The corporate tax system has evolved again with the 2018 French Government Budget Act. One of the main changes is the graduated decrease of the corporate tax rate, which is an important issue on the business taxation. Indeed, tax burden of the companies will be reduced, and the competitiveness of the French economy improved. Even though most of you have done their corporate tax return for 2018, details should be specified the changes for the small and medium-sized enterprises (SMEs) for the next fiscal years.
General principle: reduction and harmonization of the corporate tax rates
First of all, no company now has to pay the exceptional or extra 15% contribution. Even though this measure was only temporary, and the government decided not to renew, large companies paid much more corporate tax in 2017.
Next, the main change of this reform is the graduated decrease of the corporate tax rate until 2022. This reform will be undertaken in two stages. The corporate tax rate will be 28% in 2019 and 2020 on the first €500,000 of annual profits of your company. The corporate tax rate will be 31% in 2019 and then 28% in 2020 above the first €500,000 of annual profits. From 2021, tax brackets will disappear. The corporate tax rate will be 26.5% in 2021 and 25% in 2022 on the total of your profits.
As a result, cash flow of French companies should improve, and the government thus hopes to boost investment, trade and domestic consumption. According to the IFRAP Foundation (French Institute for Research on Public Administration and Politics), GDP might increase by several billion euros each year with such a reform (up to €21 billion in 2022).
Exception of the rule: the continuation of certain preferential corporate tax rates
Besides this general fall of the corporate tax rates, preferential rates are still applicable in some cases.
Firstly, profits from patent royalties are for the moment still taxed at a reduced rate of 15%.
Secondly, capital gains from the concession of business premises or building plots are taxed at a rate of 19% in some tense areas 1 only. This reduced rate only applies to buyers who undertake to turn premises into houses or to build new housing. (List of French municipalities in tense areas: Droit et finances – Comment ça marche)
For a long time, the question has been raised of extending the preferential corporate tax rate of 15% on the first €38,120 of profits for companies with an annual turnover of €50 million excluding VAT. However, the French government rejected this proposal and made the decision to establish criteria to apply this preferential rate. Companies remain subject to the corporate tax system as well as having to satisfy the following criteria:
• The company’s turnover excluding VAT must not exceed €7.63 million
• The entire capital of the company must be paid-up
• At least 75% of the capital must be held by natural persons or companies which have the parent company status.
Understand the effect of the corporate tax system reform for a SME
Let’s take the example of the public company (Plc.) Martin. This company has a turnover excluding VAT of €6 million and makes €450,000 of profits thanks to sales of building timber. The first part of its profits (€38,120) will be taxed at 15%. In 2019 and 2020, the part above €38,120 will be taxed at 28%. If its profits remain stable, the amount of the tax will be €115,326. In 2021, this company will have to pay only €109,148 and in 2022, €102,970, a tax saving of €12,356 compared to 2018. The tax saving is even €34,323 if the former 33.1/3% rate is used to calculate the amount due in 2018. It is one less cash outflow for Martin Plc. and therefore a net cash gain of this amount.
However, as a business leader or member of the finance management, you must be particularly careful about the threshold effect, represented by the threshold crossing of €7.63 million excluding VAT in turnover. For example, in 2018, if the Martin Plc. passes this threshold while making fewer than €500,000 of profits, all the profits would be taxed at the single rate of 28%. On the first €38,120 of profits, the increase of corporate tax would be €4,956.
In addition, the crossing of €500,000 of profit threshold will not really represent a threshold effect. Profits above €500,000 will be taxed more until 2021, but the first €500,000 of profits will not be impacted.
To conclude, this reform, which should improve the competitiveness and profitability of French companies, falls within an approach to standardize a number of fiscal rules at the European level. As early as the 2019 Government Budget Act, this reform was supplemented by a reform of the tax consolidation system and the system of deduction allowed for financial expenses.
1 tense areas correspond to French municipalities in which the imbalance between housing supply and demand (difficulty of access to housing, high levels of rents) is significant.
