Tax regime: Income tax or corporate tax?

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In France, there are two ways of taxing the possible benefits of a company: the income tax (known as impôt sur les revenus or IR) or the corporate tax (impôt sur les sociétés or IS).

When creating a business, the entrepreneur must choose between one of these two tax systems (providing that the chosen legal form of the enterprise allows it). The income tax results in the direct taxation of profits on behalf of the company director or on behalf of each associate in case the company is made up of more than a single-associate. On the other hand, choosing the corporate tax has as a result the taxation of profits directly on the company. The associates are afterwards subject to the income tax according to the remuneration and the dividends that they receive.

THE INCOME TAX (IR)

When a company is subject to the income tax, its profit is taxed at a progressive scale between 0 and 45% according to the revenues of the company. The scale is the following:

  • Up to € 9,807: 0%
  • From € 9,807 to € 27,086: 14%
  • From € 27,086 to € 72,617: 30%
  • From € 72,617 to € 153,783: 41%
  • More than € 153,783: 45%

The profits are considered to be distributed amongst the associates, who are taxed according to their participation in the company. The benefits are therefore not imposed at the level of the business itself. When a company is subject to the income tax, all profits are subject to a tax, whether they are distributed or reinvested within the company. It is therefore an additional taxation that can potentially be avoided, especially if the profits are reinvested within the company.

In addition, the director of the company is deemed to obtain his salary directly from the business profits, so it will not be possible to deduct his remuneration for tax purposes.

The legal forms that are normally subject to this tax are individual enterprises, the EURL (if the single-associate is a natural entity), and civil companies (such as a SCI or a SCP). The income tax is optional for any SARL, SAS, SASU and SA for a maximum of 5 years.

THE CORPORATE TAX (IS)

When a company is subject to the corporate tax, its profits are taxed with according to a scale that goes from 15% to 33.3%, according to the revenues. Nevertheless, the corporate tax rate is set to be decreased by 2022 to a maximum of 25%. As for 2018, it is set at:

  • 15% for profits lower than € 38,120 (if the company concerned is eligible to profit from the reduced rate of IS).
  • 28% for profits between € 38,120 and € 500,000.
  • 33.33 % for profits of € 500,000 and beyond.

Once the corporate tax is paid, the profits of the company may or may not be distributed amongst the associates, which is a decision made in a general assembly. That is to say, the company is free to determine the amount of profits that they want to distribute each year.

If none of the profits are distributed, the associates will only be taxed in the name of the company via the corporate tax, but they will not be subject to additional taxes derived from the professional activity concerned.

It is possible to deduce the salary of the director of the company from the profits generated, unlike in the case of the IR, as long as their activity is effective enough to result in a normal remuneration.

The companies that are subject to the corporate tax are the EURL (with a single-associate who is a legal entity), SARL, SAS, SASU, SA, etc. This tax is optional, however, for EURLs where the single-associate is a natural entity, the EIRL (which are individual enterprises), and some civil-right companies.

CONCLUSION

If you opt for a tax on the IS, all your distributed profits will be taxed a second time in the hands of the associates, as he will have to pay his personal income tax. Again, if a business is subject to the income tax scheme, all the profits derived from the company are personally taxed, but only once.

The preference for the IR or the IS must therefore be made according to several parameters, including the amount of profits made, the total amount of income received by the associates, and the legal form of the company.