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Financial

Financial > Expat Focus

Expat Focus

Self-Employed Taxes in France – An Expat Guide

  Posted Monday January 18, 2016 (18:22:57)   (363 Reads)


Expat Focus

France is a country of many beautiful images. One of the most prevailing is that of the small French business. Whether a small farm, the baker or the local carpenter and odd-job man, everything that comes to mind suggests a small and perhaps rural enterprise.

Although France has the largest economy in Europe and vast ultra-modern industries, this ‘shed based business’ is the image that many expats have of France. Indeed the small 1-2 person business it is an image cultivated by the French government as being part of the “French Way” and in fact small businesses constitute a very large part of the overall French economy.

It is therefore not too surprising that many expats upon arrival in France, and in need of income, become attracted by the idea of running their own business. From a practical point of view they may also find they have little choice as outside of the major cities work is VERY hard to find particularly for those not fluent in French or considered ‘local’.

Starting your business

Unlike the UK, in France you can’t decide at 9am to start a business then at 9:30 go out and start doing it. You also can’t just ‘start-up’ or run it for a trial period so see if you like it or if it’s going to be viable.

To begin with, you’ll need to formally register yourself or your company and tell the authorities what it is you plan to do. This is usually done via your nearest local chamber of commerce. Engaging in commercial activity without registering is illegal.

You may find that initially you cannot start up without getting your UK based qualifications converted and certified locally, or going on local training courses to obtain the French equivalents. For trade based businesses this is done via the Chambre des Metiers - essentially a sort of trade regulation body.

At some point, whatever your business idea is, before registration of your company or ‘entreprise’, you’re going to have to decide what legal statute or regime your company will operate under.

Your decision here could be critically important to your future financial health!

Selecting The Legal Basis Of Your Company

One of the commonest reasons why expat businesses get into trouble in France is that major errors were made at the time the business was originally registered. That’s because at the time the expat failed to understand that the amounts payable in taxes and social contributions in years 2-3 would be directly affected by the regime chosen when initially registering.

Sound complicated? Well, it is! To explain...

When you register your company you’ll be asked to select a regime for it to operate under. A ‘regime’ here is roughly the equivalent of the UK’s Ltd, Partnership, PLC, or Sole Trader designations.

There is not really sufficient space here to explain the totality of the position in France, but essentially there are several types including Micro-BICs, EURL, SARL, SA and Micro-Entrepreneur.

Just as in the UK, the regime selected will depend upon your company size and other factors, and importantly it will also dictate what your obligations are in terms of submitting formal accounts.

Now as accountants’ fees in France are expensive by UK standards, typically around 1500euros/1200pounds per annum for even a small basic business, then many expats are understandably deeply attracted to those regime types that do not have obligatory requirements for formal annual accounts. These are usually the Micro-BIC and micro-entrepreneur regimes.

Listening to the siren-song of this though can seriously damage your bank balance!

To understand why, one needs to remember that these ‘no need for accounts’ regimes were set up initially to aid the VERY small business with miniscule annual turnover or ‘chiffres d’affaires’. They are really meant to be for people who are perhaps running a gite or two and have turnover not exceeding maybe 5-7,000euros per annum.

For many slightly larger businesses, using this regime type can be a disaster. To understand why one needs to look at the main tax and related charge costs you’ll pay as a small businessperson in France.

Basic Self-Employed Business Taxation & Social Charges

When you’re considering setting up a small business in France you’ll see lots of publicity about how to avoid tax. These discussions are largely irrelevant to the average expat businessperson! Taxation based upon income is a factor in France as in most countries. For most small businesses with moderate turnover and profits, personal taxation liability is rarely an issue and your costs here are likely to be small unless you are phenomenally successful and well off as result.

Each year you’ll have to declare your total income to the authorities and they’ll calculate your tax due just as in the UK. One will virtually never hear that a small business is struggling because of income tax demands.

By contrast, the thing that kills many small self-employed businesses in France, usually in the second or third year, is the mandatory social contribution scheme that is roughly the equivalent of NI in the UK.

When living in France you’ll enjoy phenomenally good health, pension and social benefits care assuming you qualify, but France has to pay for all these things and that is why its social charges on employers or the self-employed are massively higher that in the UK.

Whether a local or expat running your own business you cannot opt-out of these or make your own arrangements and you’ll need to be prepared to write some big cheques each month to the social security organisation (RSI for the self-employed).

So, “how big is big?” This is where we loop back to the question of regime.

Regime selection & links to Social Payments

If at the outset you selected say a EURL and elected to go for formal annual accounts, then as per normal with accounting, after all your costs are deducted (including any social payments made) you’ll end up with something roughly like your profit. The authorities will use that net profit to calculate what you’ll need to pay in social contributions the next year.

You can expect that in the year ahead you’ll be paying around 35-45% of your net profit in mandatory social contributions excluding income tax. Yes, it’s expensive!

The situation though can be far far worse for those sad people who selected a non-accounting regime and who then had the audacity to actually achieve a high turnover.

If you are operating as a micro-BIC, you may be saving accountants’ fees but if you have a high turnover and moderate profit percentage, then you’re going to be in DEEP trouble. The problem is, that because these regimes have no accounts to use, the authorities are forced to make assumptions about your profit margins based on turnover. Worse, you cannot deduct ANY costs at all from your turnover figures.

Let’s use some crude but not unrealistic figures to illustrate the principle. We’ll assume your business is in buying and selling and you have used a micro-Bic as your regime. In this scenario the government will assume that about 28% of your total turnover is net profit. In their calculations for how much social contribution you must pay, they’ll use this figure and won’t (usually) modify it. They will not take into account any costs you’ve incurred whatsoever or what the ’real’ picture is!

So let’s say you’ve had a busy year and turned over 75,000euros. The authorities will assume that of this figure 21,000euros is net profit. Next year you’ll get a bill for social contributions of roughly 8400euros. Maybe that looks fair if expensive but you won’t find it so if in reality your real profit after all costs was only say 7% and your real profit was therefore only 5250euros!

It’s also worth noting here that the 8400euros you’ve got to pay will NOT be deductible from your next year’s accounts either!

BE WARNED – Using a micro-BIC or similar means your social payments will be calculated on a crude and often incorrect basis totally detached from reality. YOU COULD END UP BEING FORCED TO PAY HUGE AMOUNTS MORE IN SOCIAL CONTRIBUTIONS THAN YOU ACTUALLY EARNED IN PROFIT! It does happen and not infrequently. It is a major cause of expat business failure.

Sadly, even once you’ve learned your mistake, you can’t just change regimes because you feel like it or have just grasped that say a EURL regime could save you money. You can only change regimes if you elect to do so before a given date in the year or if your turnover figures exceed a fairly high level (currently around 84,000euros) at which point annual accounts become mandatory.

Summary and Recommendations

1. In France taxation and social contribution laws change frequently. Get up-to-date expert advice locally BEFORE you start.

2. When selecting your business regime, avoid the micro-bic unless you know your turnover figures are going to be very low OR you are SURE your profit margins are going to be very high and way above whatever the automatic margin calculation figure is for your type of business.

3. Learn from local people. It is a fact that French people virtually never use the micro-bic regimes because they know the dangers. It is usually only expats who fall into this trap.


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