Understanding French VAT - Rates and Compliance Essentials

Value Added Tax (VAT), or "Taxe sur la valeur ajoutée" (TVA), is an important aspect of doing business in France. If you're planning on engaging in commercial activities there, it's essential to have a good understanding of the VAT rates that apply and what you need to do to remain VAT compliant. In this post, we explore the complexities of French VAT, providing you with the necessary knowledge to navigate this tax system effectively.

Short summary

• Understand French VAT regulations including rates, compliance, and special regimes
• VAT is collected by companies for remittance to the treasury at minimum EU-set rates with some goods/services exempted from taxation.
• Businesses must register for a French VAT number, file returns regularly & comply with mandatory regulations both within France and abroad.

Overview of VAT in France

In France, VAT is a consumption tax imposed on the sale of goods and services. The VAT system is an indirect tax designed to be levied at each stage of the production and distribution chain, ultimately borne by the end consumer.

French tax authorities

The French tax authorities, commonly known as "Direction Générale des Finances Publiques" (DGFiP), are responsible for administering and enforcing taxes in France, including VAT. The tax authorities enforce VAT through a comprehensive system of registration, reporting, and auditing. Businesses are required to register for VAT and collect the tax from their customers. They must then file a regular VAT return, reporting the amount of VAT collected and paid.

The tax authorities conduct regular audits to verify the accuracy of VAT reporting and ensure compliance. Non-compliance with VAT regulations can result in penalties, fines, and legal consequences. The French tax authorities are committed to ensuring the proper collection and enforcement of VAT to maintain tax fairness and fund public services.

Value added tax (VAT)

VAT is an essential component of the French tax system. Implemented in 1954, VAT revenue plays a significant role in funding public services and social welfare programs in the country. The French government periodically adjusts VAT rates and regulations to stimulate economic growth, maintain fiscal stability, and promote certain sectors. Overall, VAT in France is a critical source of revenue and an integral part of the country's tax framework.

Although the tax authorities in France have some discretion over VAT in the country, the European Commission decides the minimum and maximum VAT rates in the EU.

French VAT rates

French VAT rates can vary depending on the type of goods or services being provided. In France there is the standard rate, two reduced rates, and a super-reduced rates - all part of the EU VAT Directive.

Standard VAT rate

In France, the standard VAT rate is currently set at 20%. This rate is applicable to most goods and services, including everyday items such as clothing, electronics, furniture, and non-essential services. When purchasing goods or services subject to the standard French VAT rate, the final price will include this 20% tax.

Reduced VAT rates

Reduced rate (10%): The intermediate VAT rate of 10% is generally applicable to certain goods and services, such as processed food, agricultural supplies, water supply, medical products, and transportation services. These items fall under the reduced rate category, offering a slightly lower tax burden compared to the standard rate of VAT.

Reduced rate (5.5%): The super-reduced VAT rate of 5.5% is reserved for essential goods and services. It applies to items like basic food products, pharmaceuticals, books, newspapers, and public transportation fares. This lower rate aims to make essential goods more affordable and accessible to the general public.

Super-reduced rate (2.1%): This rate applies to specific products such as pharmaceuticals, newspapers, periodicals, and admission to certain cultural events.

French VAT compliance

Businesses operating in France are generally required to register for VAT if their turnover exceeds the EU-set threshold of €10,000. French VAT compliance involves registering for a VAT number, accurately calculating and collecting VAT from customers, maintaining proper VAT records, submitting regular VAT returns, and making timely payments to the tax authorities.

It's essential for businesses to understand and comply with the complex VAT rules and rates applicable to different goods and services, as well as any exemptions or reduced rates that may apply.

Non-compliance with VAT regulations in France can lead to penalties and legal consequences, making it crucial for businesses to prioritize VAT compliance to ensure smooth operations and avoid financial and legal risks.

Registering for a French VAT number

To register for a French VAT number, you must follow a few key steps. First, ensure that your business activities require VAT registration. If so, gather the necessary documentation, including your company's legal identification, proof of address, and details of your business activities. Then, submit an application to the French tax authorities, either online or by mail, providing all required information.

The tax authorities will review your application and, if approved, assign you a VAT number. This number is crucial for conducting business in France, as it allows you to charge and collect VAT on your goods or services and fulfill your tax obligations.

Foreign companies with a registered office outside the EU can register for French VAT with the assistance of a tax agent or fiscal representative.

Intra-community acquisitions

Another consideration is intra-community acquisitions. These are transactions between two companies located in different EU Member States, which come with their own set of regulations. The company making the purchase has to report the transaction to the tax authorities in its own country.

The place of taxation for these acquisitions is determined by the EU Member State where the goods finally land.

Filing VAT returns

To comply with the French VAT regulations, businesses are required to submit regular VAT returns to the tax authorities. These returns involve reporting the taxable transactions, calculating the VAT owed, and identifying the VAT already paid.

The frequency of filing a VAT return depends on the business's turnover and the chosen VAT regime. VAT returns can be filed electronically through the French tax administration's dedicated online platform, making the process efficient and streamlined. Accuracy and timely submission are crucial to avoid penalties and maintain compliance with VAT regulations in France.

Input VAT and deductions

In the French VAT system, businesses play a vital role in collecting and remitting VAT to the government. However, businesses are also entitled to claim deductions on the VAT they have paid on their purchases and expenses.

Input VAT

Input VAT refers to the value-added tax paid by businesses on their purchases of goods or services. When a business buys products or services from another business, it incurs VAT on the purchase price. This input VAT becomes an integral part of the overall VAT liability for the business, which it must declare and pay to the government.

VAT Deductions

One of the key principles of the France VAT system is the ability for businesses to deduct the input VAT they have paid on their purchases. This deduction mechanism ensures that businesses are only taxed on the value they add to a product or service, rather than being burdened with the cumulative VAT along the supply chain.

In France, businesses are allowed to deduct the input VAT they have paid on their purchases from the VAT they have collected from their customers. This deduction reduces the overall VAT liability for the business, and the net amount is then remitted to the government.

VAT refunds for EU and Non-EU companies

The VAT journey doesn’t end with paying and deducting VAT, however. There’s another aspect to it - VAT refunds. Both EU and non-EU companies can claim VAT refunds in France for purchases made within the country.

EU companies

EU companies can reclaim VAT in France by submitting form no. 3559-SD along with the relevant invoices. The deadline for these companies to file a VAT refund application is June 30 of the year following the year of the tax point. This deadline is important to remember, as any applications submitted after this date will not be accepted.

Non-EU companies

Non-EU companies, on the other hand, can also claim VAT refunds in France, but through a slightly different process. These companies must submit an application to the national tax authorities in France where they incurred the VAT.

The VAT refund forms must be authenticated by customs prior to departing France.

Special VAT regimes in France

To facilitate taxation and accommodate different types of businesses, France has established special VAT regimes. These are: the basic exemption scheme, the simplified real regime, and the normal real regime.

Basic exemption scheme

The 'basic exemption scheme' is designed for small businesses with limited turnover. Under this scheme, businesses are exempt from charging VAT to their customers and do not need to submit a VAT return. However, they also cannot deduct input VAT paid on their purchases. To qualify for the basic exemption scheme, businesses must meet specific turnover thresholds set by the French tax authorities.

The basic exemption scheme is an attractive option for startups and micro-businesses, allowing them to simplify their accounting processes and reduce administrative burdens. However, it's important to note that businesses under this scheme cannot reclaim VAT on their expenses.

Simplified real regime

This VAT scheme is primarily designed for small to medium-sized enterprises (SMEs) with moderate turnover. Under this regime, businesses charge French VAT to their customers and are required to submit a regular VAT return.

The key advantage of the 'simplified real regime' is that it offers simplified accounting procedures. Instead of reporting VAT transactions individually, businesses in this scheme can report VAT based on pre-defined percentages related to their activity sector. This simplified approach reduces the administrative burden for SMEs while still allowing them to deduct input VAT on their purchases.

To qualify for the simplified real regime, businesses must meet certain turnover criteria, which are periodically reviewed by the tax authorities.

Normal real regime

The 'normal real regime' is the standard VAT scheme that applies to most businesses in France. Unlike the previous two regimes, businesses under this scheme must track and report their VAT transactions in detail, including the VAT charged to customers and VAT paid on purchases. They must submit a VAT return regularly, usually on a monthly or quarterly basis.

The normal real regime provides businesses with the flexibility to deduct input VAT on their purchases, reducing the overall VAT liability. However, it also requires more comprehensive bookkeeping and record-keeping to comply with the stringent reporting requirements.

Reverse charge mechanism for import VAT

As of January 1, 2022, the reverse charge mechanism on import VAT became both mandatory and automatic in France. This means that payments and deductions of VAT due will be carried out simultaneously and automatically, without the need for payment of import VAT and deduction on the VAT return.

Responsibility for VAT due on imports now belongs to the French Tax Authorities (DGFiP) rather than the French Customs Authorities. The French tax return forms of those importing into France will be pre-filled by the tax authorities with the reverse charge of import tax already applied. This information is based on the import amounts reported on customs declarations.

Conclusion

VAT is a vital component of the French tax system, contributing significantly to the country's revenue. Understanding the basics of VAT in France is crucial for residents, businesses, and those seeking to engage in commercial activities in the country. Hopefully, this guide has shed light on the purpose, rates, exemptions, and obligations related to VAT in France, providing you with a solid foundation for navigating the complexities of the French VAT system.

Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.

Frequently Asked Questions

What is the VAT of France?

The standard VAT rate in France is 20%, while reduced rates are 10%, 5.5%, and 2.1%. Certain medicines and transport services are subject to the 10% VAT rate.

How much is the VAT refund in France?

Travelers to France can claim up to 12% of the Value Added Tax back upon leaving the country, provided they have spent at least 100€ within three days.

What is the purpose of VAT in France?

The purpose of VAT in France is to generate revenue to finance public services from businesses and individuals.

What is the basic exemption scheme in France?

The basic exemption scheme in France exempts companies with a turnover below a certain threshold from VAT reporting obligations.

This scheme is beneficial for small businesses, as it reduces their administrative burden and allows them to focus on their core activities.