It is not necessary to possess a residence permit to be considered domiciled in France. Normally, an individual is considered domiciled in France if that is the individual’s principal residence, main place of business or professional activity, or centre of financial interests.

Generally, an executive assigned to a company’s French branch or subsidiary for less than six months will not be taxed as a French resident. But an executive remaining in France for more than six months will normally be taxed as a resident, even if the stay is interrupted by frequent travel outside the country.