Inventories must be valued at the lower of cost or market. Cost must be determined in accordance with the first in first out (FIFO) or the average-cost method. The last in first out (LIFO) method is prohibited.
Capital gains generally are taxable as ordinary income and subject to CIT at the standard rate, regardless of the duration of ownership of the assets sold.
However, under restrictive conditions, a reduced rate of 10% is applied to capital gains on the disposal of patents, industrial processes connected to patents, and software, as well as on income from the licensing of patents industrial processes connected to patents, and software. Capital losses on the disposal of patents, industrial processes linked to patents, and software (either short-term losses or long-terms losses) are tax deductible.
Gains on the sale of shares in subsidiaries held for at least two years benefit from significant relief (88% of such capital gains are excluded from CIT, with the remaining 12% portion being taxed at the standard rate). Long-term capital losses cannot be offset against future long-term capital gains.
The long-term capital gain regime applies notably to capital gains from the disposition of shares benefiting from the parent-subsidiary regime only if the seller holds at least 5% of the voting rights in the entity whose shares are being disposed.
The long-term capital gain regime also applies to capital gains from the disposition of shares in an entity located in a ‘non-cooperative state or territory’ (NCST), as long as the entity can demonstrate that its activities are real and it does not seek to locate profits in the NCST.
Capital gains and losses on shares sold to a related company
Capital gains derived from the disposal of shares held in subsidiaries for less than two years are immediately taxable at the common rate of CIT.
Capital losses derived from such disposal are not immediately deductible. In such a case, the loss will be deducted if, before a period of two years (as from the date of acquisition by the purchaser):
- the vendor stops being subject to CIT
- the shares are, after a restructuring of the transferee company, held by a company that is not related to the vendor, or
- the shares stop being held by the related company (notably further to a new sale).
If no event mentioned above arises within a period of two years starting from the acquisition by the vendor, the capital loss that has not been immediately deducted is treated in accordance with the long-term regime (i.e. the capital loss is therefore not deductible).
Otherwise, the vendor has to join to its corporate tax return a specific form mentioning capital losses that are not immediately deducted.
Capital gains of non-residents
As a general rule, non-resident companies are not taxable in France regarding capital gains derived from the disposal of French assets unless these are part of a PE.
There are two main exceptions to this principle:
- Capital gains derived from the disposal of real estate assets located in France or derived from the disposal of French real estate,and of non-listed corporations.
- Capital gains derived from the disposal of shares held in a French company subject to CIT are subject in France to WHT in the specific case where the seller has owned, at any point in time during the five years preceding the sale, at least 25% of the rights in the profits of the French company, unless provided otherwise by the DTT applicable, if any. According to ongoing cases before the French administrative courts, the capital gains derived from the disposal of shares held for more than two years may benefit from the special exemption regime.
Note that in the specific case where the non-resident company is located in an NCST, all capital gains derived from the disposal of French assets are subject to WHT in France at a specific rate of 75% as long as the entity can demonstrate that its activities are real and it does not seek to locate profits in the NCST.
Dividends generally are taxable as ordinary income and subject to CIT at the standard rate.
For information on the taxation of inter-company dividends, see Participation-exemption regime in the Group taxation section.
Interest income generally is taxable as ordinary income and subject to CIT at the standard rate.
A reduced tax rate of 10% applies under restrictive conditions to capital gains on proceeds from the:
- licensing (or sub-licensing) of patents, industrial processes linked to patents, and software held for at least two years, subject to certain conditions, and
- sale of patents, industrial processes linked to patents, and software held for at least two years, subject to certain conditions.
As mentioned above, the income subject to this patent box regime is a net income (gross minus related R&D expenses and after application of a nexus ratio).
In other cases, royalties are subject to CIT at the standard rate (plus additional social contribution if relevant).
Resident corporations are not taxed on foreign-source income derived from activities carried out abroad through foreign branches and foreign PEs. Other foreign income is not taxable until actually repatriated to French-resident corporations. As a result, undistributed income of foreign subsidiaries is not taxable. The only exception to the territoriality principle is provided by Article 209 B of the FTC, known as the Controlled Foreign Company (CFC) rules (see the Group taxation section for more information).