Taxes in France: Deductible Expenses and Examples to Avoid
Expenses deducted from taxable income are always under scrutiny during a tax audit, particularly when dealing with taxes in France. Let’s explore some recent cases that highlight the importance of following the rules.
Clear Conditions to Meet for Taxes in France
To deduct expenses from taxable income in France, they must:
- Serve the direct interest of the business, meaning they must be linked to normal business operations;
- Lead to a reduction in the company’s accounting profit (unlike an investment);
- Be properly recorded and supported by adequate documentation.
Proof is key when managing taxes in France.
The Company’s Responsibility to Justify Expense Deductions
How? By providing clear and precise documentation that demonstrates the nature of the expense and the value or benefit derived from it, especially in the context of taxes in France.
If the Tax Authorities in France Disagree
They must prove that the expense is inherently non-deductible, lacks any benefit, or that the compensation for this benefit is excessive. The company must then refute these claims by any means available. If unsuccessful, the expense will be added back to taxable income, increasing the company’s tax liability under French tax law.
It’s essential to follow the rules carefully, as shown by numerous court rulings concerning taxes in France.
Failing to Demonstrate the Business Benefit for French Taxes
During an audit, the French tax authorities questioned the deduction of fees paid by a SAS (a type of corporation) to a law firm. The company argued that these expenses were necessary for its business, as they related to services like tax analysis of dividend distributions to non-resident shareholders and the tax implications of its transformation from a SARL (another type of corporation) to a SAS. However, the judges upheld the tax adjustment, noting that the SAS had not provided any documentation to identify the nature of the services billed, thereby failing to prove that the expenses were in the company’s interest (CAA Nantes, February 27, 2024, No. 23NT01961).
In another instance, an auditor examined a lease agreement for a residential house rented by a company. Since this operation was unrelated to the company’s business, the auditor rejected the deduction of the rent paid. Despite the manager’s claim, supported by photos, that the house was used for storing business documents, the French tax authorities were not convinced.
They noted that the house’s description suggested minimal space for storage. The judges agreed, ruling that there was no evidence the rental expenses served the business’s interest, especially since the lease prohibited professional activities on the premises (CAA Marseille, February 8, 2024, No. 22MA00906).
Charging Personal Expenses to the Company in France
It is highly discouraged to deduct strictly personal expenses under French tax law. This is evidenced by the tax adjustments imposed on a SARL operating a store selling dietary supplements and fitness equipment, all upheld by the judges. One adjustment involved a Canal+ subscription, which was not deemed professional because there was no proof the broadcasts were shown in the store rather than at the managers’ personal residence.
The same decision applied to the purchase of clothing and shoes, which were considered personal expenses with no connection to the business.
Even though the business is sport-related, the judges also ruled that gym membership fees contracted by the partners and managers could not be deducted from the SARL’s income. Despite their argument that they used their lunch break workouts to network with potential clients, the judges classified these expenses as personal.
Finally, the judges found that the so-called business meal expenses incurred by the manager were not professional and therefore not deductible. An analysis of the receipts revealed that these meals were taken in the city where the manager lived, mostly on weekends or on Mondays when the store was closed, and included numerous guests, including children (TA Nîmes, February 16, 2024, No. 220045).
A real estate dealer EURL (another type of corporation) that purchased a property complex for resale in lots was also denied the deduction of “home-staging” expenses in the manager’s villa and golf-related costs. The judges rejected the claim that these expenses facilitated the sale of the luxury complex and that the manager might network with potential buyers during his golf rounds.
As these expenses were for the manager’s personal interest, the tax adjustment was confirmed (CAA Lyon, April 4, 2024, No. 22LY01380).
Submitting Unsubstantiated Expense Reports in France
During an audit, the expense reports of managers are thoroughly examined by the French tax authorities. One company experienced this firsthand and was denied the deduction of travel and meal expenses reimbursed to its managers because the supporting documents were not convincing. Using its right to obtain information from the vehicle registration service, the French tax authorities verified mileage claims and discovered that the number of kilometers declared for business purposes was overstated.
Regarding meal expenses, the number of days claimed by the company did not match the actual working days, and only a few supermarket receipts were provided. As a result, the expenses were deemed unjustified and non-deductible. The judges confirmed the tax authorities’ decision (CAA Douai, February 22, 2024, No. 22DA01958).
Advice: To avoid unpleasant surprises related to taxes in France, it’s crucial to be prepared for detailed tax investigations. Companies must be able to justify with precision the expenses they have deducted for tax purposes.
ESCEC International: Your ultimate accounting firm to fix your taxes in France
For professional guidance and to ensure your company remains compliant with French tax regulations, consider partnering with ESCEC International, your ultimate accounting firm in Paris that can help you navigate these complex issues with confidence.
