The status of sole trader was amended by Law no. 2022-172 of 14 February 2022 to promote self-employed professional activity. This new status applies to self-employed entrepreneurs operating in their own name, irrespective of the income tax category to which the activity belongs (industrial and commercial profits, non-commercial profits, agricultural profits). This law allows sole traders to opt for assimilation to a single-member limited liability company (EURL) or a limited liability farm (EARL) in which the sole trader acts as the sole shareholder.
In accordance with Article 1655 sexies of the French General Tax Code (CGI), this option means that the sole trader is subject to corporation tax, which has consequences for the sole proprietorship's results and for their personal taxation.
A sole trader subject to income tax may opt to have their business subject to corporation tax within the first three months of the financial year in which they wish to apply the option.
For example, a sole trader will have to exercise this option by 31 March 2024 at the latest if they want this change of regime to apply in 2024 to their business whose tax year began on 1 January 2024.
The advantages and disadvantages for sole traders of opting for corporation tax
For a sole trader, the advantages of opting for corporation tax include the following:
- control over personal taxation and social security contributions by deciding how much remuneration to receive. Only the remuneration actually received will be subject to income tax and social security contributions;
- the breakdown between remuneration (subject to the progressive scale of income tax at the marginal rate of 45%) and dividends (subject to the flat tax of 30% under certain conditions);
- reinvestment of profits generated by the sole proprietorship.
However, this change in tax regime means that certain measures favourable to sole traders are excluded, in particular the taxation of capital gains on the sale of fixed assets:
- application of the long-term regime to disposals of depreciable fixed assets ;
- the exemption based on revenue provided for in Article 151 septies of the CGI;
- the allowance for long-term capital gains on property provided for in Article 151 septies B of the CGI.
Determining the taxable profit of a business subject to corporation tax is essentially identical to that of a sole trader subject to income tax, i.e. the difference between sales and expenses. However, any remuneration that the sole trader may pay themselves is also considered a deductible expense, unlike in a sole proprietorship subject to income tax.
The sole proprietorship's taxable income is generally subject to the reduced rate of 15% applying to small and medium-sized enterprises (PME) up to €42,500, and then to the rate of 25% above that.
Only the remuneration actually received by the sole trader is taxed. As the sole trader is treated in the same way as the majority manager of a limited liability company (SARL), their remuneration is subject to the progressive scale of income tax in the category of salaries and wages, pursuant to Article 62 of the CGI.
Within the first three months of their business year, sole traders must consider whether they should opt for corporation tax, by assessing the tax and social security charges resulting from this option. Lobe Law, lawyers specialising in tax and sports law, is delighted to assist its clients in this respect. Please feel free to contact us!