Do not Be Fooled by ‘Micro-Entreprise’ Status
In the minds of many who relocate to France a ‘micro-entreprise’ is synonymous with a 'small business', but do not let hasty translation put you in a tax trap.
The term micro-entreprise is reserved exclusively for a small business that has a particular type of tax status, in which they benefit from simple tax and accounting rules.
However, just because the rules are simple, does not necessarily mean they are more favourable, and many who make this choice do so erroneously, because they end up paying more in tax and social security contributions than they need do.
The key benefit of micro-entreprise tax status is that, instead of having to maintain a set of accounts to arrive at a profit figure on which you pay tax and social security contributions, your tax liability is calculated after deduction of a fixed rate allowance against annual turnover.
The fixed rate allowance that applies depends on the type of business you run. Those whose activity is commercial sales, or the provision of furnished accommodation (and certain others), receive an allowance of 71%; those pursuing service based activities receive an allowance of 50%; those in a 'professional' activity receive an allowance of 34%.
This means that liability to tax and social security contributions arises on either 29%, 50% or 66% of gross sales income, depending on the type of business activity.
Accordingly, if your costs are greater than the standard micro allowance, you would actually be better off electing for the tax status of régime réel, under which you would be liable to income tax and social security contributions on actual profits.
Under the régime réel most of your social security contributions are a deductible expense. This factor alone often tips the balance in favour of the régime réel.
There are also other disadvantages of micro status, which you can read more about in our Guide to Starting a Business in France.
The downside of régime réel is that you might need to use an accountant to do your accounts, although this is not obligatory, and many small business owners keep their own books.
We do not deny that choosing micro status as a tentative first step in the establishment of a small business can often make sense, but you would be wise to avoid doing so as a reflect action, merely because it is simpler.
In the Guide, we recommend strongly that if you are thinking of setting up a business in France you should make a visit to a good commercially orientated accountant, advice we do not hesitate in repeating here.
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