SIGNIFICANT DEVELOPMENTS
The 10% surtax on corporate income tax is reduced to 6% for financial years ended in 2001. It will decrease to 3% for financial years ended from January 1, 2002.For financial years ended form December 31,2000,conditions to qualify to the participation exemption regime have changed.The percentage of shareholding(including vote and financial rights) has decreased from 10% to 5%.The FF 150 million subsidiary shares acquisition price threshold in the parent company books has been canceled.
The 40% avoir fiscal rate has been reduced to 25% of the dividends distributed to companies where the avoir fiscal is utilized in 2001 (i.e.,only parent companies and individuals remain eligible to the 50% avoir fiscal rate).
TAXES ON CORPORATE INCOME
The only tax levied on corporate income is the corporate income tax. For fiscal years ending in 2001, the applicable rate is 33.33%, plus a 6% surtax of the normal corporate tax (including the ordinary tax of 33.33% and a reduced tax of 19%-see “Capital gains” below) and a 3.3% social contribution on benefits assessed on the corporate tax amount from which FF 5 million is withdrawn before reduction by the avoir fiscal credit and any foreign tax credit.No tax is levied on income at the regional or local level.A withholding tax is levied on French branches of foreign non-EU corporations at the rate of 25% or a reduced tax treaty rate (e.g., for the United States, 5%) on net profits. Refund (limited or full) of tax may be claimed to the extent that (1) the taxable amount exceeds the dividend(s) actually distributed by the foreign corporation during the 12 months following the close of the fiscal year concerned or (2) the dividends are distributed to residents of France.
CORPORATE RESIDENCE
A corporation is resident in France if it either has been incorporated in France or it has its registered seat in France. For this purpose, France is defined as metropolitan France (excluding Monaco but including the continental shelf), Corsica, and the overseas departments (French Guyana, Guadeloupe, Martinique, Réunion, St. Barthélémy, and St. Martin).
OTHER TAXES
Turnover taxes/Value added tax (VAT) is imposed on goods sold and services rendered in France. The normal rate is 19.6%. Other rates of 5.5% and 2.1% apply to specific sales and services. Exports and certain specific services invoiced to non-French residents are zero rated.Business tax/The rate of this local tax varies; it is assessed on the rental value of fixed business assets and on salaries and wages. The latter basis is being gradually phased out until it is repealed in 2003.
BRANCH INCOME
Tax rates on branch profits are the same as on corporate profits. However, as a principle, branch profits are deemed to be distributed to the head office. The total corporate tax burden on a subsidiary’s profits distributed to the U.S. parent (from 38.55 to 38.59) is now the same as on income of a U.S. company’s French branch.Profits realized in France by foreign corporations whose head offices are located in a European country are not subject to withholding taxes, provided that certain conditions are met (effective head office in a European country; foreign corporation subject to corporate taxation).
INCOME DETERMINATION
Inventory valuation/Inventories must be valued at the lower of cost or market. Cost must be determined in accordance with the FIFO or the average-cost method. The LIFO method is prohibited. Temporary inventory relief is available where inventory cost per unit increases more than 10% over two consecutive years. Any excess increase over 10 percentage points may be reserved. The amount reserved is added back to taxable income after six years.Capital gains/Capital gains are generally taxable as ordinary income, regardless of whether assets have been held for more or less than two years.However, capital gains resulting from the sale of shares in subsidiaries held for at least two years, as well as royalties derived from the licensing of patents and patentable know-how, still qualify as long term and may continue to benefit from the reduced rate of 19% (increased by the 6% surtax and the social contribution on benefits).Long-term capital gains less the 19% tax thereon must be appropriated to a special reserve; the balance of corporate income tax (14.33%, ignoring the 6% surtax and the social contribution on benefits) becomes payable if this reserve is distributed to shareholders but not if it is offset against operating losses or later long-term capital losses, contributed to share capital, or distributed upon liquidation.Intercompany dividends/ French parent companies (i.e., companies incorporated in France and holding qualifying shares that represent at least 5% of the issued capital of subsidiaries, French of foreign) have the option of excluding 95% of the subsidiaries’ net dividends from corporate income tax (a 5% charges a
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