Throughout Europe, the reverse charge procedure is used for international transactions between two companies, including in France. Thanks to the adaptation of the tax laws of each EU member state to EU standards, the system is structured in the same way almost everywhere, yet each country has its own laws and exceptions. We tell you what you need to know about the reverse charge procedure in France.
Antonia Klatt
Last Updated on 22 October 2021What is Reverse Charge?
The reverse charge procedure shifts the VAT liability from the supplier of the goods or services to the recipient. This system guarantees that in international transactions VAT is paid in the country where the goods or services are actually used. In the reverse charge procedure, the service provider issues a net (reverse charge) invoice. The service recipient then pays the net amount and transfers the VAT liability directly to his own tax office.
The reverse charge system helps the state to avoid tax fraud. In international transactions, it is often difficult for government institutions to have complete control over commercial transactions. Uniform or at least similar laws and procedures, as the reverse charge system is one, facilitate the work of the controlling bodies. The bureaucratic hurdles for tax offices as well as for companies are thus further reduced.
Reverse Charge Mechanism in France
On September 1, 2006, the reverse charge procedure in France was extended for the first time from some special cases to general application. Prior to this, it was only used in certain exceptional cases. Since 2006, the recipient of services, provided that he has a French VAT identification number, has been obliged to transfer the VAT to the French tax authorities for deliveries coming from abroad. The service provider issues a net invoice to the customer.
The standard VAT rate in France is 20 percent, the reduced rate is 10 percent.
The reverse charge procedure covers all deliveries of goods and services that are imported into France across national borders. Not only EU countries, but also third countries (EU foreign countries) are affected by the reverse charge method.
Contrary to the law applied in many other EU countries, the service provider in France is not legally obliged to be liable for the payment of VAT by the service recipient.
NOTE: The reverse charge procedure is limited to trade relations between two companies. Trade with private persons is not affected by this regulation. Reverse-charge therefore only applies to B2B transactions.
Why was this method introduced in France?
Before the reverse-charge system was implemented, the French tax authorities had to deal with a steadily increasing tax debt. Many French companies that purchased goods or services from foreign companies demanded a VAT refund from the tax authorities. However, the foreign companies rarely paid the VAT amount to the French tax authorities. This problem was eliminated by the reverse charge system.
In general, the process of paying VAT has become much easier thanks to the procedure. Gaps in the law as well as opportunities for fraud have been eliminated thanks to the system.
This way you can still use the original method
In France, however, foreign companies can still decide whether they want to work with the reverse charge procedure or prefer to pay VAT to the French tax authorities themselves. Both have advantages and disadvantages.
The reverse charge system was developed to protect foreign companies from the hurdles that can arise when paying VAT in a foreign country. Working with a foreign tax office is often complicated, not least because of the different languages and procedures involved.
However, there are situations where it may be advantageous for the foreign supplier to participate in the French VAT system. If the foreign company itself uses services provided by others for which it has to pay VAT, the foreign entrepreneur can apply for an offset of the input tax against the VAT paid by the foreign trader through the classical payment of VAT in France. When the reverse charge procedure is applied, it is much more difficult to recover the input tax. An application must be submitted to the French DRESG office by 30 June of the following year. The handling process for such a request is long and complex.
In order to be allowed to work with the old system, the foreign company must appoint a contact person for tax matters in France. This person is the representative of your company for the French tax authorities. Such a company must be approved by the state tax administration as a so-called “répondant”. On the invoice of the service provider this company will then be listed as your representative in all tax matters.
In addition, participation in the old system is subject to a written agreement between the foreign company and the French customer. In this agreement, the obligation of the service provider to transfer the amount to the French company is recorded in writing. Conversely, the French company must undertake to transfer the aforementioned amount to the tax office. Under this system, the French répondant pays the VAT, while the recipient of the service remains liable for tax. The advantage of this procedure is that the foreign supplier can apply for a deduction of input tax.
NOTE: If you want to use this system, you are obliged to make a contractual agreement with your répondant for each transaction.
The decision for the old system is made very consciously by most companies. However, if the French business partner is not entitled to deduct input tax, only the old procedure can be used. This can occur with private individuals, public customers and doctors. As a rule, someone is entitled to deduct input tax at the latest from the time he has a VAT identification number.
Example
A German wood processing company provides assembly services for a French manufacturer of prefabricated bathrooms. The German company buys the wood in France and processes it directly on site. The German company has a répondant.
In order to now offset the VAT paid, the German company concludes a contractually agreed arrangement with the French business partner. This agreement states that the reverse charge procedure does not apply and the VAT is invoiced on behalf of the répondant. The latter will then settle the VAT of the timber construction company. The German company will then be allowed to issue an invoice with French VAT.
Create invoice correctly with the reverse charge procedure
If the reverse charge procedure is used, a so-called net invoice must be issued. In the case of a net invoice, the amount is charged without VAT.
The following information must be noted on the invoice:
- Name and address of the client
- Number and address of the seller/service provider
- The VAT identification numbers of the two companies
- The net amount to be paid
- A reference to the reverse charge method used
Conlusion
The French reverse charge procedure can be compared with reverse charge systems in other European countries. However, despite the many similarities, there are certain peculiarities to be noted.
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The choice between the reverse-charge system or the old procedure needs to be well considered and justified. Get in touch with your accountant or leave us a message to make sure that