France
Tax
Legislation
The French Ministry of Finance is undertaking some serious rethinking
of the way income from economic activities of NPOs should be taxed. The
Ministry of Finance has issued in a very short period of time two fiscal
instructions as well as explanatory documents. In volume 1 issue 2 of
IJNL, we
discussed provisions from the ministerial instruction of September 15, 1998.
The measures taken in that instruction were the result of a report
(“Clarification of the tax treatment of NPOs”) prepared by Mr. Goulard, counsel
of the Conseil d’Etat, to the Prime Minister on March 10, 1998. On
February 19, 1999, a second instruction was issued by the Ministry of Finance,
which provides further specifications to the instruction of 1998.
In this note we review the changes these instructions bring to the tax
treatment of NPOs in France.
1.
General Principle
It is now confirmed that the “exemption of NPOs from commercial taxes
remains a general principle, and their liability the exception.”[1]
In order to guarantee the principle of equality before tax and avoid distortion
of competition, NPOs engaging in business activities are liable for commercial
taxes i.e., VAT, professional tax and company tax. The criteria
established by the “doctrine des œuvres”
(fiscal instruction of May 27, 1977) in order to determine the
social utility, and therefore whether an NPO is tax exempt, is repealed. New criteria have been established.
Furthermore, according to the instruction of February 19, NPOs
performing economic activities will be exempt from VAT and professional tax
when:
·
The turnover of the organization
engaging in the delivery of goods, the sale of goods to be consumed on the
premises of an establishment, or lodging activities, is less than FF 500,000
per year.
·
The turnover of an organization
engaging in any other economic activity is less than FF 175,000 per year.
2.
Determination of the tax treatment
of an NPO
A three-step approach, described in the chart below,[2] aids in determining whether an NPO is liable for the payment of commercial taxes.
STEP 1
Does the
management have a financial interest
in the NPO?
No Yes
Go to step 2 The NPO is
liable for commercial taxes
STEP 2
Does the
NPO compete
with the business sector?
No Yes
The NPO is exempt from commercial taxes Go
to step 3
STEP 3
Does the
NPO conduct its activities along similar lines
to the business
sector?
No Yes
The NPO is
exempt from commercial taxes The
NPO is liable for commercial taxes
The following discussion explains each of these steps.
2.1. Does the management have a financial interest in the NPO?
The management does not have a financial interest in the NPO when:
·
The management and administration
of the NPO are carried out on a voluntary basis.
·
Profits are not distributed either
directly or indirectly, but used for the statutory purposes of the NPO.
·
In the case of dissolution, the
assets of the NPO are to be transferred to another NPO and must not be
distributed among members.
Since the last two points are self-explanatory, the
only issue is when the management of the NPO is considered to be on a
“voluntary basis”.
Prior to the latest ministerial instruction, it was required that
directors not be remunerated.[3] However, it is now accepted that they may
receive 75% of the minimum wage (SMIC)[4]
as compensation for work performed in the NPO, in-kind contributions, bonuses
and reimbursement of unverified expenses.[5] Payment of rent at market rate for property
used by the NPO or the payment of a reasonable salary to a relative of the
director who is employed in the NPO are not to be considered as grounds for
disqualification of the NPO.[6]
This requirement is to be applied to each director on an annual basis.
However, if a person is director of several NPOs, which are linked by their
purpose, activities and common directors, the total remuneration of the
director from all these NPOs should not be greater than 75% of the minimum wage
(SMIC).[7]
It is accepted that a director may be an employee of the NPO and therefore
receive a salary, but in this case, it is important that s/he be subject to
the supervision of the governing body. Otherwise, if s/he were a de facto
director and received remuneration greater than 75% of the minimum wage, the
NPO would be liable for payment of commercial taxes.[8]
Finally, the instruction dated February 19, 1999 clarified the issue of
remuneration of employees serving on the directing body of the organization.
Their remuneration is not limited to 75% of the minimum wage. These employees
are considered employees’ representatives and should not compose more than
one-fourth of the directing body.
2.2. Does the NPO compete with the private sector?
Only identical activities (including secondary activities) carried out
by an NGO and a business are to be taken into consideration. There is
competition only when a particular need can be satisfied either by a business
or an NPO in a given geographic area. It is further possible to evaluate
whether the activity carried out by the NPO can effectively take clients away
from the business entity and reduce its income.[9]
2.3. Does the NPO conduct its activities along lines similar to the business
sector?
The new method used to determine whether an NPO is exempt from commercial
taxes is an evaluation of the product, the public targeted, the price
applied, and the publicity given to the product. The importance of these
criteria, also called the “rule of the 4Ps”, is to be applied in decreasing
order. The product and the public are the key elements in determining the
social utility of the activity.
2.3.1.
The product
“An activity satisfying a need
which is not satisfied or is poorly satisfied by the market” is of social
utility. When an “agrément”[10]
(accreditation) cannot be granted to a business entity, and so is granted
to an NPO by the State,[11]
the activity undertaken by the NPO is recognized as being of social utility.
2.3.2.
The public
The term “public” is understood to encompass the persons who purchase
goods or services from an NPO.[12]
The activity is considered of social utility when the grant of specific
advantages to the public is justified or the economic and social situation of
the public justifies it.
2.3.3.
The price
The price established for the provision of a good or service must be:
·
Significantly lower than the market
price (commercial taxes paid by business entities must be subtracted in order
to compare the prices);[13]
·
Sanctioned by public authorities;
or
·
Variable, depending on the
situation of the public.
2.3.4.
Publicity
Finally, it is necessary to evaluate how the
organization manages its marketing campaigns. For that purpose, it is necessary
to establish whether the NPO carries out informative marketing, which is
acceptable, or commercial marketing, which is not.
3.
Management of commercial activities
3.1. Division of activities into two classes: “sectorisation”
For purposes of the VAT, the “sectorisation” (division of
activities into two classes, one for-profit and one not-for-profit) of activities was
already a requirement. Now this system can be adopted by an NPO in order to
escape company tax and professional tax on those activities that qualify as
not-for-profit. The not-for-profit activities must remain dominant, and the
accounting standards adopted should allow for the evaluation of each class of
activity.
The organization will achieve the “sectorisation” of its activity in
adopting accounting standards that will allow the use of separate accounts for
the activities qualifying as commercial and those qualifying as not-for-profit
according to the “rule of 4Ps”.
However, other parameters more difficult to account for, such as volunteers’
time, will be taken into consideration. The assets of the organization will
then have to be allocated either to the commercial sector, the not-for-profit
sector, or both.[14] Further,
donations allocated to the “not-for-profit sector” will be tax deductible for the
donor.
3.2. Creation of subsidiaries- “filialisation”
The active or passive (i.e., as a shareholder) participation of an NPO
in a business entity can be of interest when the NPO carries out significant
taxable activities. Indeed,
transferring the commercial activities into a subsidiary prevents the NPO from losing its exemption from commercial taxes. However,
if the activities of the NPO are carried out for the benefit of the subsidiary
created (e.g., helping the subsidiary reduce its expenses, increase its
profits, obtain more customers, improve its management, etc.)[15]
the NPO may lose its tax exempt status.
The grace period, which had been granted until March 31, 1999, was
extended to January 1st, 2000.[16]
NPOs must now comply with the new regulations. Furthermore, NPOs that consult
the “association correspondent” from the tax authorities in order to clarify
their tax status before January 1st will not be liable to tax
adjustment for the prior tax periods. This is in addition to the measure
already taken in September 1998 to revoke income tax assessment previously issued by
the tax authority disputing the non-profit character of an organization.
Further changes to the taxation of NPOs have been adopted in the
finance law 2000 promulgated on December 31, 1999. As had been announced by the
French Prime Minister during the “Conference on Associative Life” held in Paris
on January 20 and 21, 1999, article 15 of the finance law 2000 contains
provisions that grant organizations whose revenue from activities qualifying as
“for-profit” according to the rule of 4Ps, exemption from commercial taxes as
long as such revenues do not exceed FF 250,000. Regarding VAT, this provision
will be applied for activities carried out by the organization on the following
fiscal year the requirement was met. If the revenues of the organization exceed
the franchise during the year the organization is entitled to VAT exemption,
the organization will loose this benefit as soon a its revenues exceed the FF
250,000.
In addition, the finance law 2000 harmonizes tax deductions of
donations by individuals to organizations recognized as being of “public
utility” (associations et foundations reconnues d’utilité publique) and
donations to other organizations of general interest (charities and accredited
organizations). The maximum credit received for donations to organizations of
general interest was 50% of the amount of the donation, limited to 1.75% of
taxable income. The credit is still 50% of the donation, however the limit is
now 6% of taxable income, as was already the case for donations to associations
and foundations of public utility. Donations to organizations supporting persons
in difficulties receive a credit independently from other donations at a rate of
60% of the donation, up to FF 2070 of income per taxable year.
Framework
legislation
Another measure relevant to the non-profit sector was promulgated on
April 8, 1999: New accounting standards for NPOs, which had been adopted in
February by the National Council on Accounting.
In another development, the requirements for granting public benefit
status to a foundation or an association (“reconnaissance d’utilité publique”)
are currently being discussed and a report on the concept of public benefit was
adopted by the Conseil d’Etat on November 25, 1999. A paper about this matter
will appear in the March issue of IJNL.
Caroline L. Newman
ICNL
ICNL would like to thank Michel Doucin, General Secretary of the High
Council of International Cooperation attached to the of the French Prime
Minister’s office, and Yan Kergall, attorney in the Paris law firm UGGC and
associés, who both provided access to materials that were used in writing this
note.