Tax revolution for liberal practice partnerships (“sociétés d’exercice libérale” – SEL): reversal of administrative doctrine for remuneration received by partners
UPDATE: An official communication from the French tax authorities has just indicated that it will be possible to continue to apply the old doctrine to remuneration paid in 2023, until all the questions linked to the change in doctrine have been resolved. The changeover to BNC is therefore no longer compulsory from January 1, 2023, but will be from January 1, 2024. This leaves plenty of time to prepare for the changes ahead[1].
For many years, French administrative doctrine and the jurisprudence of the Conseil d’Etat (the highest French administrative court) have been at odds over the tax treatment of remuneration received by partners in sociétés d’exercice libérale (SEL). For the former, remuneration for the technical functions of these associates fell into the category of salaries and wages, since the associates had no clients, only their company did, whereas in several rulings, the Conseil d’Etat classified this remuneration in the category of non-commercial profits (BNC), considering that these associates had no subordinate relationship with their company.
In an update dated December 15, 2022, the French tax authorities reversed their administrative doctrine, setting out a new tax regime for the remuneration of SEL partners. The new regime, applicable from January 1, 2023, is a real big bang for the structures of liberal practice as well as for the associates, who must urgently adapt to new constraints.
1. A turnaround with almost immediate effect
As a reminder, until now, the technical remuneration of SEL associates was taxable as wages and salaries as long as they carried out their activity within the company (this position was contrary to two rulings by the Conseil d’État on October 16, 2013 and December 8, 2017). Conversely, SELARL minority partners were taxed as non-commercial profits.
Since January 1, 2023, the tax treatment of remuneration received by partners in a société d’exercice libéral can be summarized in three points:
- Remuneration received by SEL partners in respect of the exercise of their professional activity within this company is taxable in the BNC category.
- However, such remuneration is still taxable as wages and salaries when there is a relationship of subordination to the company that characterizes an employed activity.
- The same rules apply to the majority managers of SELARLs and partners of SELCAs, provided that the remuneration received for their professional activities can be distinguished from that received for their management functions. Failing this, such remuneration is taxable as wages and salaries, in the same way as remuneration received for management duties.
This change concerns only the tax aspects of associates’ remuneration, and not the social security regime, which remains unchanged.
It should be noted that an amendment was made to the Finance Act for 2023. Although this was ultimately rejected, it went against the administration’s new position and provided for this income to be subject to the salary and wages regime.
It would have been wise for such a provision to have been enacted, so that the new rule would have legislative force. It should be remembered that administrative doctrine has a sub-legislative value. A law can therefore be passed providing for a different tax regime.
2. Important practical consequences
This is an important reversal, as from now on, SEL associates will be subject to the non-commercial profits regime.
This non-commercial profits regime has a number of consequences, since these partners will henceforth have to keep accounts if they are subject to an actual tax regime.
It is also essential for each SEL partner to file an activity declaration with the tax authorities.
Similarly, associates must now issue an invoice in the name of the SEL each month in order to receive their remuneration. Clearly, a number of questions arise, and it will be essential to regulate practices, notably in the partners’ agreement. How can we resolve the problem of structures in which remuneration was previously paid on the basis of N-1 sales, with readjustment at the end of year N? It would seem complicated to maintain this practice, otherwise we would have structures that remunerate partners on sums that have not been invoiced for the month…
There is also the question of VAT liability, which was not previously the case since this tax was managed directly by the structure. Indeed, administrative doctrine now expressly states that SEL partners are not liable for VAT on invoices issued to the structure in which they are partners, since it is the structure that invoices the customer and has the customer[2]. We therefore find ourselves in a situation where an SEL partner is carrying out a BNC activity, outside the scope of VAT…
Numerous other questions arise, whether in terms of CFE, professional expenses or company car tax…
Be that as it may, the reversal of administrative doctrine concerning the remuneration of SEL partners represents a revolution in both tax and legal terms. While there are many businesses operating under this legal form (architects, lawyers, medical professions, etc.), it is essential to provide a legal framework, notably in the partners’ agreement, for the new practices to come, to prevent conflicts which will otherwise be unavoidable in certain respects.
Our lawyers are at your disposal to answer all your questions and advise you. Our meetings can be held face-to-face or by videoconference. You can make an appointment directly online at www.agn-avocats.com.
[1] “Consequently, it is accepted that SEL partners declaring, on the basis of the aforementioned doctrinal comments in their version prior to the December 15, 2022 publication, the remuneration received for the exercise of their liberal activity in these companies in the category of salaries and wages or, in the case of managing partners of SELARLs and managing partners of SELCAs, under the conditions set out in article 62 of the CGI, may continue to be taxed according to these same conditions until December 31, 2023, in respect of these remunerations, when these taxpayers are unable to comply with the BNC tax regime as of January 1, 2023”.
[2] BOI-TVA-CHAMP-10-10-60-10
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