Auto-Entrepreneur or Regime Reel?
Wednesday 04 November 2015
Much is frequently made of the advantage of the 'pay-as-you-go' contribution basis for auto-entrepreneurs, but the argument can be overplayed.
The tax status of auto-entrepreneur is popular amongst those setting up a business in France. It is simple to operate and social security contributions (cotisations) are only payable if you actually generate sales.
This is in contrast to a business that adopts the standard tax status of Régime Réel, in which (broadly speaking) cotisations are based on the profit of the business, and which requires that at least a minimum level of cotisations are paid, irrespective of the level of profit.
In reality, the differences are not always as great as is often perceived.
Although it is true to say that in the absence of any turnover an auto-entrepreneur pays no social security contributions, the moment sales are generated, irrespective of costs or whether a profit is realised, it triggers a directly proportional cotisation payment.
The rate at which the cotisation is payable will depend on the nature of the business activity, but ranges from 13% to 23% of turnover.
It is not possible to record a deficit under the auto-entrepreneur tax regime.
Nevertheless, on the face of it their position still contrasts favourably with those using régime réel, who are subject to a minimum provisional obligation of around €3,000 in social security contributions in their first year of activity (pro-rata to the commencement date of the business), rising to around €4,500 in the second year.
This occurs because, in the absence of any prior activity, for the first two years the RSI social security agency assumes provisional profit figures (called a 'forfait') on which contributions are based.
If your profit turns out to be less than those of the forfait you will receive a reimbursement of overpaid cotisations, subject to a minimum contribution.
Conversely, if your profit turns out to be higher you will be obliged to regularise your payments.
Neverthless, this default forfait rule can be tempered in one of two ways.
i. Own Estimate - It is possible to request that your cotisations are based on your own estimate of what you consider to be your likely profit (or loss).
If your actual profit is greater than your estimate you will later pay the difference, although if it is greater by at least 30% it will also be subject to a penalty charge of up to 10%.
Conversely, if your profit is lower than you estimated then you will receive a reimbursement of your over-payments, subject again to a minimum contribution.
ii. Deferred Payment - It is also possible simply to request that your payments are deferred for the first year of activity, following which you can then arrange to pay them on a fractional basis for up to 5 years, ie 20% a year.
This may only seem like putting off the evil day, but if you are unlikely to generate any significant profit in the first year, and your cash resources are limited, it may make sense for you.
Whatever route you take, under no circumstances under the régime réel can your cotisations be lower than the minimum amount stipulated by regulations.
The amount you will pay is determined by a base figure for each cotisation, to which a rate is then applied.
From January 2016 there is no minimum cotisation for the:
- Allocations familiales;
- Retraite complémentaire;
The amount payable depends on actual profit. So if you make a loss, no cotisations are payable in these cases.
The only cotisations that are payable where you only make a small profit or actually incur a loss are:
- Indemnités journalières;
- Assurance vieillesse de base;
- Invalidité décès.
The largest of these contributions is l'assurance vieillesse de base, with a rate of 17.65%, but if your profit is no greater than €4,441 you pay the minimium charge of €784.
The remaining charges are small, so where no or very minimal profit is made the minimum cumulative contribution for artisans and commerçants is around €1,000 a year.
The figures are higher for those who operate as a professionnel libéral insured through the CIPAV social agency.
However, it is possible for those in this group to request further relief in relation to the contribution requirement for the retraite complémentaire and the invalidité-décès, thereby reducing their actual minimum contribution.
Business owners using the régime réel pay at least one third (generally it is higher) of net profits in cotisations, whilst auto-entrepreneurs pay a flat rate of up to 23% of their turnover.
The point we are making is more about the differences between auto-entrepreneurs and régime réel.
Under régime réel costs can be charged and losses can be reported, which can be set off against income tax (for up to six years) on your other income. This is not possible as an auto-entrepreneur.
You need to do the maths and to take good professional advice, but, particularly if your cost base is high, it can make sense to opt for the régime réel over auto-entrepreneur status.
If you do so it must be for a minimum of two years, it is more complicated, and you will probably want to use an accountant, factors that may also weigh in your decision.