Corporate income tax policy in France

Corporate income tax in France, is a direct, annual tax applied to a company’s profits. Compared, for example, with the United States, where it was introduced in 1909, its institution can be described as recent. Initially, France only had an income tax, introduced in 1914 by the Caillaux reform to finance the war effort.

In 1948, a reform was introduced to introduce a corporate tax on profits, so that legal entities are taxed independently on the basis of their wealth.

France’s corporate income tax rate was consistently 50% until 1985, when it was gradually reduced.

Today, more than 75 years after its creation, the standard corporate income tax rate is 25% of taxable profit. Lowering this rate is a response to the fierce tax competition between countries, accentuated by the creation of the euro zone.

The reduction in France’s corporate income tax rate has been gradual and recent, starting in 1985 (I.), and impacting companies in France (II).

While the 1985-1991 period saw a reduction in the corporate income tax rate, it also saw the introduction of differentiated rates applying separately to taxable profits on the one hand, and dividends on the other.

Starting in 1985, the rate was initially lowered to 45%, before rising to 34% on retained earnings and 42% on distributed earnings in 1992.

This trend towards lower rates was not just French, but worldwide, with the average nominal tax rate on profits falling from 40.4% in 1980 to 24.2% in 2019. From January 1, 1993, the differentiated rates were replaced by a single rate of 33.3%. The reason for this reduction was the opening up of a single, integrated market, and attempts to harmonize corporate tax policy within the European Union. To this end, France has abolished the distinction previously made between distributed and retained profits.

In addition, since 2002, SMEs have benefited from a reduced rate of 15% applicable to the portion below €38,120 until December 30, 2022, then €42,500 from January 1, 2023.

The existence of such a reduced rate appears uncommon: only 10 out of 34 OECD countries had such a rate in 2015.

Starting in 2017, the gradual reduction in France’s corporate income tax rate resumed, reaching, in stages, 25% in 2022 for all companies and in 2021 for companies with sales of less than €250 million.

This reduction in the corporate income tax rate has been accompanied by a number of measures, the main ones being the abolition of the tax credit and the withholding tax, and the significant narrowing of the long-term capital gains regime, which now applies exclusively to certain company shares after having been applicable, until 2005, to all disposals of fixed assets.

Lowering the corporate income tax rate and exempting capital gains on securities has boosted France’s competitiveness and tax appeal for foreign investment. In addition, by bringing the French rate closer to the average rate of 24.2%, it provides an incentive to slow the relocation of activities and encourage relocation.

By reducing the tax levied on profits, this cut reduces the tax burden on companies’ cash flow, thereby improving their self-financing and distribution capacities. In this respect, the budgetary cost of lowering the rate from 33.3% to 25% has been estimated at around €11 billion in 2022.

The measures taken to accompany this reduction have simplified and made more secure the tax management of companies, while at the same time generating tax costs resulting from the virtual disappearance of the long-term capital gains regime.

In the consolidated financial statements, the multiplicity of corporate income tax rates and their gradual reduction have led to frequent adjustments to deferred tax assets and liabilities, making them difficult to compare.

After 40 years of lowering the corporate income tax rate, it would be desirable for the 15% and 25% rates to have as long a life as the 50% rate.

Our tax law department is at your disposal to provide assistance and expertise.