Tax optimization for businesses
Tax optimization is a divisive topic for many taxpayers. While it is a valuable tool for some businesses, it is unfortunately often equated with tax evasion by a portion of the population.
What is corporate tax optimization?
Corporate tax optimization involves reducing the tax burden on a company. Thus, tax optimization can be defined as using tax rules in the most efficient way to minimize the tax liability. It is by no means tax fraud, which involves an intention to operate outside the legal framework to reduce taxes.
Today, corporate taxation is very complex, covering various types of taxes: corporate income tax, value-added tax, corporate property tax, etc. Therefore, mastering taxation has become a priority for business leaders.
Many business leaders struggle to master their taxation due to the complexity of the regulations and lack of time. However, the French tax system has established many mechanisms allowing companies to reduce their tax burden. Often, business leaders believe that tax optimization only concerns large international corporations. In reality, it affects all companies, regardless of their size. Indeed, SMEs are also impacted by taxation and need to master it.
Corporate Tax Optimization and Legality?
Contrary to popular belief, tax optimization does not mean illegality. Indeed, optimization involves using all applicable tax rules to reduce the tax burden. It is not forbidden for a company to want to reduce its tax liability as long as it stays within the limits set by the law.
Tax optimization, therefore, requires a perfect knowledge of the laws and the French tax system to avoid falling into tax fraud or having the optimization scheme challenged by the tax authorities.
How to Optimize Company Taxation?
There are various mechanisms for optimizing company taxation. The prerequisite for any search for tax optimization solutions is a precise audit of the company’s current taxation. Then comes the analysis of the various options available to the company: setting up a group scheme to limit taxation on profit repatriations, controlling the deficit, using credits and tax reductions applicable to companies (research tax credits, sponsorship expenses, etc.).
It is essential to keep in mind that there is no one-size-fits-all optimization scheme for all companies. Tax optimization requires meticulous application of the rules based on the particular situation of the company.
- Control of expenses and deficit
The deductibility of current expenses is the easiest lever for a business leader to implement to optimize the company’s taxation. Although entrepreneurs understand the principle of deducting expenses, they may not necessarily deduct the full amount of these expenses. It is necessary to pay attention to the conditions for deducting expenses from a tax perspective, particularly that they must be incurred in the interest of the company and supported by an invoice.
In addition to the deductibility of expenses, a company can reduce its tax liability through effective management of its deficits. Of course, deficits can be used to offset a taxable profit in subsequent years, but it is also possible to offset this deficit against a previous profit and thus benefit from a “carry-back” credit from the treasury.
However, whether the offsetting of deficits is carried forward or backward is subject to various conditions.
- Use of group regimes
There are two tax regimes for groups of companies.
The first is the Parent/Subsidiary regime. Through this mechanism, dividends repatriated to the parent company will be exempt from taxes, subject to the reintegration of a 5% share subject to corporate income tax.
The main conditions for this regime are the threshold of the parent company’s participation in its subsidiary, which must be at least 5%, and the obligation to hold the shares for at least 2 years.
The second mechanism is that of tax consolidation. The group will be subject to joint taxation at the level of the group’s head, allowing, among other things, offsetting profitable and deficit results of the different group companies. In addition, intragroup capital gains will be neutralized.
This mechanism is also subject to several conditions: ownership of 95% of the capital of subsidiaries by the group’s head, closing of financial years on the same dates, and drafting of a tax consolidation agreement.
The implementation of tax consolidation should not be taken lightly. Indeed, although this regime offers many tax advantages, it involves additional declarative obligations.
- Use of various tax credits and reductions
Tax credits and reductions are mechanisms established by the legislator to encourage companies to invest in certain sectors or territories.
There are different tax credits and reductions for companies.
The best-known is undoubtedly the Research Tax Credit (CIR). It was introduced to promote the research and development (R&D) activities of French companies. The amount of the tax credit varies depending on the amount of investments made by the company: 30% or 5% depending on whether the investment amount exceeds 100 million euros.
In addition, there are specific schemes to promote overseas investment.
Thus, a company subject to corporate income tax can fully deduct certain investments made in overseas territories. This mechanism provided for in Article 217 undecies of the CGI relates in particular to productive investments and the construction or acquisition of rental buildings. However, the benefit of this scheme is subject to strict conditions.
There are many mechanisms for a company to optimize its taxation. The assistance of a tax lawyer is recommended to choose the devices adapted to your company’s situation. Beyond the choice of the mechanism, a tax lawyer will assist you in implementing it, which can sometimes be complex due to the numerous conditions set by the legislator.
Risks of Corporate Tax Optimization?
Attention, the practice of tax optimization is not without risks. The major risk is falling into illegality by attempting to circumvent tax rules. Such illegality can be sanctioned on the grounds of tax fraud.
In addition, the French tax authorities have an increasingly extensive arsenal for repressing abuse of tax law, allowing them to set aside certain tax optimization schemes. For all these reasons, it is necessary to be accompanied by a tax lawyer to optimize your company’s taxation safely.
Why Hire a Tax Lawyer?
Many professionals offer their assistance in implementing tax optimization solutions: lawyers, notaries, accountants, wealth management advisors.
Among all these professionals, only a tax lawyer can provide tax advice. They have a solid legal background and in-depth knowledge of tax legislation necessary for practicing corporate tax optimization. In addition, through litigation practice, a tax lawyer will advise you to avoid the tax authorities challenging the chosen optimization scheme.
The tax lawyers at LEXPERTAX are experts in corporate tax optimization.
We will advise and accompany you in auditing your company’s taxation beforehand, determining the best optimization solutions to implement together, and finally securing the implementation of the chosen scheme.