France: Business Tax reform introduced

In one of the most significant reforms in decades, the French Finance Bill for 2010 abolishes the controversial local business tax (taxe professionnelle). The business tax – a tax unique in the EU – was an annual tax based on the "rental" value of a company's buildings and equipment owned or used for business purposes.

As from 1 January 2010, the business tax is replaced by the Territorial Economic Contribution (Contribution Economique Territoriale (CET). The CET has two components: the Cotisation Foncière des Entreprises (CFE) assessed on the rental value of buildings and the Cotisation sur la Valeur Ajoutée des Entreprises (CVAE) computed on the basis of the added value generated by the company.

The CFE is based exclusively on the rental value of property located in France, with a specific 30% reduction for industrial buildings. This component of the CET has inherited many characteristics of the old business tax, but no longer taxes investment (such as machinery and equipment and other tangible assets), which overall comprised about 80% of the basis of the business tax.

The CVAE is determined by applying a rate to the added value generated by the company. The rate is 1.5% for large companies with turnover exceeding EUR 50 million, but it is progressive for small and medium-sized companies (between 0.5% and 1.5% depending on turnover). In practice, companies with a turnover below EUR 500,000 will benefit from a full exemption from the CVAE (an additional credit of EUR 1,000 is available for companies with turnover below EUR 2 million). It should be noted that the CVAE is based on a new and extensive definition of "added value." For most taxpayers, the CVAE is computed based on adjusted receipts minus eligible items. However, the added value cannot exceed 80% of the company's turnover (85% if turnover exceeds EUR 7.6 million).

The CET (i.e. CFE + CVAE) is capped at 3% of the added value (3.5% under the old business tax). The limit can only ever operate to reduce the CFE component. To limit any negative impact of the reform, transitional relief applies for the next four years (between 2010 and 2013).

Ultimately, companies will pay less in local tax, which is consistent with the recovery plan the government outlined in December 2008. According to official estimates, the tax burden on companies investing in France will be reduced by about EUR 4.8 billion per year (after corporation income tax).