The Tax Regime of a French SARL: Corporation Tax, the Family Election and Dividend Taxation

Corporation tax or transparency: how a French SARL is taxed

A French SARL pays corporation tax. That is the default and it applies whatever the company's corporate purpose (CGI art. 206, 1) — profits are taxed in the company's hands as they are earned, then taxed again in the shareholders' hands when distributed. Two escape routes exist, and a third situation reverses the default entirely. A family SARL can elect indefinitely for partnership treatment, so that profits are taxed directly on the shareholders. Any young SARL can elect for the same treatment temporarily, for five financial years. And an EURL whose sole shareholder is an individual is transparent from the outset, with corporation tax available only by election. This guide works through each regime, the rates and instalments that apply under corporation tax, what happens to losses, how distributions are taxed in the shareholders' hands, and the conditions that make the family election available — and lose it.

Which regime applies — and can you change it

The multi-member SARL. Corporation tax applies by default. Only two choices change that — the family-SARL election and the temporary start-up election — both examined below.

The EURL. Everything turns on who the sole shareholder is. Where that shareholder is an individual, the company falls automatically under the partnership regime and its profits are taxed in the shareholder's hands under income tax (CGI art. 8, 4°), with an election available for corporation tax. Where the sole shareholder is a legal entity, corporation tax applies compulsorily and no election exists.

Choosing corporation tax. The election is made by notifying the tax office, or simply by ticking the box on the form filed when the company is registered or a change is declared. The courts look at what the company clearly intended, not just the paperwork. In one case an EURL's sole shareholder was an individual — so it would normally be taxed in his hands — but the company's bylaws said it was subject to corporation tax and it filed corporation-tax returns from its very first year. The court held it had validly chosen corporation tax, even though the gérante had ticked the wrong box on the registration form, because everything else the company did pointed the same way: its bylaws, its returns, its profit decisions, even a share-transfer deed (CE 5 February 2024, no. 470324). Because the choice is judged on the company's conduct as a whole, it is worth keeping these documents consistent with one another.

The five-year start-up election

A SARL may elect for partnership treatment temporarily, for five financial years, where four conditions are met cumulatively. The company must have been created less than five years before the opening of the first financial year covered by the election — a condition assessed at that date only. It must carry on, as its principal activity, an industrial, commercial, artisanal, agricultural or professional activity, which excludes managing its own securities or property portfolio. At least 50% of the capital and voting rights must be held by individuals, and at least 34% by one or more persons who are gérants — the 34% threshold being measured by counting the rights held directly by the manager and by the members of his tax household. And the company must employ fewer than 50 people and have annual turnover, or a balance-sheet total, below €10 million during the financial year.

Except for the workforce condition and the company's age, these conditions are assessed continuously across the financial years covered by the election: if one fails during a year, the company becomes subject to corporation tax from that same year. The election requires the agreement of all shareholders and must be notified to the tax office within the first three months of the financial year it applies to; it can be revoked during the five-year period. Made at incorporation, it applies from the first financial year; made after the first year-end, it amounts to a change of tax regime with the consequences that follow.

Why elect at all? Two reasons dominate. Losses in the early years flow straight through to the shareholders — deductible against the taxable results of corporate shareholders and, where the loss is a professional one, against the total income of individual shareholders. And where a shareholder carries on his professional activity within the company, interest on borrowings taken out to acquire the shares becomes deductible from his share of the company's results, whereas interest on borrowings to acquire shares in a company subject to corporation tax is in principle not deductible at all.

Under the election, each shareholder is taxed on his proportionate share of the company's result, taxable for individuals as industrial and commercial, agricultural or non-commercial profits, professional or non-professional according to whether the shareholder works in the company. That share is added to the household's other categorical income. Two consequences deserve attention: remuneration paid to shareholders working in the company is not a deductible expense of the company but is added back to its result and taxed on the shareholder in the relevant category; and losses are allocated to shareholders in proportion to their holdings, professional losses being deductible against total household income while non-professional losses can only be set against categorical income of the same nature, with any excess carried forward against income of the same nature for the following six years.

Corporation tax: computing, rating and paying

How the result is computed. The results of companies subject to corporation tax are determined and declared under the rules governing industrial and commercial profits, subject to the specific base rules applying to companies within the charge. In practice the taxable result is built from the accounting result, adjusted upwards or downwards to reflect tax rules. Gains and losses on disposals of fixed assets other than participating interests fall within the short-term regime and form part of the result taxable at the standard or reduced rate. Corporation tax itself, and the additional contributions to it, are not deductible in computing the charge.

Rates. The standard rate is 25%. Qualifying small companies pay 15% on the first €42,500 of taxable profit per 12-month period, the excess being taxed at the standard rate. Three conditions govern the reduced rate: 

• turnover below €10 million, computed excluding tax and excluding exceptional receipts such as proceeds from disposals of fixed assets; 
• capital fully paid up; 
• and continuous ownership, directly or indirectly, of at least 75% of the capital by individuals. 

Two refinements matter in practice. Where capital is increased with a share premium, failing to pay up that premium in full defeats the paid-up condition, since the premium forms an integral part of the price of the shares. And in tax-consolidated groups, ownership is assessed at the parent, which alone can benefit, while the €10 million limit is measured against the aggregate turnover of all group members. 

Claiming the rate requires two statements filed with the return — a computation of the profits taxed at the reduced rate and a statement of the capital's ownership — though failing to produce one of them does not by itself defeat the 15% rate.

Where the financial year is longer or shorter than 12 months, the €42,500 ceiling is prorated by reference to the number of months, a year opened or closed mid-month counting residual days as a proportion of thirty. Beyond these rates, certain long-term regimes apply reduced or nil rates — essentially to participating interests and industrial property income, with a transitional regime for disposals of professional premises to be converted into housing. Where the nil rate applies, gains escape tax but losses are neither deductible nor capable of being carried forward.

The 3.3% social contribution. A SARL with turnover of at least €7,630,000 that pays more than €763,000 of corporation tax owes a social contribution on profits (CGI art. 235 ter ZC). It is charged at 3.3% on the corporation tax computed at the standard and reduced rates, after an allowance of €763,000, prorated where the period is longer or shorter than 12 months — for a 15-month period the allowance becomes €953,750, for a 3-month period €190,750. The contribution is not deductible from the taxable result and is paid through four advance payments on the corporation-tax instalment dates.

Instalments. Corporation tax is paid through quarterly instalments due no later than 15 March, 15 June, 15 September and 15 December, a 10% surcharge applying to late payment. Instalments are computed on the last closed financial year's result — on profits taxed at 25%, on small-company profits taxed at 15%, and on net licensing income taxed at 10% — each instalment being a quarter of the tax due, calculated using the rate applicable to the year in question. For the first instalment of a year, a company may use the results of the last-but-one closed year or, on its own responsibility, those of the last closed year where it expects them to be lower, with a regularisation at the second instalment. No instalments are due where the reference year's tax does not exceed €3,000, during a total exemption period under a temporary relief, in the first financial year of a newly created company, or in the first year in which a pre-existing company becomes subject to corporation tax.

Manager remuneration. Remuneration of every kind allowed to managers — salary, fees, expense reimbursements, allowances, benefits in kind — is in principle deductible provided the total does not exceed normal payment for the functions performed, meaning it must correspond to genuine work and not be excessive relative to the services rendered. That holds whether the recipient is taxed as an employee or under the regime for managers and shareholders. Excessive remuneration is added back to the company's results and taxed on the recipient as investment income. Benefits in kind form part of remuneration and follow the same test. The mechanics of fixing that pay, and the arbitrage between salary and dividends, are covered in our guide to SARL manager pay.

Losses: carry forward and carry back

A SARL within the charge to corporation tax that makes a loss has two routes. The default is carry forward: the loss becomes a charge of the following year and is set against that year's profit, with no time limit. One cap applies — a company with profit above €1 million and carried-forward losses above €1 million cannot absorb the whole of its prior losses in the year, the deductible amount being capped at €1 million plus 50% of the profit exceeding €1 million.

The alternative is carry back, available by election where the company made a loss after a profitable year (CGI art. 220 quinquies). The loss is set against the immediately preceding year's profit, limited to the undistributed portion of that profit, and the election is in principle made within the filing deadline for the loss year's return. Two limits apply together: only the immediately preceding year can absorb the loss, and the amount carried back is capped at €1 million and cannot exceed the available profit. The set-off creates a claim on the Treasury equal to the tax paid on the absorbed profit, usable to pay corporation tax for years closing over the following five years and refundable at the end of that period — with earlier refund available to companies in conciliation, safeguard, reorganisation or liquidation proceedings from the date of the opening decision.

Distributions: how dividends are taxed in the shareholders' hands

Corporate shareholders. A shareholder that is itself subject to corporation tax includes the dividends in its taxable profit, subject to the parent-subsidiary regime where it applies.

Individual shareholders: the withholding. Unless a dispensation applies, a compulsory 12.8% withholding is levied on distributions to individuals resident in France for tax purposes. It is not a final tax: it is an advance payment on the definitive charge, computed on the gross distribution, and it is operated by the paying establishment — generally the distributing company. Social levies on the distribution are in principle withheld at the same time and by the same person, at an overall rate of 17.2%. Where the paying establishment is in France, individuals belonging to a household whose reference taxable income of the last-but-one year was below €50,000 for single, divorced or widowed taxpayers, or €75,000 for jointly assessed taxpayers, may request exemption from the withholding. The withholding is then credited against the income tax computed on the annual return, whether at the flat rate or the progressive scale, and refunded in whole or part where it cannot be absorbed.

Flat rate or the scale. By default, a dividend is taxed at a single flat rate of 12.8% on its gross amount, with credit for the tax already withheld at source (CGI art. 200 A). Under the flat rate there is no 40% allowance, no deduction for the costs of earning the income, and no CSG deduction.

The alternative is to choose the progressive income-tax scale. That choice is express, applies to the whole year's investment income and capital gains, cannot be reversed for that year, and is made on the income-tax return by the filing deadline.

Choosing the scale gives three things:

• the 40% allowance on the gross dividend, applied by the tax office;
• deduction of expenses actually paid in the year, such as custody and collection fees; and
• deduction of part of the CSG — of the 9.2% withheld, 6.8 points become deductible from the year's taxable income, but only on income taxed under the scale.

That last point is where care is needed: CSG on any income left under the flat rate is never deductible, so the choice applies to the whole year in one direction — it cannot be split. The starting point is to compare the household's marginal tax rate with the 12.8% flat rate. But the choice has one further effect that is easy to miss: putting dividends onto the scale raises the figure used to calculate the pay-as-you-earn (PAS) rate, and so increases the household's withholding rate.

The 40% abatement is conditional on the distribution being a distribution in the tax sense and on its resulting from a regular corporate decision. Regularity is read narrowly in the taxpayer's favour: a distribution decision is irregular only where it was not taken by the competent organ, results from a fraud, or falls outside the cases in which the Commercial Code permits distributions out of profits. For an EURL, the fact that the minutes and decision register did not record the whole of the dividends paid did not allow the administration to deny the abatement.

The company's own obligations. Where the company pays the dividends it acts as paying establishment and must remit the withholdings and social levies to the Treasury within the first 15 days of the month following payment. It must verify the identity, actual residence or registered office of the beneficiary. And by 15 February each year it must declare the prior calendar year's payments on the dematerialised single tax return form, showing gross amounts by nature and tax regime, with income already subject to social levies shown separately. Where the company dispenses with the withholding, it must be able to produce the beneficiary's sworn statement on request — failure to produce it attracting a €150 fine.

The family SARL: permanent transparency, on strict conditions

The family election removes the company from corporation tax and places it under the partnership regime (CGI art. 239 bis AA). For an existing company it constitutes a change of tax regime. Two conditions define eligibility, and both must be satisfied not merely when the election is notified but throughout every year for which the regime is claimed (CE 5 February 2014, no. 345436).

The activity. The company must carry on a commercial, industrial, artisanal or agricultural activity. A professional or civil activity does not qualify, unless it is ancillary and forms the inseparable complement of the qualifying activity. A SARL letting furnished property may elect, and whether any member qualifies as a professional lessor is assessed at the level of each member individually. Pharmacists, whose activity is commercial, may elect provided all conditions are met and they practise through a SELARL — but the possibility does not extend to SELARL members whose activity is treated as professional for tax purposes. Losing the qualifying activity ends the election, and the boundary can be crossed by drift rather than decision: where a furnished-letting SARL acquired 60% of the shares of four property partnerships and the management of those holdings became its main activity, the tax administration challenged the regime — though the courts required a real enquiry into whether the SARL actually participated in managing them, rather than an inference drawn from how the shares were classified in its accounts.

The family. The election is open to SARLs formed exclusively between direct-line relatives, siblings, spouses and Pacs partners. The company may combine members of these groups, but each shareholder must be directly connected to the others by direct or collateral kinship to the second degree, or by marriage. Qualifying compositions include spouses; a father and one or more children; a father, his children and their spouses; two spouses and a child of one spouse's first marriage; two siblings and their spouses; a grandfather and several grandchildren provided the grandchildren are siblings; and two Pacs partners, with no requirement of joint assessment. Non-qualifying compositions include two brothers and the son of one of them; two brothers-in-law; cohabitants and their common children; an uncle and his nephew, even where the nephew inherited the shares on his father's death; and a wife with her children together with her husband's children from a first marriage. A father-in-law and son-in-law composition has been accepted, though some administrative courts have held elections between a son-in-law and his parents-in-law irregular. Where shares are acquired by a person married under a community regime, the non-acquiring spouse is recognised as a shareholder only if he has notified the company of his intention to be personally a shareholder — absent that notification, a family SARL formed between a person and a sibling-in-law whose spouse is not a shareholder cannot elect, the kinship link being missing.

Making the election. A company that wants the election to take effect from a given financial year must notify the tax office before that year begins. All the shareholders must agree and sign the notification — an election signed by the gérant alone is not valid and cannot be held against a shareholder who did not sign it (CE 12 February 2014, no. 358356).

For new companies, the election takes effect immediately — for both registration duty and profits tax — if it is made in the incorporation deed and that deed states the family relationship between the shareholders. The same immediate effect applies where a company already taxed in the shareholders' hands converts into a family SARL without creating a new legal person, and where a SARL's sole shareholder transfers shares to qualifying family members, provided the election is made in the deed recording the conversion or the transfer. Taking this route avoids the tax consequences of a "deemed cessation of business."

In fact, when a SARL leaves corporation tax to move to the family regime, the change of tax regime is treated as a cessation of the business. That normally means the operating profits not yet taxed, any profits whose taxation had been deferred, and the unrealised gains built into the company's assets (the increase in their value that has not yet been taxed) all become taxable immediately — assessed on the shareholders in proportion to their rights. This immediate taxation of the deferred profits and unrealised gains can be avoided, on conditions, where no new legal person is created and those items remain taxable later under the new regime.

Losing the société de famille regime. The regime ends where the company revokes the election, converts into another form, abandons the qualifying activity, or — most commonly — where a person outside the required degree of kinship becomes a shareholder. Death has a rescue mechanism: where a deceased shareholder's shares pass to a non-relative, the election survives provided the heir transfers the shares to a relative of the other shareholders within six months, and where a shareholder dies and his children or spouse join the company, the regime continues whatever their kinship with the others. A gift is treated differently precisely because it is voluntary: a gift-partition of shares to the donor's sons with reservation of usufruct ends the regime, and the tolerance allowed on death does not extend to transfers by gift. A third company acquiring the bare ownership of part of the shares also ends the election, the bare owner being a shareholder and, in the decided case, outside the family group. On divorce, the administration has accepted continuation where the shares are transferred by one spouse within six months to a person meeting the kinship test — a solution that should transpose to the dissolution of a Pacs, and the dissolution of a Pacs in the year following its conclusion does not by itself forfeit the election for the earlier year.

Consequences. The company computes its result but is not taxed on it: profits are taxed on the shareholders in proportion to their rights, as they are earned, whether or not they are actually distributed, and losses are likewise taken into account by each shareholder for his share. Individual shareholders are taxed personally on their statutory share of profits and on the various remunerations allowed to them for the functions they perform in the company — those remunerations being treated as a method of allocating profits rather than as a deductible expense. Where the company pays the employee's portion of social contributions on behalf of manager-shareholders affiliated to the general scheme, that payment is added back to the distributable profit as additional remuneration, though it can be deducted from their share of profits where they take a direct, regular and continuous part in the company's activity; the employer's portion is deductible from the profit to be shared. For shareholders working in the company, their shares are treated as business assets used for the profession, with two consequences: expenses incurred to acquire the shares can be set against their taxable share of profits, and gains on selling the shares are taxed under the professional capital-gains rules.

The three regimes side by side

Frequently asked questions

Key takeaways