France tax: Reform of france business tax underway

The French tax administration is circulating a draft regulation that would replace the highly unpopular business tax with a "territorial economic tax" (TET).

The business tax (la taxe professsionnelle) is an annual local tax due by all enterprises in France (with some limited exemptions). The basis of the tax is the rental value of a company's tangible fixed assets (i.e. buildings or land and moveable assets) used for business purposes. The taxable basis for the business tax due in year Y (e.g. 2009) corresponds to the fixed tangible assets used in year Y-2 (2007 where Y is 2009). The business tax liability of a company is limited to 3.5% of the value added in the year, but it may not be lower than 1.5% of the value added for enterprises with a turnover exceeding EUR 7.6 million.

The proposed TET would generally have the same scope and exemptions as the business tax, but would be comprised of a "local business tax" and an "additional tax."

The local business tax component would correspond to the current business tax assessed on the rental value of tangible assets. However, the draft regulation proposes the following substantial changes:
- The tax base would be limited to buildings or land used for business purposes; moveable assets would be outside the scope of the tax; and
- The rental value of industrial assets would be reduced by 15% in comparison with the current rules.

The rate of the additional tax would be progressive, ranging from 0% to 1.5%. Enterprises with a turnover less than EUR 500,000 would not be liable to the additional tax and the rate would be 1.5% when turnover exceeds EUR 50 million. The turnover taken into account to determine the applicable rate of the additional tax would not be limited to turnover generated by the taxable enterprise on its own, but would be extended to turnover generated by all other companies the enterprise directly or indirectly controls. Further, the additional tax would be added to the local business tax, whereas the current business tax liability assessed on the value added is reduced by the business tax liability assessed on the rental value of tangible assets.

Finally, a capping mechanism would apply to the TET depending on the value added, which is comparable to the current capping mechanism amounting to 3.5% of value added, although no rate has been proposed as yet.

The draft, which is in very preliminary states, has been circulated to the regional and municipal tax authorities and business representatives for comment and discussion. If approved by the French Parliament, the changes would become effective in 2010.