The company’s profits, as determined in accordance with generally accepted accounting principles, are subject to a few adjustments for tax purposes in France. Items such as non-allowable expenses on excess depreciation are added back, while others are deducted. It is worth noting that some specific tax deductions are only granted if recorded in the books: for such items, no adjustments need to be made to book income. This is the case for the excess of declining-balance over straight-line depreciation, as well as for reserves for cost increase of inventories, which is a provision designed to replace the last-in-first-out (LIFO) method (presently prohibited for both tax and book purposes). Tax credits, either French or foreign, may be offset against corporate tax but cannot be refunded.
To be deductible, expenses must meet the following conditions:
- They must be incurred in the direct interest of the business or be connected with the normal management of the enterprise;
- They must be certain in amount and must be incurred by the end of the relevant year; and
- They must be entered into the accounting books for the relevant year.
The following expenses are not deductible:
- Payments to persons established in non-cooperative jurisdictions and payments to specified persons (see below);
- Expenditure of a private character;
- Corporate tax;
- Income tax;
- Liquidation surplus tax;
- Company car tax;
- Fines and penalties;
- Interest paid to shareholders in excess of certain limits (see Sec. 13.2.);
- Gifts in excess of certain limits;
- Certain profit transfers (for example, excessive royalty or interest payments made between related parties);
- Excessive depreciation;
- Charitable donations to specified foundations or societies are deductible to the extent of 60%, which is further restricted to EUR 10,000 or 5% of the company’s turnover, whichever is higher. The balance amount of donations is not deductible, however, the same can be carried forward for five years. Effective from financial years ending on or after 31 December 2020, the deduction limit is increased to EUR 20,000, and in case of donations exceeding EUR 2 million, only 40% of the excess amount is deductible instead of 60%, subject to certain exceptions;
- Effective from 1 January 2019, certain royalty payments made to related non-resident parties are not deductible if such payments are not subject to an effective tax rate of at least 25% in the hands of the recipient and the applicable tax regime has been identified as harmful by the OECD; and
- Contribution Foncière des Entreprises (CFE), i.e., local real estate contribution of companies (see Sec. 8.1.1.) is not deductible.
In addition, certain reserves are allowed for tax purposes only when the charge is actually incurred and paid (such as organic tax accruals).
Pursuant to Art. 238 A of the French General Tax Code (CGI), payments due or made by a French resident to a person established or a resident in a low-tax jurisdiction are not deductible for French tax purposes unless the payer evidences that the payment is in remuneration of a genuine service and is not excessive. The same holds true for payments made to a bank account in a low-tax jurisdiction.
A low-tax jurisdiction is defined as one where the recipient is not subject to tax or is subject to tax by the tax liability is 60% or lower (50% or lower prior to 2020) than the tax liability which would have arisen in France if the person were a French resident. Where the payment is made to a bank account in a low tax jurisdiction, the rules apply regardless of the residence of the account holder. However, the Supreme Court ruled in a 2019 decision that where a payment is made to an account with a financial institution, the account holder may be deemed to benefit from a low-tax regime only if the tax authorities can substantiate that if the account holder were a resident of the same jurisdiction as the financial institution and conducts therein the same activities for which the remuneration was paid, his tax liability would be 60% or lower than the tax liability that would have been due in France.
Payments subject to the limitation include interest charges, commissions, rents and services fees, and royalties and similar remunerations, all as broadly defined. Also, the formulaic apportionment of charges for head office expenses or intra-group services (which is otherwise accepted subject to conditions) may be affected by the limitation since it is then not possible to prove that the payment is in remuneration of a genuine service and is not excessive.
The burden of proof in determining the existence of a low-tax regime lies with the tax administration. It is not sufficient to rely on general information on the tax system of the foreign jurisdiction, and the tax authorities are required to assess all aspects concerning the taxation of the recipient in the foreign country. In this regard, the Supreme Court ruled, for example, that the tax authorities do not substantiate the existence of a low-tax regime in Andorra and Hong Kong by relying solely on high-level information pertaining to taxation in those jurisdictions (no income tax in Andorra and territorial basis in Hong Kong). Further, the determination of the level of taxation of the recipient should be made by reference to all taxes on income or profits imposed by any level of government.
Disallowed expenses are reclassified as a constructive distribution and subject to withholding tax at the rate applicable to dividends. Late interest, grossing-up for withholding tax purposes, and other penalties may also apply. Where a treaty applies, however, one should examine whether the reclassification is possible under the relevant treaty.
Payments to persons established in non-cooperative jurisdictions (see Sec. 13.5.) may be disallowed as a deduction for French corporate tax purposes in the same way as payments to persons established in low-tax jurisdictions (see above). The main difference between both types of payments (i.e., to low-tax jurisdictions vs. non-cooperative jurisdictions) resides in the rebuttal procedure. Indeed, in order to be able to deduct payments to non-cooperative jurisdictions, the taxpayer has to prove not only that the payment is in remuneration of a genuine service and is not excessive, but also that the objective and effect of the transaction is not the shifting of income to non-cooperative jurisdictions.
Effective from 1 January 2019, new rules restrict the deduction of royalty payments to related non-resident parties that are not resident of an EU or EEA Member State. The rules limit the deduction of royalty payments to the extent that such payments are not subject to an effective tax rate of at least 25% in the hands of the recipient, and the applicable tax regime has been identified as harmful by the OECD. The non-deductible portion is determined by applying a ratio equal to:
(25% - effective tax rate)÷25%
For example, if the effective rate is 0%, 100% of the payment is non-deductible, and if the rate is 12.5%, 50% of the payment is non-deductible.
Where the royalty payment is made in respect of a sub-licensing agreement, the rule applies at the level of the ultimate licensor.
See Sec. 13.2.
See Sec. 13.5.
In response to the COVID-19 pandemic, a one-time deduction for Contribution Foncière des Entreprises (CFE) the year 2020 is provided for the local real estate contribution (see Sec. 8.1.1.) to small and medium-sized companies engaged in certain specified sectors. The deduction is available to the extent of two-thirds of the CFE, further, a list of sector activities eligible for such deduction has been published.