Net taxable income is theoretically the net increase in a taxpayers net worth from one fiscal year to the next. Such net increase is equal to the difference between the net book value of assets at the beginning and at the end of the fiscal period, decreased by any additional contributions and increased by any distributions made during this period to the shareholders. The net book value of assets is the excess of the value of the assets over the total liabilities which consist of debts owed to third parties, depreciation and reserves relating to future liabilities. The result is the net taxable ordinary income. Capital transactions are subject to rules of taxation which are different than those applicable to ordinary income. If a company subject to corporate income tax is a member of a corporate group, special rules may be applicable for the determination of its net taxable ordinary income
DETERMINATION OF GROSS ORDINARY INCOME
The gross ordinary income of a commercial enterprise is defined as its total revenue from all operations carried out in France and such other income as is made subject to French tax by double taxation treaties. Although dividends received by a company are included in its taxable income, a number of special tax rules apply to the taxation of such income
- EXCLUSION OF CERTAIN FOREIGN SOURCE INCOME
All income earned by a company subject to French corporate income tax from business operations carried on abroad by a permanent establishment or by a qualified agent acting on its behalf, or as a result of a complete commercial cycle performed abroad, is not taxable.
For purposes of the foregoing, a corporate taxpayer is deemed to have a permanent establishment abroad where it engages in profit-making activities in a foreign country, and, in connection therewith establishes a permanent installation such as an office, factory or storage facility, hires personnel to operate same, and grants to such personnel a certain degree of autonomy for the negotiation and conclusion of commercial contracts.
A qualified agent is an agent who, without being an employee of the French corporate taxpayer, acts for and on its behalf in such a manner that he may be deemed to be dependent thereon. A corporate taxpayer is deemed to perform a complete commercial cycle abroad where, from France and without a permanent establishment in the foreign country, it conducts an entire business transaction such as the purchase and resale of goods.
In order for income earned abroad by a corporate taxpayer to be exempt from French tax, it must have been derived from activity which is regularly performed abroad as opposed to an occasional transaction. In practice, this requirement is difficult to satisfy and, where France has entered into a double taxation treaty with the country in which the taxpayer regularly carries out activities, the taxpayer must, in fact, have a permanent establishment in such country to benefit from this exemption.
A company subject to French corporate income tax is entitled to deduct all expenses incurred for the benefit of and in connection with its normal business operations. As a general rule, a business expense is deductible only if it results in a decrease in the net worth of the taxpayer. Deductible expenses may be divided into four categories:
1.purchases of material and merchandise,
A corporate taxpayer may deduct the amount of all purchases of material and merchandise it made in the ordinary course of business during the fiscal year, as well as all expenses ancillary to said purchases such as transportation expenses, insurance premiums and customs duties. The amounts of such purchases are deductible on an accrual basis.
In order to be deductible, overhead expenses must satisfy the following three conditions: first, they must be related to and necessary for the operation of the business of the taxpayer; second, they must be evidenced by appropriate documentation and represent an actual expense incurred by the taxpayer; and third, they must not result in an increase in the net worth of the taxpayer. As a general rule, the business expenses which a taxpayer may deduct for a taxable year are limited to those which accrued during such year.
Only those fixed assets which are necessary to and are actually used in the operation of the taxpayers business are depreciable. As a general rule, tangible fixed assets are depreciable; land, securities and intangible assets are not, in principle, depreciable, however, unless they have a limited useful life. The expenses incurred by a taxpayer for research and development may, at the election of the taxpayer, be either deducted during the year they were incurred or treated as a fixed asset and depreciated.
The two principal methods of depreciation in France are the straight-line depreciation method and the accelerated depreciation method. In certain circumstances, an exceptional depreciation is allowed.
When analyzing the tax situation of a French company, it is important to distinguish between accumulated profits which must be the subject of a balance sheet entry under the rubric réserves and deductible amounts set aside in order to meet accrued liabilities, estimated expenses or other contingencies which must be the subject of a balance sheet entry under the rubric provisions.
As a general rule, losses which were actually incurred as the result of the operation of the taxpayers business or which result from certain events occurring in the normal course of business and which affect the assets of the taxpayer are deductible in the taxable year during which they were incurred.
- LOSS CARRY-FORWARDS
As a general rule, if the net worth of a taxpayer decreases during a fiscal year, the amount of such net loss is deductible from the taxable ordinary income realized by the taxpayer during the following fiscal year if the taxpayer elects not to carry back such net loss Such net loss may be carried forward indefinitely until such time as it may be used to offset net taxable income. Loss carry-forwards may normally not be transferred to another taxpayer; only the taxpayer who actually incurs the tax loss may benefit there from, and only if it does not change its corporate purpose or activity. Accordingly, in the case of a merger, spin-off or partial spin-off, loss carry-forwards generally may not be offset by the transferee company against its income. The Ministry of Economy may, however, make a special ruling permitting such an offset.
- LOSS CARRY-BACKS
If certain conditions are satisfied, any net loss realized by a taxpayer during a fiscal year, as well as unused net losses carried forward may, upon the election of the corporate taxpayer, be deducted from the taxable ordinary income it realized during any of the three fiscal years preceding the Loss Year to the extent that the income which is offset as a result of such loss carry-back has not been distributed to shareholders.
In order to qualify for the foregoing loss carry-backs, the taxpayer must not have been a party to a merger, spin-off, partial spin-off, have ceased doing business or have been the subject of a judgment ordering liquidation in bankruptcy during the Loss Year.