Business Taxation

General

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.