France: Special Corporate Tax Regimes

Whilst France is at the forefront of proposals to end fiscal distortions through the harmonization of world tax systems and even dedicated a presidency of the EU to the advancement of such an agenda, it nonetheless offers a considerable number of discriminatory tax regimes which give certain sectors of the domestic economy a significant fiscal advantage over others. These tax incentives overlap but nonetheless broadly fall into one of three categories:

• Reduced or nil rates of corporate income tax for the sectors favored. Included in this category at the time of writing are energy conservation companies, patent holding companies, business start-ups and companies locating to free trade zone areas (established in mainland France, Corsica & the French colonies). However, the free zone schemes in Corsica and the metropolitan colonies (part of EU territory) came partially to an end in 2002 as a result of EU moves to limit state aid schemes and 'unfair' tax competition. Local Investment Funds were introduced in 2003 to mobilise individual savings.

• Unusually generous tax-deductible allowances (including accelerated depreciation): This incentive has the effect of significantly reducing taxable income. The principal beneficiaries of these allowances are companies operating in the fields of mineral extraction, oil & gas exploration & publishing. Accelerated depreciation allowances are also available to all sectors in respect of certain products (e.g. software purchases).
  
• Artificially created investment tax credits which can be set off and credited against corporate income tax assessments. These are granted to companies involved in scientific & technical research and to all sectors of the economy engaged in staff training.
(N.B. Only a few of the most significant tax incentives are referred to here).

BACK TO TOP

Patent Holding Company

Resident patent holding companies pay a reduced corporate income tax rate (instead of the standard rate) on income received from entities in respect of patents licensed for exploitation. This concession does not apply if either:

• The licensee is a resident French corporation which is associated with the licensor and which is subject to corporate income tax in France; or
  
• The patent was not developed but was acquired and market value was not paid for the acquisition; or
  
• Market value was paid for the acquisition but the acquisition took place less than 2 years ago.

BACK TO TOP

Energy Conservation Entities

Companies involved in the financing, leasing or rental of energy saving equipment or plants are exempt from corporation tax on any profits earned (N.B. They are also exempted from any taxes on capital gains realized on leasing operations). The law is set out in Article 208 of the General Tax Code.

BACK TO TOP

SME

The French government has taken steps to encourage investment in SMEs over recent years. A law of August, 2007 focussing on purchasing power, labour and employment in SMEs (TEPA) was passed to allow payments for overtime to be exempt from income tax and social security contributions up to a maximum of 21.5% of remuneration.

In addition, TEPA provides for a reduction in wealth tax of up to 75% up to a maximum of EUR50,000 investment for a taxpayer investing in a non-public SME.

Small and medium businesses investing in research and development are eligible for tax credits of up to 30% of their total R&D costs.

BACK TO TOP

Tax Free Zones

Corsica Free Zone

The general conditions are:

• The company must have located in Corsica prior to December 31, 2001.
  
• The company must have a physical presence on the island in that management and property must be located there if the tax concessions are to apply.
  
• The company must not employ more than 30 employees (in certain cases it is 50 employees).
  
• Financial, banking and insurance companies cannot benefit from the scheme.

In 2003, new tax breaks were given to enterprises already established in Corsica, with tax reductions of 80%, 60%, 40%, and 20% in the years 2004 to 2007.

44 Mainland Districts

The objective of these schemes is to help to revitalize 44 economically depressed areas. The law is set out in article 44 of the General Tax Code. To be eligible for this scheme the following criteria must be satisfied:

• The scheme must have been created prior to December 31, 2001.
  
• Physical plant must be located in the zone and a significant level of the company's real economic activity must take place from within the zone.
  
• Unlike other tax free zones the list of permitted economic activities which qualify for the scheme is wide.

French Overseas Territories

This scheme applies to a number of overseas territories which come under France's fiscal umbrella:

• The scheme must have been created prior to December 31, 2001.
  
• The scheme must relate to a priority sector of the economy. This includes most sectors of the economy but excludes banking and finance.
  
• Ministerial approval is required and is granted according to whether the application serves the economic interest of the region.

Corporation tax is reduced as follows:

• There is a full and unlimited exemption from corporate income tax for a period of 10 years. (This exemption does not apply to capital gains from the sale of fixed assets and shares in the company). Moreover the exemption period is even longer for certain sectors of economic activity such as entities engaged in the research & exploitation of minerals and entities undertaking certain activities in Guyana.
  
• After the expiry of the corporation tax holiday the tax base is reduced to 66% of the actual profit made (this was applicable until 2002).
  
• There is a 25 year exemption from corporate income tax on all undistributed profits reinvested in the enterprise.
  
• There are unusually generous allowances which can be deducted from profits so as to reduce taxable income.

The law is laid out in articles 163,199, 217,1655 of the General Tax Code.

Many of the 2001 tax-free zones were due to lose their incentives in 2007; but after urban discontent in 2006, then French Prime Minister Dominique de Villepin said that the government would offer tax incentives to draw big companies to invest in tax-free zones in urban areas.

Villepin, speaking a month after urban unrest broke out in poor urban areas in many regions of France, said one aim would be to encourage big companies to give a helping hand to small and medium-sized businesses in the tax-free zones.

In return, he expected the big groups to make proposals on what they could contribute.

Speaking at a monthly press conference, the prime minister also said the government was looking at extending the scope of the tax-free zones and of prolonging and strengthening those which were due to lose their special status in 2007.

Villepin noted that at the beginning of November he had announced the creation of 15 new tax-free areas.

He said: "I want to set up a true partnership between business in favour of small and medium-sized companies operating in urban tax-free zones."

To this end "big companies will be able to deduct from their corporate taxes half of the amount they invest in the capital of small and medium-sized companies".

In return, the big companies "will have to commit themselves to accompanying the growth of the company which they are helping".

BACK TO TOP

Local Investment Funds

Local Investment Funds, which were introduced in 2003, have to use at least 60% of their capital to support small or medium sized regional enterprises, which should not be finance companies or financial holding companies. Tax benefits include exemption from tax on dividends and capital gains tax on share sales.

BACK TO TOP

Mineral Extraction Companies

Companies involved in the extraction of minerals of value to the French economy can deduct from trading profits assessed to an annual corporate income tax levy the full value of a reserve fund into which has been transferred either:

The reserve fund must be used within 5 years either to purchase capital assets, to finance research into the exploitation of mineral reserves or to purchase participating interests in companies involved in the exploitation of such reserves. If the reserve is not used in this way the fiscal concession is abrogated and the reserve is added back on to taxable profit at the end of the 5 year period and taxed accordingly.

The law is laid out in article 4C of Annex IV in the General Tax Code and was passed with a view to creating incentives for French companies to renew strategic mineral reserves in the future. It represents a significant fiscal concession.

BACK TO TOP

Oil & Gas Companies

Oil & gas companies exploiting reserves in France and abroad can deduct from taxable profits an accounting reserve fund into which they may transfer a sum equivalent to:

• 23.5% of the value of sales generated by the company exploitation of oil and mineral reserves up to a maximum of 50% of the net profit generated by the company on such sales. The funds so transferred must be used within 2 years to finance the prospecting of new reserves or to improve production of oil and gas reserves already being worked in these countries. Assets purchased with the reserve fund cannot be set off against taxable profits a second time through depreciation unless the investments are made in France in which case 80% of the assets purchased can be set off against taxable profits through depreciation. The law is set out in Article 39 of the General Tax Code.

BACK TO TOP

Media Publications

Companies operating weekly or fortnightly publications dealing largely with political matters are entitled to draw up a tax-deductible provision into which they can transfer 30% of financial profit. This provision must be used within 5 years and can only be used to finance 40% of the total cost incurred purchasing fixed assets such as equipment, furniture, land and buildings strictly necessary to run the publication. Where the funds are not so used within 5 years they are transferred back to trading income and taxed accordingly. The provision also applies where the publication is owned by an individual (as opposed to a company) and therefore subject to personal income tax (as opposed to corporate income tax). This is a significant fiscal concession and constitutes an enhanced accelerated depreciation allowance the effect of which is to greatly reduce taxable profits. The law is set out in Article 39 of the General Tax Code.

BACK TO TOP

Innovation Financing Companies ("SFI")

"SFI" are French companies which finance and facilitate the industrial application of technological research and promote or exploit inventions already patented or about to be patented which could be exploited to generate completely new applications. Companies subscribing to the share capital of an SFI can set off 50% of the capital contribution as a tax-deductible depreciation. When those shares are sold capital gains tax is not payable on the proportion of the investment that has been depreciated. The law is set out in Article 39 of the General Tax Code.

BACK TO TOP

Scientific & Technical Research

Until 2003, certain expenditure directly and indirectly related to research and development was subject to a tax investment credit which totalled 50% of the amount by which the research expenditure exceeds the research expenditure in the previous years after taking into account the average rate of inflation (calculated bi-annually).

From 2004, a new system of R&D tax credits was put in place. Credits are based on 5% of total expenses and 45% of the increase in expense over the previous period, up to a ceiling of EUR8m. R&D subcontracted to public research organizations receive a double tax credit.

In March, 2005, the European Court of Justice stated that the restriction of research and development (R&D) tax breaks afforded by the French government to research carried out in France was in contravention of EU law. The dispute concerned Laboratoires Fournier, which manufactures and sells pharmaceutical products.

The firm commissioned centres based in various EU member states to undertake research projects, and took the resultant expenditure into account in calculating its tax credit for research for the years 1995 and 1996. However, in 1998, the French Audit Directorate disallowed that expenditure for the calculation of the tax credit and issued tax adjustment notices.

Laboratoires Fournier brought proceedings before the Dijon Administrative Court, and the ECJ's opinion on whether Community law precludes a member state legislating to restrict the benefit of a tax credit for research had been sought as part of those proceedings.

Delivering its verdict, the ECJ announced: "The Court concludes that the principle of freedom to provide services precludes legislation of a Member State which restricts the benefit of a tax credit for research only to research carried out in that Member State."

' Young, Innovating Enterprises'

Young innovating enterprises with significant R& D are defined as follows:

• less than eight years old; fewer than 250 employees; turnover below Euros 50m.
• Direct R & D expenses should be at least 15% of total expenses (net of outsourced R & D).
• 75% of the capital should be owned by individuals (even indirectly) or by risk-capital companies.

No taxes will be levied for first three years, and there will be a 50% exemption for years four and five. However, financial income is taxable.

Municipalities may exempt new buildings from property taxes and professional tax owned by such enterprises for a period of seven years.

The EU does not allow such advantages to exceed a ceiling of 100,000 Euros per year.

Normally, the holder of shares in companies pays capital gains tax if the sales value exceeds 15,000 Euros. However, for shares in such companies, there will be no capital gains tax if the investor owns less than 25% of the company and if he sells them after having held them for three years.

New Enterprises In Priority Zones

New enterprises created before December 2004 established and working entirely out of certain priority zones were exempt from tax for the first 23 months. This was extended to companies created up to December 2009. At the same time, the tax exemption for 23 months is allowed if 15% of the activity is conducted out of the zone. Beyond the 15% threshold, the tax exemption would be applied to income based on the proportion of turnover realized within the zone.

Tax incentives announced in 2008

Under a stimulus plan unveiled by President Sarkozy in December 2008, companies will benefit from approximately EUR11.5bn in accelerated tax credit payments over the course of the coming year.

Traditionally reimbursed over a three-year period, tax credits obtained for research will now be repaid at the beginning of 2009 in one lump sum, a measure estimated at roughly EUR3.8bn. Value-added tax credits will also be reimbursed immediately, amounting to a further EUR3bn. Registered losses, incurred by businesses in 2008, will be compensated, with EUR2bn available from 2009.

Other measures, designed to alleviate the burden on businesses, include accelerating depreciation on new investments in 2009, thereby reducing corporate tax, and an initiative whereby the government pledges to increase its deposit payments from 5% to 20%, following the signing of a public contract.

Tax incentives announced in 2009

In a bid to entice foreign film-makers to France, a new tax incentive ratified by the French parliament in December 2008, will enable international film producers to benefit from a 20% tax reduction on production costs when they film in France.

Forming part of the 2009 Finance bill, the introduction of this international tax credit, will serve as a large incentive for foreign film companies.

Under the terms of the initiative, international producers of both foreign films and televised series will benefit from a 20% tax credit on expenses incurred in France – up to a limit of EUR4m, provided that their work has a link to either French or European culture.

According to Thierry de Segonzac, President of Ficam, the French federation of cinema, audiovisual and multimedia industries, 2008 proved a disastrous year for the industry.

Alluding to specific occasions where prohibitive production costs resulted in the cancelling of filming in France in favour of less expensive alternative locations, Ficam’s president reported that spending on four foreign film productions in France in 2008 amounted to a mere EUR3.7m.

Eager to tempt American film producers in particular back to France, Ficam extolled the new tax incentive, convinced that from 2009 it will serve to generate growth of more than EUR100m, as much as EUR200m by 2010, and EUR250m by 2015 – the equivalent of around 480 days of foreign filming in France as opposed to 120 days currently.

In a bid to spur economic development in the French overseas territories, the National Assembly approved legislation in July 2009 granting tax incentives to businesses which invest in new "Zones Franches d’Activités" (ZFA), or Activity Zones in the territories, until 2019. Eligible businesses can benefit from a 50-80% reduction of their taxable base for corporate and undeveloped land tax depending on the territory in which they are investing, and business the activity, being carried out. Research and Development and projects associated with tourism and the environment in Guyana, parts of Guadeloupe and the Réunion Islands have been designated as priortoy areas under the law. Alternatively, investors can use an 80-100% reduction for local business tax, with reductions capped at EUR150,000 and EUR300,000 respectively.

However, on June 30, 2009, Budget Minister Eric Woerth announced the government’s intention to reduce certain tax breaks whose “relevance and efficiency” appeared questionable, and to reflect on a means by which to reduce global fiscal expenditure.

In October, 2010 the French Budget Ministry published key details of the country’s 2011 finance bill, which provides for drastic cuts in public spending and for a EUR9.5bn cut in existing tax breaks.

BACK TO TOP