International tax issues to be considered when structuring acquisitions of Intellectual Property: France - overview

04 September 2008

Etienne Guillou

1. Tax rate on IP ownership

Income from the licensing of patents, patentable inventions and manufacturing processes are subject to the 15% reduced corporate income tax rate. This specific rate also applies to capital gains generated by the sale of these IP rights provided that the sale does not occur between related parties. In all cases, the 15% rate applies only if the licensed/sold IP rights have been held for more than two years since acquisition or have been created by the French company.

Income from the licensing and the sale of trade marks, know-how and software is subject to the standard rate of the French corporate income tax which amounts to 33.5%. However, where a company has an annual turnover of less than €7,630,000 (excluding VAT) and at least 75% of the paid up capital has been continuously held by individuals or by companies meeting the same conditions (relating to turnover and capital), the corporate income tax rate for the first €38,120 of profits is lowered to 15%.

A company liable to corporate income tax of more than €763,000 will be additionally liable to a social contribution on profits equal to 3.3% of such corporate income tax (whether computed at the standard rate or at reduced rate) less a relief of €763,000. An exemption from the additional social contribution liability is for a company with an annual turnover of less than €7,630,000 (excluding VAT) and at least 75% of the paid up capital has been continuously held by individuals or a company meeting the same conditions.

2. Withholding Taxes

Under French tax law, royalties paid to foreign companies are subject to a 33.3% withholding tax. This tax is generally reduced to 15%, 10%, 5% or 0% depending on the tax treaty which may have been signed between France and the State where the foreign company is located. France has a wide tax treaty network.

Additionally, for payments to EU affiliates, protection can be obtained under the EC Interest and Royalty Directive.

3. CFC Rules

When a French company subject to the French corporate income tax, holds directly or indirectly more than 50% of an IP structure located abroad and is subject to a "favourable tax regime", income of this IP structure is taxable in France, at the level of the French company.

The French tax law considers that a "favourable tax regime" exists when income of the foreign entity is not taxed or is subject to a taxation which is more than 50% lower than the French taxation.

However, this provision does not apply to:

  • IP structures located in the EU, provided that the shareholding by a French company cannot be considered as an artificial scheme, the aim of which is to avoid the application of the French tax law;

  • Other IP structures when they carry out an effective industrial or commercial activity (i.e. when the activity is not artificial and when the IP structure has not been located abroad only for tax purposes).