France is a semi-presidential republic. The president, directly elected head of state, appoints the prime minister as head of government. The territory of France is made up of 18 administrative regions: 13 metropolitan (i.e. European France) and 5 overseas. All five overseas regions, together with Saint-Martin (French territory in the Caribbean), are considered part of the EU (with the status of the outermost region). Strasbourg, a French city, is one of the three official headquarters of the European institutions, together with Brussels and the city of Luxembourg.
CIT = Corporate Income Tax - corresponding to IRPEG
SSC = Social Security Contribution - corresponding to the Social Contribution (Employee + Employer)
The most important sectors of the French economy in 2018 were public administration, defense, education, health and social assistance (22.4%), wholesale and retail trade, transport, hotel and restaurant services (17.8%) and professional, scientific and technical activities; administrative activities and assistance services (14.0%).
59% of France exported to the EU: Germany 14%, Spain 8% and Italy and Belgium 7%; in non-EU countries it exported 8% to the United States and 4% to China.
69% of France imported from EU Member States: Germany 18%, Belgium 10% and the Netherlands 8%; from non-EU countries, on the other hand, it imported 5% from both the United States and China.
The French tax system is generally based on the principles of equality, ability to pay and progressiveness, set out in the 1789 declaration of human rights. For their implementation, the transalpine legislator - in adopting a tax return type articulated in national taxes and local taxes, divided according to the destination of the revenue - has privileged not only the taxation of assets but also that of the income deriving from it (property taxation) in parallel with the taxation of consumption (indirect taxation) and of the income produced by the activity of natural and legal persons (personal taxation) ._ cc781905-5cde-3194-bb3b-136bad5cf58d_
The withholding tax on income (“prélèvement à la source”) has been in force since 1 January 2019. The reform affects taxpayers who receive wages and salaries, pensions and replacement income and provides that the tax is withheld at source by the person who pays the income, based on a rate communicated directly by the Administration.
Therefore, the French now pay taxes during the year in which the income is produced. The changes also concern those who receive self-employment and land-based income; in this case the tax is withdrawn from the current account on a monthly or quarterly basis, in the form of advances.
Taxation of natural persons
Without prejudice to international conventions against double taxation, in France the liability to income tax (IR) is not linked to the nationality of the taxpayer, but to the principle of territoriality. In fact, both natural persons who have their fiscal domicile in France for income produced wherever they are produced and natural persons who do not have their fiscal domicile in France for income produced within French territory are subject to IR.
In order for a person to be considered fiscally domiciled in France, one of the following requirements must be met:
have in France the foyer (i.e. the house in which the taxpayer and his family usually reside provided that this residence is permanent) or the main place of stay (which occurs when, in the space of a year, more 183 days in French territory);
exercise in France an activity (whether waged or not) from which the production of an income derives;
to have the center of economic interests in France.
Individuals not fiscally domiciled in France are liable to tax depending on whether or not they have a residence in French territory. In the first case, the taxpayer discounts the IR on the basis of the income produced by the property. In the second case, the taxpayer is not subject to IR unless he has income from French sources, i.e. income from goods, rights or activities located in France (for example, income from real estate, income from agricultural, commercial or artisanal enterprise exercised in France, sums deriving from artistic or sports services performed or used in France) or income or remuneration received by a debtor domiciled in France (for example pensions and annuities regardless of the country in which the service being remunerated was rendered, sums received by writers or by composers and their heirs or legatees under copyright) ._ cc781905-5cde-3194-bb3b-136bad5cf58d_
The rules of taxation: fiscal foyer and family quotient
The taxation of natural persons is established not on an individual level but on the basis of the fiscal foyer (the "tax nucleus"), that is, the family entity that can be composed of a single person (unmarried, widowed, divorced or separated) from a married couple (regardless of the type of matrimonial regime), by persons (also of the same sex) linked by a de facto union regulated by a PA.CS (civil solidarity pact) and by the persons who are dependent on them.
Therefore, the taxpayer for IR purposes is not the individual but the "tax nucleus" and the tax base is constituted by the sum of the income earned by the persons considered to be part of the tax nucleus .
The tax base and the rates
Once the income category to which they belong has been identified, the income earned by each member of the fiscal foyer must be added up to determine the tax base. This total gross income is then decreased:
of the deductible charges incurred in the tax year, duly documented, which have not already been taken into consideration for the determination of the individual income categories. They are strictly provided for and essentially concern expenses related to the personal situation of the taxpayer (e.g. charges that are compulsory such as maintenance payments to ascendants or descendants, periodic allowances paid to the divorced spouse, contributions paid to supplementary pension schemes, social security contributions paid in accordance with the law);
abatements foreseen on the basis of family burdens, age or personal situation.
The current rates, ranging from 0% to 45%, are as follows:
income up to € 9,964 at 0% rate
income from € 9.965 to € 27.519 at a rate of 14%
income from € 27,520 to € 73,779 at a rate of 30%
income from € 73,780 to € 156,244 at a 41% rate
income over € 156,245 at a 45% rate.
Investment income is subject, from 1 January 2018, to a flat-rate tax (ELT) set at 30% (12.8% for income tax, plus social contributions at the rate of 17.2%). The income items subject to the ELT are, in particular, all capital income (interest, distributed income, dividends, director's fees and similar income), including interest accrued on residential savings accounts (PEL, CEL) open to starting from 2018.
Taxation of companies
The corporation tax (IS) is compulsorily applied to corporations and similar (SAS, joint stock and simple joint stock companies, limited liability companies, limited partnerships and some cooperatives) due to their legal form. and regardless of the corporate purpose. Furthermore, due to the nature of the activity carried out, the SI applies to civil industrial companies and more generally to companies that carry out commercial activities or carry out transactions of a lucrative nature. On the other hand, partnerships and similar bodies can opt for taxation to the IS. Territorial public bodies (regions, departments, municipalities, public institutions of inter-municipal cooperation with their own taxation, municipal unions and mixed unions made up exclusively of local authorities or their groupings) are totally exempt from IS. On the other hand, companies that establish themselves in certain areas of the French territory characterized by economic and social hardships benefit from a temporary exemption from the IS (e.g. Corsica, regional aid areas, areas of rural revitalization, sensitive urban areas, areas of urban redevelopment, urban free zones, competitiveness poles).
A transfer pricing decree completed the implementation and implementation of action 13 of the Beps Project (Base erosion and profit shifting), which establishes a series of binding measures against aggressive tax planning by corporate groups which, by exploiting the existing regulatory disparities between the tax systems of individual states and jurisdictions reduce their effective tax burden. This new Decree provides further details for taxpayers on the content and methods of submitting transfer pricing documentation to enable interested parties to be fully compliant with the new Article L 13 AA of the French procedural tax code. The Decree establishes that the documentation relating to transfer prices (for example, Master File and Local File) must be delivered in electronic format in the case of a tax audit, at the request of a tax inspector. The Decree also provides that the data tables contained in the transfer pricing documentation must be submitted in electronic format to allow the French tax authorities to verify any type of calculation.
The tax base and the rates
On the basis of the principle of territoriality, only the profits of companies that carry out their activities in France, including through a permanent establishment, regardless of nationality, are subject to the SI. It follows that taxable companies in France cannot deduct losses incurred by their foreign companies from their operating results. However, subject to the authorization of the Ministry of Economy, for some companies there is the possibility of determining the taxable income on a consolidated basis. With regard to research and development and software expenses, a company may decide to immediately deduct the costs incurred for software research and development or to amortize the cost on a straight-line basis for a maximum period of five years. The cost of acquiring the software can be amortized on a straight-line basis over 12 months. The cost of the patents acquired can be amortized over a period of five years. Charitable donations made by companies to certain foundations or companies are deductible up to 60% of their amount (limited to € 5,000 in turnover).
According to the action plan envisaged by the 2018 Finance Act, the corporate tax rate cuts apply over a five-year period as follows:
for tax years starting January 1, 2018 or later, the standard rate for all companies is 28% on taxable income up to EUR 500,000 and 33.33% on taxable income above this amount;
for tax years starting January 1, 2019 or later, the standard rate for all companies will be 28% on taxable income up to EUR 500,000 and 31% on taxable income above this amount;
for tax years starting on or after January 1, 2020, the standard rate for all companies will be 28%;
for tax years starting on or after January 1, 2021, the standard rate for all companies will be 26.5%;
for tax years starting on or after January 1, 2022, the standard rate for all companies will be 25%.
Corporate groups, on the other hand, can opt for the so-called tax integration regime which allows the French parent company to integrate at least 95% of the profits made by the French subsidiaries in its tax profit and to pay the IS for all the companies of the group. French companies and their 95% owned national subsidiaries can choose to file a single tax return, thus allowing the losses of a group company to be offset against the profits of an associated company. Tax is then levied on total income after some adjustments have been made to provisions within the group (e.g. debt reliefs, dividend distributions).
Successions and donations
If the deceased or donor is fiscally resident in France, the tax will be payable on the value of the assets wherever transferred. Regardless of whether the donor or donee has tax residence in France, the tax will be payable on all personal and real assets located in France. Inheritance tax is applied to the transferred assets at their current market value. Debts existing at the time of death are fully deductible. No inheritance tax is due for inheritance between spouses or partners of a Pacte civil de solidarité (Pacs) and for inheritance between brothers and sisters living together.
Heritage and real estate
Article 31 of the 2018 Finance Act canceled the wealth tax (ISF) in force in France since 1982 by replacing it with a real estate tax (IFI) intended exclusively for real estate.
Value added tax
Natural and legal persons who carry out transactions for consideration attributable to an activity (regardless of its nature) other than that of employment or that is not expressly exempt are subject to VAT. The activities carried out by legal persons governed by public law as a "public authority" are outside the scope of application of VAT except in cases where this exclusion entails a distortion of competition (in general, these are public services of an industrial and commercial which can be given in concession by local authorities to private companies). The ordinary rate is set at 20%. For particular categories of goods or services, three reduced rates are envisaged: the 10% rate is applied to the purchase and import of certain goods and services, such as agricultural, fishery and poultry products that have not undergone any transformation, forestry products and plant protection products, passenger transport services, personal services, the sale of food products intended for immediate consumption and medicines that cannot be reimbursed by the national health service; the rate of 5.5% applies to the sale of prepackaged food products, services for the disabled, the supply of gas and electricity and heating produced from renewable energy sources, the administration of meals in school canteens, books on any medium (digital, paper), to admission tickets to live shows and cinemas, to the sale of works of art, collectibles or antiques, to construction and renovation works of public housing, to renovations that contribute to energy saving, to improving accessibility for disabled people and to bringing buildings used as homes built for more than two years up to standard; the 2.1% rate is applied to certain shows, editorial products and publications (including online), to medicines reimbursable by the national health service, to the TV license .
Customs and excise duties
Depending on the country of origin, the goods may be subject to customs duties. The rules are aligned with EU customs regulations.
Some specific goods are subject to excise duties, in particular:
Alcohol and alcoholic beverages (e.g. wine, beer, ethyl alcohol);
Processed tobacco (e.g. cigars, cigarettes, tobacco);
Oil and gas products.
Declarations, instrumental obligations and payment of taxes
The “prélèvement à la source” (Pas) has been in force since 1 January 2019, which provides for the withholding tax on income from employment, retirement, self-employment and land. Before the reform, income was received gross and taxes paid during the following year. Under the new rules, the French will instead pay taxes during the year in which the income is produced; income taxes will therefore be paid on a pay-as-you-earn (Paye) basis. The reform concerns taxpayers who receive wages and salaries, pensions and replacement income (such as unemployment benefits): the mechanism provides that the tax is withheld at source by the person who pays the income on the basis of a rate communicated directly by the Tax administration. The new regulation also affects those who receive income from self-employment and land; in this case, however, the tax is withdrawn from the current account on a monthly or quarterly basis, in the form of advances. For citizens who do not pay taxes (for example those who receive low income), nothing changes but the obligation to submit the tax return remains.
It is possible to opt for a different rate. For example, in the event of income inequality within the couple, the spouses can request that an individual tax rate (taux individualisé) be applied based on their respective income rather than single for both (normally, in fact, the rate is fixed taking into account the income of the family unit). The rate will then be updated to take into account the changes that have occurred after the presentation of the new tax return. When fully operational, for employees and retirees the tax will automatically adapt to what is received, with the possibility, at any time, to ask the Administration to update the Pas rate if one's economic situation changes during the year.
Controls by the Administration
The Tax Administration may issue notices of assessment which may consist of a vérification de comptabilité, a contradictory examination of the personal tax situation (ESFP) or an examen de comptabilité. In the first case, the accounting documents are examined at the company headquarters and compared with material or factual data to check the correctness and truthfulness of the declarations. The second check (ESFP) allows to verify the consistency between the declared income and the actual financial situation of the taxpayer. The third verification (accounting examination) consists of a "remote" control; once the notice has been received, the company has 15 days to send the Administration the dossier with the accounting records referring to the indicated period.
Social security contributions
The French social security system is made up of various schemes offering a wide range of benefits. This system includes basic social security coverage (sickness, maternity, disability, death, accident at work and old age pension), unemployment benefit, mandatory supplementary pension plans, supplementary death / disability coverage and supplementary health coverage.
Contributions are divided between employer and employee; on average, the share of contributions payable by the employer represents 45% of gross salary. For 2021, the employee's share of French social security contributions represents approximately 20% to 23% of the salary. However, as contributions are valued using different ceilings, the average rate will decrease as gross earnings increase.
Employer contributions paid to supplemental health coverage schemes (which are mandatory and collective) are mandatory.
In general, for any employee carrying out a paid activity in France, the employer retains the worker's share and pays the employer's share of the French social security contributions. However, France has agreements with more than 40 countries whereby expatriates temporarily transferred to France can remain under the social security schemes of the country of origin and are exempt from French taxes (scope of the exemption according to the applicable provision bilateral agreement), provided you have a valid certificate of coverage.
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