France has a very sophisticated and developed tax system for both companies and individuals. In particular, the fiscal authorities often enjoy a reverse burden of proof and will generally consider not only the form but also the substance of a potentially tax mitigating structure. In particular, transactions must be seen to have commercial and/or trading veracity and preferably should be with a respectable and non 'black-listed’ jurisdiction (see below). Notwithstanding the above, French companies are not, unless there has been a specific election to the contrary, taxed on their worldwide income. This territorial concept of taxation can provide significant benefits where French companies establish foreign branches. In effect, the profits of such branch operations will normally be outside the French tax net provided there are no direct remittances.
- Location: South of the United Kingdom, northeast of Spain and west of Germany. It has the largest landmass of any Western European country covering an area almost equivalent to that of Britain and Italy combined.
- Size: 210,000 sq. miles or 554,400 sq. kilometres
- Population: 65,951,611 (2013)
- Development: France is Europe's second greatest industrial power after Germany. It manufactures approximately 3 million cars per annum, has large chemical and pharmaceutical sectors together with the world's third largest armaments industry. In addition, it is also the European Union's largest producer of agricultural products, perfumes and up-market wines. Nevertheless, at present the French economy is suffering from increasing unemployment, an inefficient public sector and pressure to meet various currency convergence criteria. In fact, for the first time many French nationals have had to seek employment outside of France, especially in the economically robust United Kingdom.
- Capital city: Paris with a City population of 2,211,297 (2013) whilst the Metropolitan Île-de-France area has 11,659,260 (2013), which makes it technically the largest City in Europe, world famous for its architecture, cuisine, nightlife and culture.
- Currency: The Euro (€)
- Education level: Highly educated population
- Language: French is the principal language and is spoken universally. However, a number of other languages are still used including Breton, Basque, Corsican, Provencal (Occitan) and to a limited extent Catalan.
- Legal system: The French legal system like virtually all of Continental Europe is based on civil law. Unlike common law countries, the legal system is fully codified and it severely restricts the ability of judges to interpret the law. Nevertheless, in general a civil law judge will have greater ability to partake and influence a case's presentation than would normally be the case in England & Wales, Ireland or the United States of America
- Trade Bloc Membership: France is one of the 6 founding members of the European Union. The country has probably had more influence on the structure of EU bodies than any other member including Germany. The traditional dominance of the EU by France and Germany is currently under threat as the recent accession states have close ties to the United States.
Major Legal Entities
Companies: Sàrl's, Eurl's, SA's & SAS's
In France, as in most other European countries, there are both private and public companies. In the case of the former the principal company is a société à responsabilité limitée (Sàrl) which is controlled by a company manager. The minimum capitalisation is technically as little as €1.00 but thin capitalization rules mean that few companies will actually capitalize at this level. At the time of incorporation, at least 20% of the capital must be fully paid up. Under current legislation it is now possible to have only one initial shareholders (the maximum being 50). All Sàrl's must submit annual accounts although as in Britain smaller companies need not submit audited accounts to the fiscal authorities. Apart from Sàrl's, there are also single subscriber companies such as enterprises unipersonelle à responsabilité limitée (Eurl's) which were introduced to provide individuals with limited liability. Fiscally, as with US limited liability companies (LLC's), Eurl's will normally be transparent for tax purposes, although as in many other instances under French tax legislation, it is possible to elect standard corporate tax treatment. In the case of public companies the main vehicle is the société anonyme (SA). However, it should be noted that an SA need not be publicly quoted. In addition, all SA's must have 7 or more initial subscribers although they can be nominees. Another version of the SA is the société par actions simplifiée (SAS), which is basically a SA meant for joint ventures and, therefore, only requires 2 subscribers.
The Importance of Fiscal Election in France
Unlike many other countries, in France tax legislation [which is governed by various tax laws and the code général des impôts (CGI) allows company managers and directors great flexibility in choosing how their companies should be assessed for tax. If an imprudent election is made it can result in very serious tax consequences. For example, a French company that has a foreign branch must decide whether it wishes to be taxed on the normal 'territorial* basis or whether it should be taxed on its world-wide income. Of course in many instances, the standard territorial system (which does not require any specific election) will work in favour of companies with profitable foreign branches, especially if located in fiscally beneficial jurisdictions (but see anti-avoidance caveats below). The result in general being that undistributed income held by a foreign branch will not be subject to French tax. If and when foreign branch profits are distributed, double taxation is most often avoided by either appropriate tax treaty provisions or when no treaty exists, an equalization payment if the foreign tax paid is less than French tax. However, where foreign branches and/or subsidiaries are not profitable the failure to elect* to be taxed on world-wide income (which when made is difficult to rescind) could result in an unnecessarily high tax burden. The two main non-territorial tax elections are bénéfice mondial and the bénéfice mondial consolidé.
Non-Territorial Tax Elections
Bénéfice mondial: This allows foreign branch activities to be included in a French company's returns (see Art. 209 CGI).
Bénéfice mondial consolidé*: This allows for a single submission to be made at the end of a financial year for all branches, subsidiaries and/or partnerships in or outside of the French jurisdiction provided at least 50% of the equity is controlled (see Art's 103-134 and 209 CGI) by the French mother company
*CONSENT MUST BE APPLIED FOR TO THE MINISTRY OF FINANCE.
Partnerships: SP's, SNC's & SC's
- Société en participation (SP): This is a basic partnership which is not a separate legal entity and which in most cases need not be declared to third parties or file individual accounts. In theory, it is not even necessary for an SP to have a partnership agreement although this could cause potential problems should there be any future disputes. In cases where the existence of an SP has not been declared to a third party, the contracting individual signing any given contract will be fully responsible to that person/entity. However, the non-declared partner will generally (subject to any contrary agreement) have to then pay the declared partner 50% of the claim amount;
- Société en nom collectif (SNC): This is basically a general partnership where all parties are jointly and severally liable for debts with profits being ascribed pursuant to the partnership agreement. This structure, as with an SP, may result in a greater risk to a wealthier partner than to a poorer partner. Further, unlike an SP an SNC is a separate legal entity which must register with the commercial court, always inform third parties of its existence and maintain its own accountancy records;
- Société en commandite (SC): This is the French equivalent to an American limited partnership with both general and limited partners. A general partner is one who manages the limited partnership and is fully liable for his actions. A limited partner, on the other hand, has no liability other than the sum(s) that he agreed to invest in the partnership. Apart from the above, the requirements and obligations of an SC are almost identical to those of an SNC;
- Société civile: These are partnerships which are normally fiscally transparent and are used for non-commercial real estate acquisition and management, professional, agricultural and research bodies. For fiscal transparency, SI 655 of the code général des impôts (see also sections 1845 -1871) must be satisfied. The specific requirements being: That the activity in question is only carried on in France and, that the modis operandi is not of a commercial nature which, of course, does not exclude private property acquisition and, that no services will be supplied to third parties other than specifically related to the performance of the non-commercial activity. The registration requirements and legal obligations relating to a société civile are closely related to a Sàrl but rather than two shareholders there must be two partners. There are no specific capitalisation requirements and equity investments (be they in cash or kind) will be represented by parts d'interet (de facto share representations), which will be evidenced in the partnership agreement. Of particular interest to foreigner partners is the société civile immobiliere (SCI) which, because of the fiscally transparent nature of these vehicles, may circumvent local corporation and inheritance taxes, the legitima portia principle and the capitalisation requirements of a Sàrl but unfortunately not capital gains tax
Registering a Branch of a Foreign Company in France
In France, the branch of a foreign corporation registered with the commercial court, is called a succursale. In essence, it must satisfy the same criteria demanded of a local Sàrl save that: There are no minimum capitalisation requirements. An important consideration country with the relatively high capitalisation demands of France and, there are no specific auditing requirements as there can be for larger Sàrl's, and, the succursale is not a different legal entity to its mother company. Obviously, all local French legal criteria must be satisfied but it should be noted there might be additional tax treaty and accountancy benefits.
For more information on the French Tax System please contact one of our tax planning consultants.