Holding company and payroll tax: the benefits of creating a limited liability company (SARL) to avoid payroll tax on directors’ remuneration!

Payroll tax is payable by employers who are not subject to VAT, or who have not been subject to VAT on at least 90% of their sales for the calendar year preceding that in which the remuneration is paid (CGI, art. 231, 1).

As a general rule, therefore, a holding company is liable for this tax when it receives dividends from its subsidiaries, or other financial income not subject to VAT. The basis of assessment for this tax is determined by a ratio known as the “coefficient d’assujettissement”: in the numerator, sales not subject to VAT (“overall revenue and other products which have not given rise to the right to deduct VAT”), and in the denominator, sales revenue for the year.

The hope of excluding dividends received by a mixed holding company from the “coefficient d’assujettissement” of the payroll tax was quickly dashed by a ruling by the Conseil d’Etat on February 14, 2018 (CE 8e-3e chambre, 14 février 2018, n°410302, Sté Nord Provence Finances), which confirms that the rules for calculating the “rapport d’assujettissement” to the payroll tax are autonomous from the calculation of the tax coefficient used to determine the VAT deduction coefficient and that, as such, dividends received by a ” holding mixte animatrice ” must be included in the numerator of the “rapport d’assujettissement” to the payroll tax (see point 2. ).

Payroll tax issues are not neutral for holding companies and must be anticipated. There are two possible solutions to prevent the remuneration of holding company executives from being subject to payroll tax:

1. ensure that the executive in question is not covered by the general social security system, as is the case for the majority manager of a SARL (1.); or
2. create a separate financial sector for VAT purposes, in which only the remuneration of persons wholly and exclusively assigned to this financial sector will be subject to payroll tax, the manager being exclusively assigned to the business sector subject to VAT and not subject to payroll tax (2.).

1.       No payroll tax for holding company executives subject to the non-salaried worker regime

The basis of assessment for the payroll tax is the sums included in the basis of assessment for the “Contribution Sociale Généralisée (CSG) d’activité” pursuant to article 231 of the Code Général des Impôts (General Tax Code).

In application of article L. 136-2 of the French Social Security Code (CSS), the CSG basis of assessment comprises the gross income from activities carried out by the persons mentioned in article L. 311-2 of the CSS and article L. 311-3 of the CSS; this corresponds to all sums subject to the general social security system.

Position of the Conseil d’Etat

The Conseil d’Etat considered that only executives mentioned cumulatively in article 80 ter of the CGI and article L 311-3 of the CCS were within the scope of application of the payroll tax (CE 21-1-2016 n° 388989, 8e et 3e s.-s., Sté Juliane : RJF 4/16 n° 332).

The Conseil d’Etat has broadened its position, stating that remuneration paid to corporate officers who are compulsorily affiliated to the general social security scheme must also be included in the payroll tax basis, even if such officers, such as members of the management board of an incorporated company, are not expressly referred to in Article L 311-3 of the Social Security Code (CE 3e-8e ch. 19-6-2017 n° 406064, SAS ICMI). To explain this solution in her conclusions, the rapporteur public, Emmanuelle Cortot-Boucher, indicated that the list given by article L. 311-3 is not limitative, which results from the fact that it is introduced by a “notably” and is only intended to specify the scope of article L. 311-2.

The French administration’s position

Following the ruling by the Conseil d’Etat, the administrative doctrine clarified the cumulative nature of articles 80 ter of the CGI and L. 311-3 of the CSS, specifying that “notably included in the CSG and therefore payroll tax base are remunerations paid to company executives designated in article 80 ter of the CGI and referred to in article L. 311-3 of the CSS” (BOI-TPS-TS-20-10-20180606 n°40 after modification of the doctrine following the ruling CE 21-1-2016 n° 388989).

According to the French tax authorities, article 80 ter of the CGI covers all executives subject to the employee tax regime, including non-partner managers and majority managers of SARLs, as well as non-partner managers and general partner managers of sociétés en commandite par actions (BOI-RSA-CHAMP-20-40-20-20160526 n°30); this position could be challenged, as majority managers of SARLs are covered by article 62 of the CGI and not article 80 ter of the CGI.

No payroll tax on the remuneration of TNS executives

To date, the remuneration of executives who are not covered by the general social security scheme provided for under Article L 311-2 of the CSS, in respect of their corporate mandate, remains excluded from the payroll tax base, which corresponds to the following functions:

• SARL majority managers ;
• managing partners of EURL (one-person limited liability undertakings);
• directors or members of the supervisory board, even if entrusted with special functions;
• provisional managing directors of incorporated companies;
• managing partners of partnerships (SNC).

In application of the presumption of non-affiliation with the general scheme, SARL majority managers are not subject to the general social security scheme, but are covered by the scheme for non-salaried workers (L 311-11 of the CSS and L 311-3, 11° of the CSS and former L 120-3 of the Labor Code, now article L 8221-6, I of the Labor Code).

Even if the list given by article L. 311-3 is not limiting, due to the introduction of this list by the adverb “notably”, it seems difficult to consider that the functions listed above fall within the scope of the payroll tax, being functions subject to the scheme for self-employed workers (régime TNS).

Thus, creating a SARL holding company should make it possible to avoid payroll tax on remuneration paid to the managers, if they are majority managers…

Beware of the impact of the TNS regime on dividends paid to managers

If the SARL holding company wins the payroll tax battle, the simplified joint stock holding company (SAS holding) wins the dividend tax battle! While the creation of a SARL holding company enables directors to be affiliated to the TNS social security system, and thus offers a clear advantage in terms of payroll tax, this status does have the disadvantage that the portion of dividends exceeding 10% of the share capital, share premiums and contributions to partners’ current accounts received by the TNS executive will be subject to social security contributions at the rate set for earned income, whereas the assimilated employee executive of an SAS holding company, for example, will be subject to the single flat-rate withholding tax on dividends received, and to social security contributions at a rate of 17.20%. Do the math to check whether the absence of payroll tax compensates for the fact that part of the dividends are subject to social security contributions!

Benefits for activities not subject to VAT

In addition to the specific case of holding companies, subjecting directors to the TNS social security system may also be of interest for activities not subject to VAT (insurance, brokerage, etc.), in order to avoid payroll tax on executive’s remuneration.

2.       Mixed holding company and creation of two distinct business sectors

If the executive in question comes under the general social security system, a mixed holding company (a holding company that receives dividends but also invoices services to subsidiaries) can limit the amount of payroll tax it has to pay by segmenting its financial and non-financial activities.

Holding animatrice – dividends are included in the numerator of the payroll tax liability coefficient, as the payroll tax liability ratio is not the VAT counter-prorata.

In a ruling handed down on February 14, 2018 , the Conseil d’Etat reaffirmed the principle that dividends received by a company, including a holding company interfering in the management of its subsidiaries (in particular by providing services subject to VAT for the benefit of the latter), must be included in the numerator of the “rapport d’assujettissement on payroll tax  referred to in Article 231,1 of the French General Tax Code, thereby increasing the said tax (CE 8e-3e chambre, February 14, 2018, n°410302, Sté Nord Provence Finances).

The Conseil d’Etat puts an end to the hopes raised by the Douai Administrative Court of Appeal, which had ruled in the case of a mixed holding company that dividends should not be included in the numerator of the ratio used to determine the basis of liability to payroll tax, since the VAT on its overheads was fully deductible, the dividends paid by its subsidiary should therefore be considered as the consideration for an economic activity, falling within the scope of VAT (CAA Douai 28-2-2017 n° 15DA00594, 2nd ch. , Sté Nord Provence Finances: RJF 6/17 n° 549, concl. J.-M. Guyau).

The Conseil d’Etat recalls that the rules for calculating the “rapport d’assujettissement” on the payroll tax are autonomous from the calculation of the tax coefficient used to determine the VAT deduction coefficient. The numerator of this ratio takes into account the total revenues and other income that did not give rise to a right to deduct VAT, i.e. income or revenues corresponding to operations outside the scope of application of VAT but also within the scope and exempt from this tax, which includes dividends! (CE 14-2-2018 n° 410302 : RJF 5/18 n° 483 ).

“After noting that Nord-Provence Finances is a mixed holding company which receives dividends from its subsidiary, invoices the latter for assistance services and interferes in its management, which makes it possible to consider the holding company as carrying out an economic activity, the court deduced from this finding that the VAT on its overheads is fully deductible, which is correct. But the ruling is vitiated by an error of law insofar as it then holds that the dividends paid by the subsidiary must be considered as the consideration for an economic activity, falling within the scope of application of value-added tax” (Conclusion by the rapporteur public Benoît Bohnert under CE 14-2-2018 n° 410302: RJF 5/18 n° 483).

Dividends received by an animating mixed holding company must therefore be included in the numerator of the “rapport d’assujettissement” on the payroll tax (CE 14-2-2018 n° 410302, CAA Nantes, April 19, 2018, 16NT02041, SAS Groupe Monin; BOI-TPS-TS-20-30 n° 90).

Consequences of creating separate business segments

Companies that have set up distinct sectors of activity for VAT purposes (CGI, ann II, art 209), must determine the payroll tax by applying to the remuneration of employees specifically assigned to each sector the “rapport d’assujettissement”  specific to that sector. The French tax authorities specify that “when distinct sectors of activity exist for VAT purposes, they must be taken into account when calculating payroll tax” (BOI-TPS-TS-20-30 n° 190).

In the case of a separate business segment, payroll tax is calculated as follows:

• remuneration paid to staff permanently and exclusively assigned to the financial sector is, in principle, fully subject to payroll tax;
• remuneration paid to staff permanently and exclusively assigned to the non-financial sector is not subject to payroll tax;
• remuneration paid to employees assigned to both of the above sectors is subject to payroll tax on the basis of the mixed holding company’s general tax liability ratio.

If there is a sectorization, it must actually be materialized! The Nantes Administrative Court of Appeal has ruled that a company does not demonstrate the sectorization of its activities by producing a simple table showing the allocation of each employee to each sector, and which does not provide any details or justification on the nature of its activities and operating resources, and does not justify the existence of separate accounting (CAA Nantes, April 19, 2018, 16NT01807, SA Vallogis), so take care to properly materialize the sectorization of your business sectors!

Application to executives

Presumption of concurrent assignment to both sectors

The Conseil d’Etat has indicated that, due to the transversal nature of the attributions of the Chairman of a SAS pursuant to Article 225-56 of the French Commercial Code, his remuneration is presumed to be allocated to both the financial and non-financial sectors “even if the monitoring of activities is subcontracted to third parties or entrusted to employees specially assigned to this sector, and if the number of operations falling within this sector is very low” (CE 8-6-2011 n° 331848, Sté Sofic, and CE, 3rd and 8th ch, June 19, 2017, n° 406064, SAS ICMI , concl. E. Cortot-Boucher).

Proof to the contrary of non-allocation to financial sectors

Despite the presumption, the administration admits that “the company may provide proof that some of its executives do not have an assignment in the financial sector. Such proof may be provided, for example, if it is clear from the company’s articles of association, board of directors’ deliberations or employment contract that an executive does not have the legal authority to exercise control and responsibility in the financial sector. In this situation, their remuneration must not be allocated to the financial sector for the purposes of calculating payroll tax” (BOI-TPS-TS-20-30-20160406 n°195).

The Conseil d’Etat appears to limit proof to the contrary to the presence of at least two executives, stating that “However, if it is clear from the evidence produced by the company that some of its executives do not have allocations in the financial sector, in particular when, given the organization adopted, one of them is deprived of all control and responsibility in this area, the remuneration of this executive must be regarded as falling entirely within the sectors liable to VAT and, consequently, as placed outside the scope of the payroll tax” (CE, 3e et 8e ch., June 19, 2017, n° 406064, SAS ICMI , concl. E. Cortot-Boucher).

In practice, the following precautions should be taken:

• create a delegation of authority structure that is sufficient to overcome the presumption of mixed management, in the case of a company with multiple managers;
• if necessary, appoint two directors; and
• in the case of salaried executives, include a description of their duties in their employment contract, and exclude them from the holding company’s financial sector.

Holding company and payroll tax: This is not a simple subject, but it is one that must be understood when setting up or structuring a holding company!

If you have reached the end of this article, and would like to be assisted in structuring your holding company to optimize its tax position, AGN Avocats invites you to make an appointment with one of our tax and corporate lawyers to discuss your situation.