Corporate Taxation: Taxes, Deductions and Optimisation

Corporate tax optimisation rarely begins with a scheme. It begins with three structuring decisions — the tax regime, the treatment of investments, and the rigour of supporting documentation — which determine most of the actual tax burden. The rest is a matter of marginal adjustments, often overestimated. This article covers these three areas, then the points on which the tax authorities most frequently make adjustments.

The tax regime, a foundational decision

Profits are taxed either under income tax in the hands of the operator or partners, or under corporate tax at the level of the company itself.

The attachment depends on the legal form, but it is largely optional: a sole proprietorship or a partnership can elect for corporate tax, and certain capital companies can, under conditions and for a limited period, elect for the partnership regime.

The trade-off hinges on one concrete point: what the manager actually withdraws. Under income tax, the entire profit is taxed in the manager's hands, whether or not it is withdrawn. Under corporate tax, undistributed profit is taxed only at the level of the company; the remuneration paid is deductible from the result, and dividends are subject to their own regime. A company that reinvests generally finds it advantageous to be under corporate tax; a business whose manager withdraws the entire result does not automatically benefit from it.

On rates, a reduced rate of 15% applies to a first bracket of profit, subject to conditions relating to turnover, full payment of capital and its majority ownership by individuals. Beyond this bracket, the standard rate applies. As these thresholds are periodically revised, they must be checked for the financial year concerned.

Deductible expenses: four cumulative conditions

An expense is deductible only if it satisfies all of the following conditions:

• It is incurred in the interest of the business, and not in the personal interest of the manager.
• It results in a reduction of net assets, which excludes expenses that in reality constitute a capitalised asset.
• It is recorded in the financial year in which it is incurred.
• It is substantiated by a valid supporting document.

The fourth condition is the one that causes the most deductions to be lost, and it is purely documentary. A genuine and perfectly legitimate expense becomes non-deductible for want of a compliant invoice. This is also the area where the rollout of electronic invoicing is changing practices: the reliable audit trail, which links the invoice to the economic flow and to payment, is becoming the standard of proof. Our article on the reliable audit trail details what this requirement covers.

Certain expenses are excluded by nature, regardless of their usefulness: fines and penalties, lavish expenditure, and part of the expenses relating to passenger vehicles.

Investments: depreciate, provision, deduct

Three treatments coexist and are not interchangeable.

Depreciation spreads the deduction of a capitalised asset over its useful life. The choice of method and duration is not free: it must reflect the actual consumption of the expected economic benefits. The applicable rules are set out in our article on accounting depreciation.

The provision anticipates a probable and clearly specified expense. Its deductibility requires that the event be ongoing at the closing date and that the amount can be estimated with sufficient accuracy. A flat-rate provision, calculated as a percentage without individual analysis, is regularly rejected — see our rules applicable to provisions.

Immediate deduction remains possible for low-value assets, below a unit threshold, as well as for maintenance expenses that do not extend the useful life of the asset. The boundary between deductible maintenance and improvement to be capitalised is a classic point of tax adjustment.

VAT, a matter of cash flow as much as tax

VAT is not an expense for the taxable business, but it weighs on its cash flow and accounts for a significant share of adjustments.

Deduction of input VAT requires a compliant invoice showing all the mandatory particulars, an expense incurred for the purposes of transactions giving rise to a right of deduction, and the tax becoming chargeable at the supplier's level. Certain expenses are excluded from the right of deduction, notably those relating to passenger vehicles and certain accommodation services.

A VAT credit may be refunded rather than carried forward, which usefully changes the cash flow profile of businesses in an investment phase. The details are set out in our article on VAT credit adjustment and refund.

Incentive schemes, to be assessed before committing to them

Research tax credit, innovation tax credit, apprenticeship support, exemptions linked to geographic location: these schemes represent significant amounts, but their logic is identical. They require documentation built up as you go, not reconstructed in the year of the audit.

A research tax credit without a technical supporting file and without tracking of time spent per project is a fragile tax credit. The amount obtained and the amount retained after an audit are two different things, and the gap is entirely down to the quality of the file.

What an audit looks at

The standard limitation period allows the tax authorities to adjust the three preceding financial years. The most frequent points of adjustment are stable from one year to the next:

• Unsubstantiated or insufficiently substantiated expenses.
• Confusion between personal and business assets, notably regarding vehicles, travel expenses and mixed-use premises.
• Provisions that are insufficiently individualised.
• Capitalisable expenditure recorded as expenses.
• VAT deducted on expenses excluded from the right of deduction.

Rights and obligations during the procedure — response deadlines, guarantees, avenues of appeal — are covered in our article on tax audit.

Usage scenarios

Starting a business. The choice of regime must be made based on a three-year projection of the manager's withdrawals, not solely on the headline tax rate. This is the decision with the greatest cumulative effect.

Unexpected profitable year. Legitimate year-end levers are limited: recognise justified provisions, incur genuinely useful expenses before closing, verify that depreciation has been applied. Decisions taken after closing have no retroactive effect.

Significant investment. The trade-off between immediate deduction and depreciation must be prepared before commitment, as it depends on the nature of the asset and not on a discretionary choice.

Frequently asked questions

Which tax regime should be chosen? This depends mainly on what the manager withdraws. The corporate regime suits businesses that reinvest, since undistributed profit is taxed only at the company level. Taxation at the partner level taxes the entire profit, whether withdrawn or not.

Is a business expense always deductible? No. It must be incurred in the interest of the business, reduce net assets, be recorded in the correct financial year and be substantiated. Certain categories are excluded by nature, such as fines and lavish expenditure.

Can a vehicle be deducted? Partially. Passenger vehicles are subject to a cap on deductible depreciation and an exclusion from the right to deduct VAT. Commercial vehicles are subject to a different regime.

Is a provision freely deductible? No. It requires a probable expense, clearly specified, whose triggering event is ongoing at the closing date. A provision calculated on a flat-rate basis, without a case-by-case analysis, is regularly challenged.

How many years back can the tax authorities go? The standard limitation period covers the three preceding financial years, with extended periods in certain situations, notably in the case of undeclared activity.

Is the research tax credit risky? The scheme itself is not; a file put together after the fact is. Technical documentation and time tracking per project must be produced as you go so that the credit obtained can withstand an audit.

Key takeaways

Three decisions determine a company's actual tax burden, and they are taken upstream: the tax regime, decided on the basis of the manager's actual withdrawals rather than the headline rate; the treatment of investments, between immediate deduction, depreciation and provisioning; and the quality of supporting documentation.

This last point is the least glamorous and the most profitable. Most tax adjustments do not penalise questionable schemes but genuine expenses that are poorly documented. Accounting records in which every entry is linked to a valid supporting document retain, after an audit, what approximate accounting will have only declared.