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Tax and Legal Framework of Investing in France
In the following article Roland Schneider of Arsene Taxand takes a look at the tax and legal framework of investing in France.
Over the last few years, a large number of reforms have made the tax and legal framework of foreign investments in France very attractive.
From a company law standpoint, investments can be made through either a limited liability company (soci?t? ? responsabilit? limit?e - SARL) or a joint stock company (soci?t? anonyme - SA).
In a SARL, the share capital is freely determined by the bylaws. The number of partners can be limited to two, or even one. In contrast, an SA must have minimum share capital of EUR37,000 and at least seven shareholders. An SA may make a public offering of securities (appel public ? l'?pargne).
A simplified joint stock company (soci?t? par actions simplifi?e - SAS) is mid way between a SARL and an SA. The advantage of an SAS is that the organisation of the company's management as well as the relations between its partners are freely determined by the bylaws. An SAS may have only one partner and, since the introduction of the Economic Modernisation Act of 4 August 2008, no minimumshare capital is required (previously, an SAS was required to have share capital of at least EUR37,000).
Pursuant to the executive order of 24 June 2004, simplified joint stock companies may now issue preferred shares granting particular rights to their holders.
Lastly, investments may also be structured by means of a partnership (soci?t? en nom collectif - SNC), in which partners' are indefinitely and jointly liable.
French company law therefore offers a variety of possibilities for carrying out investments.
From a tax perspective, France has also become extremely attractive for foreign investments. For one, contributions are not subject to any proportional levies.
The global corporate income tax rate is 34.1/3% (corporate income tax rate of 33.1/3% and social contribution of 3.1/3 of the corporate income tax). Small companies, i.e. companies the revenues of which is less than 7,630,000 EUR and the share capital is held for at least 75% by individuals benefit from a reduced overall rate of 15% for the part of their profit up to 38,120 EUR.
Tax losses may be carried forward indefinitely. Tax losses may be carried back over the three previous fiscal years. Loss carry forwards are maintained in the event of a change in control of the company.
Companies may choose to set up a tax consolidation group, which can only include entities more than 95% owned. This regime is similar to the tax consolidation scheme in Spain.
The French tax consolidation regime includes a significant measure aimed at preventing abusive practices, namely the deduction of interest arising on artificial financing mechanisms: when a company buys shares in an entity which becomes a member of the same tax consolidation group from persons controlling the company either directly or indirectly, the deductibility of financial charges due by the group is limited. However, a number of exceptions exist, in particular when the shares are reclassified within the group immediately after their acquisition from a third party.
An SNC is a tax-transparent entity. It may opt to pay corporate income tax and hence act as parent of a tax consolidated group. The same applies to a French permanent establishment of a foreign entity.
This explains why numerous investments carried out in France by foreign groups - particularly from Spain - are structured by means of an SNC or a French permanent establishment of a foreign entity.
Holding companies also benefit from important tax advantages. 95% of dividends received by French parent companies are exempt from tax (up to 100% in some cases). Moreover, since 2007, 95% of capital gains on disposals of equity investments held for at least two years have been tax-exempt.
To qualify for such exemptions, no conditions must be met regarding the nature of revenues received by the entity in which the company holds a stake.
Interest on loans taken out to finance acquisitions of equity interests remains deductible, on condition that certain limits regarding interest paid to related parties are respected.
Interest arising on borrowings contracted outside France is not subject to any withholding tax.
Dividends paid to parent companies established in other European Union member States are exempt from withholding tax pursuant to the European Parents-Subsidiary Directive.
Regarding dividends paid to parent companies established in other member States, tax treaties generally limit the withholding tax rate to 5% (sometimes it is abolished altogether). It should be noted that France has one of the largest network of tax treaties in the world, with more than 110 different agreements.
As regards VAT, the standard rate is 19.6% and reduced rate is 5.5%
Lastly, Individual income tax rates range between 0% and 40%.
The tax regime applicable to employees seconded to France was amended by the aforementioned Act of 4 August 2008. Henceforth, the "impatriation" premium along with revenues from activities carried out outside France are exempt from income tax, while 50% of foreign-source dividends and capital gains from sales of shares are also tax-exempt.
This article has been published in November 2008 in the Spanish journal Moneda Unica and a copy of the original article is attached.
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