Nicolas Jacquot

French business tax (taxe professionelle), which was created in 1976, is one of the four direct taxes collected by local councils. Any individual or legal entity engaged on a habitual basis in a no-salaried or professional activity is liable to this local tax, the rate of which is decided by local councils each year. The tax has two bases: the rental value of property, and equipment and movable assets, used for the needs of the business activity.

For this reason, it is commonly considered as a burdensome tax penalising investments and generally speaking industry (compared to services). It is seen as a way of encouraging businesses to move abroad to avoid this high tax requirement of operating in France.

Reform of business tax was presented on September 30 2009 and will be discussed by the French parliament until the end of the year. The reform should, according to the French government, lead to a reduction in business tax for a significant majority of taxpayers. For taxpayers that will be liable to an increased amount of business tax as a result of this reform, a transitional relief should be applicable until 2014.

As from January 1 2010, it is proposed that the existing business tax will be replaced by the so-called Cotisation Economique Territoriale (CET). CET will consist of two elements: the Cotisation Locale d'Activité (CLA) assessed on the rental value of properties and the Cotisation Complémentaire (CC) computed on the basis of value added.

The scope of the new tax will largely remain unchanged except for one significant change being the renting of unfurnished real estate which will expressly fall into the scope of the new tax.

CLA will only be assessed on the rental value of the property. Other tangible assets that were previously assessed will no longer be taxed. The determination of the rental value of the property will remain unchanged; however a reduction of 15% will apply on the rental value for industrial property. The previous general reduction of 16% on the taxable basis will no longer apply.

On the assumption that an entity is within the scope of CLA, it will be liable to CC if its turnover exceeds €500,000 ($744,000). CC will be an additional tax burden to CLA.

The rate of CC will be progressive (from 0.5% to 1.5%) and will notably depend on the level of turnover.

It is worth mentioning that a draft document circulated in August included a provision stating that, for groups of companies, the CC rate would be determined by reference to the turnover realised by the company and by all companies held by the liable company. Under this mechanism, all companies within the group will be liable to the same CC rate. The aim of this provision was to ensure taxpayers cannot split their activity between various subsidiaries in order to keep their CC rate as low as possible. This provision is not included in the proposed reform, but may be reintroduced during the discussion in parliament.

There is a new definition for turnover (and thus value added) which in addition will include all kinds of subsidies and capital gains realised within the course of the operating business. It should be noted that a new definition for value added will be applicable for banking and financial activities.

In any case, the value added cannot exceed 80% of the company's turnover. This is subject to debates in Parliament.

The mechanism for the limitation of the tax according to the value added element will remain the same, however slightly refined. It will apply in addition to CLA and CC. The CET will be limited to 3% of the value added element.

All those elements will have to be confirmed by the French Parliament.

Nicolas Jacquot (nicolas.jacquot@fr.landwellglobal.com)