Legal news

Aid has been set up to support companies affected by the health crisis. Should this aid be included in the taxable income? Answer at the time of the tax returns.

Financial aid. Your company may have been able to apply for direct aid of up to €1,500 from the solidarity fund, particularly if it has been closed down by decision of the administration, or if it has suffered a loss of turnover of at least 50%. In addition, it could apply for additional aid of between €2,000 and €5,000 if it had one employee, could not pay its debts within 30 days and was refused a cash loan. Finally, the Council for the Social Protection of the Self-Employed (CPSTI) has set up an exceptional financial aid for all merchants and craftsmen, without any steps to be taken, the amount of which corresponds to the supplementary pension contributions paid on the basis of their 2018 income and can be up to €1,250. If you were not able to benefit from these aids, your company may have been able to benefit from the exceptional financial aid paid by the CPSTI to self-employed workers.

… not taxable. The cumulative amount of these aids can thus reach up to 9 250 €. And fortunately, it will not have to be included in your company’s taxable income, nor in your professional income on your income tax return.

What about the government guaranteed loan? An exceptional government guarantee is granted for loans granted from March 16, 2020 to June 30, 2021 inclusive to non-financial companies registered in France, by credit institutions and finance companies. The amount of the loan granted to your company is capped at 25% of the turnover excluding VAT in 2019 (i.e. three months of turnover). The repayment of the loan is deferred for a minimum of 12 months and then spread over a period of up to five years.

Tax treatment. The tax treatment here is the same as for any loan made by your company. The amount borrowed is not taxable and the repayments are non-deductible, except for the loan interest.

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

The French overestimate the amount of inheritance tax they will have to pay and have little knowledge of the mechanism.

Understanding how they are calculated in order to evaluate their importance is essential when considering the transfer of one’s estate.

Here are the instructions to follow, step by step, through the example of a couple married in community of property, with two children and a common heritage of 1 million euros.

• Identify the assets that are part of the estate

When couples are married without a marriage contract, all assets (housing, car, securities…) purchased during their union are common.

At the death of the first of them, half of these assets become part of the estate and will go to his heirs, including the surviving spouse.

The other half continues to belong to him.

The estate then includes the assets that belonged to the deceased (those acquired before the marriage or received by donation or inheritance, even afterwards).

Be careful, the income from the own property is common property. If the deceased owned a property that he rented out, the rents are common property as explained by the solicitor network.

• Assessing the value of the estate

The real estate assets are evaluated at their market value, except for the couple’s main residence which generally benefits from a 20% deduction upon the death of the first spouse.

As for the furniture (beds, tables, silverware…), it is possible to retain a flat rate of 5% which is calculated depending on all the other assets of the estate.

However, it is often preferable to estimate the furniture by making a detailed inventory (their value is often less than 5% of the value of the house).

• Calculating the share of the estate for each child

In the absence of a will or a donation to the surviving spouse, the children share either three quarters of the estate (if their surviving parent opts for one quarter of the estate in full ownership), or they share the bare ownership of the entire estate (if the survivor opts for usufruct).

This second case is, by far, the most frequent.

The spouse does not pay any duty on his or her share of the estate.

As for the value of the bare ownership of the children, it is evaluated according to a scale fixed according to the age of the usufructuary parent.

For example, on an estate valued at 500,000 €, the bare ownership is worth 400,000 € if the surviving spouse is between 81 and 90 years old (80% of 500,000 €) and is worth 450,000 € if he or she is 91 years old or older (90%).

• To abate 100,000 (E) of the deduction from which each one benefits

The value of the bare ownership is shared between the children.

From their individual share, the allowance currently fixed at 100 000 €, from which each one benefits, must be deducted.

For example: on a bare ownership of 400,000 €, each receives 200,000 € and is taxed on 100,000 € (after deduction of the allowance of 100,000 €).

This deduction is only fully effective if the deceased did not make any donation to his children in the 15 years preceding his death.

If the children have benefited from it, the 100,000 € deduction has already been used or has been used up. In this case, only the balance is available.

Example: if the children already received 70,000 € ten years before the death, only 30,000 € of the allowance remains to be deducted.

All donations made by the deceased under 15 years are taken into account, whether they are handmade or notarized, with the exception of family donations of cash, which are exempt up to 31,865 € (these are gifts of money made to a child who has reached the age of majority before 80 years).

Donations declared to the tax authorities for more than 15 years are ignored when calculating the inheritance tax.

• Apply the progressive scale

On the net taxable share of each child, the scale of inheritance tax “in direct line” is then applied.

This scale is progressive.

As the taxes are calculated child by child, the bottom of the scale (taxed at 5% and 20% up to 552 325 €) is used each time.

As a result, the more children there are, the lower the tax payable.

Example: for a taxable asset of 400,000 €, the rights to be paid are 58,194 € in the presence of an only child, 36,388 € if there are two children (18,194 € per child) and 14,582 € for three children (4,861 € per child).

• Estimating the inheritance tax on the surviving spouse’s estate

When the second spouse dies, the children are taxed on the surviving spouse’s assets.

Namely: half of the joint property he/she owned, his/her own property and, possibly, one quarter of his/her spouse’s estate which he/she inherited.

If he/she had opted for the usufruct of his estate, the children do not pay any tax on the value of this usufruct which falls to them when the surviving parent dies in turn.

Example: the children are only taxed on the 500,000 € of joint property that belonged to the survivor. The 100,000 € of usufruct will revert to them without additional tax.

If the surviving parent has not made a donation to them in the last 15 years, the children receive another 100,000 € allowance on their share and each of them benefits from the bottom of the inheritance tax scale.

• Summary for the entire estate

To find out the level of taxation of the family estate to be passed on, simply add up the taxes due by each child after the death of each parent.

Thus, according to the estimations the solicitor network, for a joint estate of 1,000,000 €, the taxes to be paid total are 136,388 € in the presence of one child, setting a tax rate of 13.64%.

With two children, this rate falls to 9.28% (92,776 €) and to 4.92% with three children (49,164 €).

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

Furnished rentals are the provision of furnished living quarters when they include all the furnishings necessary for a normal living situation for the tenant.

Income from renting furnished accommodations of which you are the owner and income from subletting furnished accommodations of which you are the tenant are subject to income tax in the industrial and commercial income (BIC) category, not in the property income category.

Exemption from tax on furnished rentals:

Furnished rental income earned by people who rent or sublet a portion of their primary residence before December 31, 2023, is not taxable in the following two situations:

Situation 1: when the income does not exceed €760 per year and the rental is for people for whom the rented premises are not their primary residence (bed and breakfast);

Situation 2: when the rented premises are the primary residence of the lessee or sublessee (or temporary residence if he/she is a seasonal worker), the income is also not taxable if the following three conditions are met :

• The rooms rented or sublet must be part of the landlord’s principal residence ;
• The rented or sublet rooms must be the primary residence of the renter or subletter, or their temporary residence if they are seasonal workers;
• The rental price must remain within reasonable limits.

Mode of taxation:

There are two regimes applicable in the case of furnished rentals: the micro regime and the real regime.

1. A) Micro-BIC regime

Depending on the income from the previous year and the year before, if it does not exceed €72,600 for a classic furnished rental, or €176,200 for a classic furnished tourist accommodation or guest rooms, the micro regime can be applied.

A deduction of 50% is automatically applied to the income from such rentals for classic furnished accommodation (as well as rural cottages not classified as “furnished tourist accommodation”) or 71% for classified furnished tourist accommodation and guest rooms. Its minimum amount is 305 €.

This deduction is at a fixed rate to cover all your expenses. For this reason it is not possible to deduct any expenses in order to reduce your taxable income. You must declare the total amount of rent received, including rent payments (i.e. allowances for expenses paid by the tenant).

1. B) Real regime

The other applicable regime is the real regime, which applies when income exceeds the limits of the micro BIC system or when you want to deduct the exact amount of your expenses or depreciate your assets.

The real tax regime requires accounting records to be kept.

Regardless of how taxpayers fall under the real tax regime by right or by choice, special rules apply depending on whether they are professional or non-professional landlords.

Regardless of the type of landlord, this activity is subject to registration with the Business Formalities Center (for non-professional landlords, the Commercial Court Registry).

1) Professional Furnished Landlord

The activities of a furnished accommodation landlord are professional if the following two conditions are met:

– The annual income from this activity for all family members exceeds €23,000 per calendar year;

– This income exceeds the family’s income taxable income in the categories of wages, industrial and commercial profits (except those derived from the activity of renting out furnished accommodation), agricultural profits and non-profit profits.

The activities of a professional furnished accommodation landlord are subject to registration with the Business Formalities Center.

2) Non-professional landlord of furnished housing

If one of the above conditions is not met, the landlord is considered a non-professional landlord.

A non-professional landlord of a furnished accommodation requires registration with the Business Formalities Center. This is the Commercial Court Clerk’s Office where the property to be rented is located.

The registration must be done within 15 days of the start of the rental of the property using a P0i form.

This will allow :

• obtain a SIRET number ;
• make it known that the activity exists;
• indicate the taxation system you have chosen.

Note that in the case of more than one furnished rental, the jurisdiction of the Commercial Court is the one in which the property generating the most income is located.

The difference between a professional and non-professional furnished accommodation landlord:

1. A) Differences regarding damages

1) For non-professional furnished accommodation landlords

Losses incurred as a result of a non-professional furnished rental are carried forward for the next 10 years solely on the income from the non-professional furnished rental.

Example: you are engaged in a craft activity that is taxable as a professional BIC and you rent out a furnished dwelling. Your non-professional furnished rental property results in a loss of €1,000 in year N, while the income from your craft business is €2,000. Your taxable income for income tax purposes in year N is €2,000. You cannot deduct the loss from the non-professional rental of a furnished accommodation from the result of your craft business.

In year N+1, your non-professional furnished rental generates €300 and your craft business generates a profit of €20,000. Your taxable income for income tax purposes will be €20,000 and the loss carried forward from your non-professional activity will be reduced to €700 (€1,000 – €300). You will be able to carry it forward up to N+9 on any profits made in those years. 

2) For professional landlords of furnished accommodation

Losses incurred from furnished rental activities carried out on a professional basis can be deducted from the taxpayer’s total income without any limit on the amount. If the total income is insufficient, the total negative balance so generated may be carried forward to the next 6 years.

The determination of these negative values must, of course, comply with the rules of the general tax code for deducting expenses. So, for example, losses should not arise from depreciation excluded from deductible expenses.

Example: you are a professional landlord and your spouse is an employee. In N your professional activity of renting out furnished accommodation forms a loss of €10,000, while your spouse’s taxable salary is €40,000. Therefore, your family’s taxable income would be €30,000 (€40,000 – €10,000). No loss can be carried forward to the following year.

In N+1, your business as a professional landlord of furnished premises has generated a loss of €20,000, while your spouse’s salary is €10,000. Thus, for N+1 your household’s taxable income would be zero. A total negative balance of €10,000 (€10,000 – 20,000) would arise. This total loss will be deducted from the total income of subsequent years and cannot be carried forward beyond six years.

1. B) Differences regarding capital gains from real estate

1) For non-professional landlords of furnished housing

Capital gains realized on the disposition of your furnished accommodation are taxed as private capital gains. As such, they are not subject to professional capital gains regime.

2) For professional landlords of furnished housing

Professional furnished tenants are subject to the professional capital gains system on the disposition of rented premises.

Capital gains of professional landlords, provided they have been in business for at least five years, are fully exempt from tax if the average rental income from the property in the two calendar years preceding the closing date of the fiscal year in which the capital gain is realized does not exceed the €90,000 tax-free threshold, and partially exempt if the same income ranges from €90,000 to €126,000 (tax-free).

Nicolas BRAHIN

Lawyer of the Bar of Nice

Specialist in banking and financial law

Panthéon-Sorbonne University

Cabinet BRAHIN Avocats

nicolas.brahin@brahin-avocats.com

The brackets of the progressive scale used to calculate the 2020 income tax are revalued by 0.2% as of January 1, 2021. This revaluation is set according to the evolution of consumer prices excluding tobacco in 2020 compared to 2019. People who declare more than €10,084 in income over the year will have to pay income tax (instead of €10,064 last year). This is stated in Article 4 of the Finance Act for 2021.

The new income tax scale has revised ceilings:

• for the 2nd tax bracket, an income ceiling increased to €25,710 (instead of €25,659 for the previous year) ;

• for the 3rd bracket, an increase in the ceiling to €73,516 (instead of €73,369).

How is the income tax calculated?

The amount of tax is calculated from the net taxable income by:

• dividing the net taxable income by the number of units;

• applying to this result the progressive tax scale by bracket;

• multiplying the result obtained by the number of family quota units to obtain the amount of tax due.

For example, a married or civil union couple with two minor children has a net taxable income of €55,950.

This couple has 3 units (2 units for the couple and a half unit for each child), the net taxable income of 55 950 € is divided into 3 = 18 650 €.

The scale is then applied to the 18 650 €:

• income bracket up to 10 084 € taxed at 0% = 0

• income bracket 10 085 € to 25 710 € taxed at 11% : 8 565 € (obtained by calculating 18 650 – 10 085) x 11% = 942,15 €.

Our advice to fulfil your tax declarations in the best way

The introduction of withholding tax (“prélèvement à la source”) does not exempt you from completing and validating your income tax return (“déclaration de revenus”).

Due to the health crisis, the deadlines for completing and validating the declaration have been extended.

I/ Employees : abatement or actual costs 

Business expenses (“frais professionnels”) have an important place in the tax return.

If you are an employee, your expenses are automatically “covered” by a flat-rate deduction of 10%, with a minimum of 441€ and a maximum of 12.627€.

However, if it is in your interest, you can deduct your expenses for their actual amount (only if you have kept proof of your expenses).

This option is annual.

The deduction of actual expenses is advantageous if your expenses represent more than 10% of your salary, including allowances for professional expenses.

The lower your salary, the easier it is to justify expenses exceeding this limit, especially if you had to move in 2019 to take up a new job (moving expenses), if you work far from home (travel expenses), etc.

II/ Rental properties : micro-financial or actual regime 

If you have rented out one or more unfurnished properties, you are automatically covered by the micro-financial scheme (“régime micro-foncier”) as long as your rentals do not exceed 15.000€.

The tax authorities will calculate your taxable property income by applying an allowance of 30% to the amount of rent declared.

You will therefore only be taxed on 70% of this sum, whatever the level of your charges.

You can give up this scheme to deduct your charges for their real and justified amount.

This option commits you for 3 years.

It applies to all your rented properties.

It is advantageous when your expenses represent more than 30% of your rent.

This can be the case if you have renovated a property before renting it out or between two tenants.

But be careful because this year, an anti-optimisation measure introduced because of the “white year” due to the withholding tax, provides that in the event of taxation according to the actual regime, maintenance, repair and improvement work carried out in 2019 is only deductible up to the amount of the average expenses paid in 2018 and 2019.

III/ Declaring your stock market capital gains (“plus-values boursières”) correctly 

Capital gains (“plus-values”) realized in 2019 following the sale of securities or corporate rights (shares, company shares, bonds) are taxable in 2020.

The capital gain or loss corresponds to the difference between the sale price of the security sold (minus disposal costs such as trading commissions, brokerage fees, intermediary commissions, expert fees, etc.) and the acquisition price (plus acquisition costs).

The overall net capital gain or loss for 2019 corresponds to the net result of all your disposals (“résultat net de l’ensemble de vos cessions”).

In principle, your capital gains and losses in 2019 have been calculated by the financial institutions holding your securities.

At the beginning of the year, they must have sent you tax forms with the amounts to be declared.

Please note : if you made a global capital loss in 2019, this can only be charged against your capital gains of the same nature made over the next 10 years.

IV/ Real estate wealth tax (“impôt sur la fortune immobilière”) 

The health crisis does not affect in any way the valuation of the assets to be declared for the “IFI”, the real estate wealth tax.

It is necessary to retain its value on 1 January 2020.

If your real estate assets (debts deducted) exceed 1.3 million euros, you are liable for this tax and must declare them (form n°2042-IFI).

The due dates are identical to those for income tax.

On the basis of this declaration, the tax authorities will calculate the amount to be paid, usually by 15 September.

The crisis has no impact, that is why the main issue of the declaration is still to assess one’s assets.

For instance, anything that complicates the sale also affects the value of the property.

Thus, it is admitted, even if it is not official, a discount of 10 to 30% for properties given in rent (“biens données en location”), and 10% for those held in non-trading property companies (“sociétés civiles immobilières SCI”) or in joint ownership (“indivision”).

However, it should be noted that the Court of Cassation has refused to reduce the value of a principal residence owned jointly by a married couple under the regime of separation of property (“régime de séparation des biens”).

As the sale of the property by a single spouse is unlikely, joint ownership does not affect its value.

Nevertheless, the couple could benefit from the 30% allowance on the principal residence.

On the other hand, the tax authorities limit the deduction of debts : if your home is worth 1 million euros, you cannot deduct more than 700.000€ in loans, property tax, works, etc.

Please note : if you own your accommodation via a  non-trading property companies, you do not benefit from the 30% allowance.

Until 2018, companies benefited from a reduced corporate tax rate on the sale, concession and sub-concession of eligible intellectual property assets: either a reduced rate of 15.5% (Article 39 terdecies of the French General Tax Code), or a unique rate of 12.8%, plus social contributions, if they were liable to the income tax regime.

France’s favorable tax system has been thoroughly re-examined in the 2019 Finance Bill in an effort to render it compatible with the OECD’s recommendations to link the intellectual property revenue with the Research & Development activities that have generated it (L 2018-1317 of 28 December 2018, Article 37).

COMPATIBILITY WITH THE OECD’S “NEXUS” APPROACH

The new article 238 of the French General Tax Code (CGI) adopts the OECD’s so-called “nexus” approach that aligns R&D expenditures with the conferment of tax benefits (the former article 39 terdecies, 1, of the CGI was deleted).

The new favourable tax system is conditional upon the exercise of an option and differs from the previous regime in two main aspects:

• The benefit eligible for the preferential treatment is no longer the net benefit of the sale (the capital gain) or the concession (products minus management fees), but rather the brut revenue drawn from the assets, minus any R&D expenditure incurred to develop the IP asset in that same period of time.
• More importantly, the “nexus ratio” applied apportions income according to a ratio of expenditures: it determines what income may receive tax benefits by calculating the ratio of qualifying to overall expenditures incurred to develop the IP asset. It intends to ensure that the IP income that benefits from the regime is linked back to the entity that has incurred the R&D expenditures by contributing to that IP.

NEW REDUCED TAX RATE

The new tax rate is lowered to 10 percent for corporate companies, and also for inventors (natural, and not legal, persons), who were until then subject to a tax rate of 12,8%.

This lowering of the tax rate was justified by a reduction of the taxable base subject to the favourable tax system. The objective was to guarantee companies competitive opportunity, “without falling into the trap of entering a race to the bottom” on corporate taxation, as said by Mr Noël Giraud, the General rapporteur of the French National Assembly.

INCLUSION OF NON-PATENTED BUT PATENTABLE INVENTIONS

The 2019 Finance Bill has made non-patented, but patentable, inventions eligible under the following two cumulative conditions:

• The invention’s patentability must be certified by the National Industrial Property Institute (INPI);
• The business in question must be a small to mid-size enterprise (SME).

INCLUSION OF ORIGINAL SOFTWARE

The framework laid out in article 238 of the French General Tax Code (CGI) is also applicable to software with protected copyrights, as intended in 13° of Article L.112-2 of the French Intellectual Property Code (CPI). This includes software preparatory design material.

To enjoy the protection afforded by this Code, the software must be original in character.

DOCUMENTARY OBLIGATION

The application of this new regime is accompanied with a requirement of documentation introduced by article L. 13 BA of the French Tax Procedure Code (Livre des procédures fiscales). This unprecedented obligation is intended to provide the administrative body with all the relevant information on the benefits drawn by the asset from the preferential tax regime and the expenses incurred while working in the R&D sector.

This documentation must be available to the administration at the date of the accountability inspection, if need be.

Article 740-0 C has been added to the French General Tax Code to impose a sanction, more precisely a fine of 5 % of the revenue subject to the reduced tax rate, if this obligation is not respected.

SPECIFIC CONDITIONS WITHIN A TAX GROUP

In application of the provisions of article 223 H of the French General Tax Code, the new regime is applicable to the tax group as a whole rather than to each member company. The option is exercised by the parent company.

For each asset or group of assets owned by or under the concession of a company, the sale, concession and sub-concession net result, as well as the corresponding “nexus ratio”, are calculated at the level of the tax group to which the company belongs.

The parent company, and not its subsidiaries, is responsible for providing the tax declaration and for fulfilling the documentary obligations. However, the overall result declared by the parent company must detail the amount of gross revenue received from and the amount of eligible expenses incurred by each company in the group.

UNDETERMINED BUDGETARY IMPACT

The budgetary impact of the reform has not been estimated since the extent of the consequences of the changes brought to the favourable tax system vary considerably from one company to another.

For instance, the cost of the preceding tax arrangements under Article 39 terdecies amounted to 663 million of euros in 2017 and 365 million of euros in 2018. The annual average amounted to 456 million of euros between 2012 and 2018.

The General rapporteur, Mr Joël Giraud, highlighted in his report that the shrinking of the tax base as a result of the “nexus” approach could result in a net gain for the state in comparison with the current situation, despite the inclusion of software and the 10% tax rate.

In addition, Mr Albéric de Montgolfier, the rapporteur of the 2019 Finance Bill of the Senate, said that “there is no reason to think that the adoption of the new regime leads to a massive loss of France’s attractiveness in regard to Research and Development activities, notably thanks to the existence of the Research Tax Credit (CIR).”