Company directors do not always have the option of choosing their tax regime. Corporate entities (SA, SAS, SARL...) are systematically subject to corporate income tax. Under certain conditions, however, they may opt to pay income tax. Conversely, entrepreneurs in EURLs, partners in sociétés civiles professionnelles (SCPs) and those in sociétés en nom collectif (SNCs) are automatically subject to income tax (IR), this time with an option to opt for corporate income tax (IS). So how do you make the right choice for your situation? Which is best for me? Here's how.
Difference between income tax and corporation tax
Income tax has a direct impact on the entrepreneur or partner in a company. The profit made by the company, regardless of whether it is used in full or in part to remunerate the manager and partners, is subject to tax. The tax authorities do not take into account any investments or reimbursements that may be made by the managers with this profit. It considers that the profit constitutes, in its entirety, the income of the operator(s). To this income must be added the other resources of the tax household.
Partners pay income tax in proportion to the number of shares they hold in the company's capital. If, for example, a managing director holds 60% of the capital, he will declare 60% of the company's income on his personal tax return.
Corporate income tax, as its name suggests, concerns companies as legal entities. The company is a separate entity from its directors or shareholders. The latter receive salaries, dividends or both. They declare these and are subject to personal income tax (IRPP). Dividends are taxed at a flat rate of 30% (17.20% social security contributions, 12.80% personal income tax).
As for the company, it has its own assets and pays taxes based on its profits. A reduced rate of 15% on the first €38,120 is applied (subject to conditions), followed by a flat rate of 25% (formerly 33.33%).
Choosing between corporate and personal income tax
Before choosing a tax regime, you need to know whether you are entitled to do so. Individual SARLs, family SARLs, SAs, SASs and SASUs may opt for the IR tax regime for a non-renewable 5-year period. They must have been in existence for less than 5 years, employ no more than 50 employees, generate sales of no more than 10 million euros, and have at least 50% of their capital held by individuals (34% by legal representatives). EIRLs, individual EURLs, SNCs and SCPs may opt for corporate tax. Since 2019, this decision is no longer irrevocable.
Then it's a good idea to ask yourself a few questions:
- What other income does the taxpayer have (spouse's salary, income from movable and immovable property, etc.)?
- What is the profit forecast? Are significant profits or, on the contrary, losses envisaged?
- What exemptions, tax reductions and tax breaks are available?
- Can the company afford to pay salaries with charges?
- Do associates prefer to receive dividends only?
- Will the business grow significantly?
- Isn't there a risk of double taxation?
- What is the impact on social protection and social security contributions?
Conclusion: What should I choose?
The two systems are different. One is not better than the other. Each person must make his or her own choice according to his or her own situation. It is sometimes useful to consult a chartered accountant or a tax lawyer to avoid making a mistake.
However, as a general rule, the higher the profit generated by the business, the higher the rate of corporation tax. If it exceeds the corporate income tax rate, now down to 25%, it is preferable to opt for corporate income tax. The higher the income tax bracket, the less attractive this option is.
On the other hand, in the event of a deficit, it is advisable to pay income tax. Taxable profit, the operator's presumed income, will thus be reduced. With corporate income tax, the deficit is deducted from future profits.
In a company subject to corporation tax, management salaries are included in current expenses. They therefore reduce profits. But beware: disproportionate remuneration may be sanctioned by the tax authorities in the event of an audit. The manager also benefits from a flat-rate 10% deduction for professional expenses, but may prefer to pay actual expenses.