France micro-entreprise: when is régime réel better?

France’s simple microentreprise tax and social charges regime can, in some cases, result in higher tax and social security contribution payments than under the more complex régime réel, where actual business expenses are deducted.

Several analyses have shown that the micro regime, used by many starting small businesses, might not always be the most financially advantageous option, even though it avoids having to keep extensive books or use accountants or sophisticated software to track expenses.

As a reminder, micro regimes involve declaring your turnover to Urssaf monthly or quarterly for social charges calculations.

Under certain conditions, micro-entrepreneurs who meet income requirements and remain within the microentreprise turnover limits can also opt to pay income tax directly through Urssaf via the versement libératoire system.

Otherwise, gross micro income is declared annually, with a fixed expenses allowance applied before tax is calculated.

BIC and BNC tax regimes

When it comes to tax regimes, the forms have specific sections for those declaring bénéfices industriels et commerciaux (BIC; profits from industrial, commercial and artisanal activities) and bénéfices non commerciaux (BNC; relating to services where a professional is selling knowledge or expertise).

For example, if you declare your total micro-BNC turnover, an automatic expenses deduction of 34% is applied before you are taxed on the rest.

Total turnover, in this case with no deduction, is used as the basis for calculating social security payments to Urssaf.

This leads to the situation where Urssaf contributions, which for a typical BNC professional on a régime réel would be equal to about 16% of their taxable income, can reach 25.6% of total turnover under the micro-entreprise regime.

New turnover limits

Until five years ago, two separate declarations had to be made by small businesses – one for social security, usually in March, and the other for the tax authorities in April or May.

These are now combined.

New limits have been introduced from this year to qualify for the micro fixed-expense regimes.

BIC firms that sell goods are now eligible, as long as their turnover, excluding VAT, is not more than €203,100.

For BIC firms offering services, the turnover limit is now €83,600 and the same limit will apply for BNC activities – a significant increase from the previous €77,700.

When real expenses are higher

A new publication called Le Guide de la Businesswoman, by Virginia Lopes Gomes, shows that once business expenses rise, the 34% flat-rate allowance can leave some people paying more tax.

“The micro-entreprise regime can become a tax disadvantage when real expenses mount up,” she said, citing sub-contractors, advertising, client visits, office equipment and software.

She gives the example of a micro-entreprise with €80,000 turnover and €32,000 of expenses deductible under a régime réel. With €20,480 in Urssaf contributions, income tax would be calculated on €27,520 under the régime réel, compared with €52,800 under the micro regime.

Ms Lopes Gomes warns that anyone switching to a régime réel should not get too “imaginative” when it comes to expenses: “The main mistakes people make are to include personal expenses, exceed certain thresholds, and fail to keep receipts and other justifications for the claim.”