The depreciation of fixed assets has to be carried out component by component. The components of a fixed asset have to be depreciated separately according to their own lifetime.
Declining-balance depreciation is allowed for certain new and renovated assets whose useful life is in excess of three years.
For assets bought or manufactured between 4 December 2008 and 31 December 2009, the rate is computed by multiplying the rate of straight-line depreciation by:
- 1.75, if the useful life of the asset is three or four years
- 2.25, if the useful life of the asset is five or six years, or
- 2.75, if the useful life of the asset is more than six years.
For assets bought or manufactured after 31 December 2009, the rate is computed by multiplying the rate of straight-line depreciation by:
- 1.25, if the useful life of the asset is three or four years
- 1.75, if the useful life of the asset is five or six years, or
- 2.25, if the useful life of the asset is more than six years.
A temporary investment incentive measure was introduced by the Finance Bill for 2016, enabling companies to claim an additional deduction equal to 40% of the asset investment, provided the investment meets the following three conditions:
- Conditions of the fiscal special depreciation regime (i.e. a new asset having a minimum useful life of three years).
- Belonging to some limited categories defined by the government (industrial assets, such as plant machinery and equipment, manufacturing equipment, and research operations fittings).
- Investments made between 15 April 2015 and 14 April 2016.
The Finance Bill for 2017 extended this incentive measure to companies that invest under the following three conditions:
- The investment has been firmly decided before 15 April 2017.
- The investing company has paid, before 15 April 2017, an instalment that amounts to at least 10% of the total investment cost.
- The final acquisition of the investment occurs within a two-year period following the date of beginning of the purchase order.
Special depreciation rules have been enacted for 'green' road transportation equipment. Said rules apply until 31 December 2021.
With the aim to facilitate the digitalisation of the French economy, exceptional depreciation rules apply as of 1 January 2019 to investment in robots, 3D printers, and other digital based equipment.
A special depreciation regime is also available for green shipping in relation with investment made between 1 January 2019 and 31 December 2021.
Under current French tax rules, goodwill (e.g. clientele, trademarks) cannot be amortised.
No specific rules apply regarding deduction of start-up expenses, except the qualified expenses incurred in establishing the company (so called ‘frais d’établissement’), which can be either deducted or depreciated over five years.
Research and development (R&D) and software expenses
Concerning R&D and software expenses, a business may elect to immediately deduct costs incurred in R&D of software or to amortise their cost on a straight-line basis over a maximum period of five years.
The cost of acquiring software may be written off on a straight-line basis over 12 months.
The cost of patents acquired can be amortised over a five-year period.
Interest expenses are tax deductible but subject to various limitations applicable to all loans or to related-party loans.
Restriction of interest deduction
A test is applicable to the existing rules governing interest deductions for financing by a party that is directly or indirectly related to a French borrower.
Interest deductions are allowed only if the French borrower demonstrates that the lender is, for the current financial year, subject to a CIT on the interest that equals 25% or more of the CIT that would be due under French tax rules. When the lender is domiciled or established outside of France, the CIT determined under French law equals the tax liability that the lender would have owed on the interest had it been resident or domiciled in France.
Taxpayers must provide documentation to support the CIT calculation if requested by the French tax authorities.
Furthermore, the interest rate is capped to a specific rate defined by the FTC, or a higher rate if the taxpayer can demonstrate that the market rate applicable to its situation would be higher than the rate provided by the FTC.
The ‘Carrez’ rule was anti-abuse legislation preventing interest deductions in France relating to French or foreign participations acquired by a French entity but effectively managed outside France.
This restriction no longer applies to financial years opened as of 1 January 2019.
Additional limits on interest deductions
The deduction of financial charges is provided by general and specific rules applicable to related parties financing. .
The net financial expenses incurred in a given year are deductible only if they do not exceed the higher of the two following thresholds:
- EUR 3 million.
- 30% of the adjusted taxable income of the taxpayer (i.e. EBITDA).
Financial expenses and income used to determine the net amount referred to above include, inter alia, amounts that are accrued in remuneration for monies put at the disposal of or by the taxpayer. They include, but are not limited to:
- Payments under participating loans.
- Imputed interest on financial instruments (e.g. convertible bonds).
- Notional interest amounts under derivative instruments or hedging arrangements.
- Certain foreign-exchange gains and losses.
- Guarantee fees for financing arrangements, arrangement fees, and similar costs related to the borrowing of funds.
The adjusted taxable income corresponds to the taxable income before the offset of tax losses and without taking into consideration net financial expenses and, to some extent, depreciation, provisions, and capital gains and losses. 75% of the net financial expenses exceeding the threshold is tax deductible, provided that the equity-to-asset ratio of the company is at least equal to, or is not lower by more than two percentage points, the equity-to-asset ratio of the consolidated group to which it belongs.
Non-deductible financial expenses of a given year are carried forward indefinitely within the above-mentioned limits. Unused interest deduction capacity of a given financial year can be carried forward for up to five years.
Please see comments regarding thin capitalisation in the Group taxation section.
Bad debts that are definitively non-recoverable are treated, from a tax point of view, as deductible charges.
Under certain conditions, a tax-deductible reserve can be established for debts whose collection is uncertain.
Charitable donations made by companies to certain foundations or societies are deductible at up to 60% of their amount (limited to EUR 5,000 of the turnover before taxes).
Fines and penalties
As a general principle, fines and penalties are not tax deductible for CIT purposes.
Most taxes, including unrecoverable turnover taxes, registration duties, and CET, are deductible. The major exceptions are CIT and tax penalties, which are never deductible.
Carryforward of tax losses
Tax losses carried forward are available to offset the first EUR 1 million of taxable profits and 50% of taxable profits in excess of this.
The carryforward is conditional to certain limitations, namely that the entity continues the same business activities. The FTC provides criteria for measuring such a change of activity that jeopardises the right to carry forward net operating losses.
Under certain circumstances, a ruling can be obtained from the French tax authorities to keep all or part of the net operating losses despite a business reorganisation.
Carryback of tax losses
Tax losses are available for carryback to the fiscal year immediately preceding that in which the losses arise and up to a maximum of EUR 1 million. Any unused surplus will be carried forward and used as set out above. In addition, the election to carry back tax losses must be filed prior to the deadline for submission of the tax return for the loss-making period.
The overall tax losses of a French tax group, as well as pre-election tax losses of the individual members of the group, will be attributed, whether carried forward or carried back, in the same manner and within the same limits as those set out above.
Payments to foreign-related parties
Unless otherwise provided by the FTC, payments to foreign affiliates are deductible from the CIT basis as long as they meet the arm’s-length test. If they do not, Article 57 of the FTC provides that income directly or indirectly transferred to the foreign-related parties, through either the increase or the reduction of the purchase or sales price of goods and services, or through any other means, must be added back to taxable income. For the purpose of this provision, foreign-related parties are defined as a parent, subsidiaries, or sister companies.
Where the payments are made to companies located in a country with a privileged tax regime, the French taxpayer must prove, in addition, that the transaction is bona fide and that the amount due is not exaggerated (see the Group taxation section for more information on countries with a privileged tax regime).
The FTC restricts the conditions for deducting licensing royalties where the licensor and the licensee are related parties. The deduction will not be possible if the related-party beneficiary is not liable to an effective tax rate of at least 25% on this income.