The choice of taxation method depends on a number of factors, including your company's legal status. Partnerships (sociétés civiles, EI, SNC, etc.) are theoretically subject to income tax, while corporations (SAS, SA, etc.) are subject to corporate income tax.
Nevertheless, French law allows you to choose your tax regime freely, regardless of your company's legal status, with a few exceptions.
These two systems therefore lead to a number of differences in terms of tax calculation. If you are subject to income tax, you pay the company's profits in your own name.
If you decide to file for corporation tax, the company will pay the taxes in its own name. Taxation is a key issue, and it's not always easy to understand all the rules.
However, it's important to consider these questions when setting up your company.
Here are the differences and all the keys you need to make an informed choice
Profits are not taxed in the same way, depending on your preference.
If you are subject toincome tax, the progressive income tax scale applies.
If you have opted forcorporate income tax, it depends on the amount of your profits and the size of the company.
Calculate your tax liability according to the two methods, and deduce the most advantageous for your tax situation.
Arbitration is based on your family quota, your total income and the amount of profits earned.
Being taxed under thecorporate income tax regime means that the contractor's remuneration can be deducted from total taxable profit.
This option makes it easy to skilfully calculate the remuneration you need to pay in order to be included in the reduced corporate income tax bracket.
It's important to note that if your company is taxed on acorporation tax basis, you are free to decide how much profit you wish to distribute each year.
If you don't distribute any, they will only be taxed in the company's name via corporation tax, but will not be subject to any additional taxation.
This option may therefore prove attractive from a tax point of view if you wish to reinvest a large part or all of your annual profits.
When you are subject to income tax, all profits are subject to tax, whether they are distributed or reinvested within the company.
This means additional taxation that can potentially be avoided, especially if profits are reinvested.
Distributed profits can also be optimized, in particular by avoiding their "double taxation".
If you opt for corporate income tax, all your distributed profits will be taxed a second time in the hands of the entrepreneur, when he pays his income tax.
Again, if you opt for the income tax system, all your profits are taxed, but only once.
It therefore depends on the nature of your project, your personal tax situation and the amount of dividends you receive.
Thefinancial year does not always end with a profit. Sometimes the company loses money, and therefore makes a loss.
If the company is subject tocorporation tax, the deficit can be carried forward against any profits the company makes in the future .
You can also carry back the deficit to benefit from a tax credit.
Income tax allows the company's deficit to be deducted from the income of the partner's tax household.
Other income received by the tax household can therefore be used to offset the company's deficit.
If you expect to make a loss in the first few years of your company's existence, it's in your best interest to opt for income tax, so that you can deduct it from the total income of your tax household.
There is therefore no single best tax regime, only one that is best suited to your project.
Whether you opt for income tax or corporation tax depends on a number of factors, including the amount of profits you make, the total amount and structure of income received by your tax household, and the legal status of your company.
Economic conditions and your forecasts for the success of your project can also influence you.
As this is a crucial issue, it is often advisable to seek professional advice to make an informed choice.
Written by our expert Paul LASBARRERES-CANDAU
June 19, 2018
