All legal entities that carry out operations in France, other than certain sociétés à responsabilité limitée and exploitations agricoles à responsabilité limitée which may elect to be deemed transparent for income tax purposes, are subject to corporate income tax (impôt sur les sociétés). While, as a practical matter, such corporate taxpayers are subject to tax on the excess of their gross revenues over their cognizable deductions and adjustments to income, technically, they are subject to tax on the annual increase in their net worth from one fiscal year to the next, decreased by any additional contributions and increased by any distributions made to the shareholders (CGI, art. 38). This distinction, although technical, is nevertheless important because it permits the tax administration to include in a corporate taxpayer’s taxable income not only its normal operating income, but, in addition, revenue resulting from dispositions of assets, reductions in liabilities made not in the ordinary course of business and, in certain instances, increases in the value of the assets owned by the taxpayer.
Although the taxable event in France is technically expressed in terms of an increase in the net worth of the taxpayer, as a practical matter, corporate tax may be analyzed as the taxation of income. Consequently, instead of speaking of the “taxable net increase in the net worth” of a corporate taxpayer, reference will be made in the discussion that follows to a taxpayer’s “net taxable income.”
Net taxable income (bénéfice net imposable) is theoretically the net increase in a taxpayer’s net worth from one fiscal year to the next (CGI, art. 38(2)). 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, and its parent company’s, net taxable ordinary income.