France: Corporate, individual tax measures | KPMG | BE

France: Corporate, individual tax measures in newly enacted laws

France: Corporate, individual tax measures

In France, two finance laws with tax provisions were enacted—one on 29 December 2017 and the other on 31 December 2017.

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The Finance Law for 2018 and the second Corrective Finance Law for 2017 were adopted by the French Parliament and, following their examination by the French Constitutional Court (Conseil Constitutionnel)—the Constitutional Court did not question the constitutionality of these two laws, except on certain minor points—were published in the French official gazette (Journal Officiel) on 29 December 2017 for the second Corrective Finance Law and on 31 December 2017 for the Finance Law for 2018. With these actions, the processes for enactment of the two laws were completed.

The main provisions of the tax measures from the two laws affecting corporations and individuals are described below.

Background

Read about the main provisions of the two recently enacted finance laws in TaxNewsFlash-Europe (describing the draft budget 2018) and TaxNewsFlash-Europe (describing the draft corrective finance bill).

The first Corrective Finance Law for 2017—which created two exceptional surcharges of corporate tax for the largest French corporate taxpayers—had already been enacted in mid-December 2017. Read TaxNewsFlash-Europe

Finance Law for 2018: Tax measures affecting companies

Progressive reduction of corporate income tax rate to 25%

Prior tax reform measures (2016) already provided for a progressive reduction of the standard or ordinary corporate tax rate from 33⅓% to 28%.

The Finance Law for 2018 provides for a further progressive reduction of the corporate income tax rate to 25%, fully applicable for financial years opened in 2022. The schedule for phased-in application of the progressive reduction will be as follows:

  • In 2018, the 28% rate of corporate income tax will apply for amounts of taxable profit up to €500,000 and a corporate income tax rate of 33⅓% will apply for amounts of profit above €500,000.
  • For financial years opened as from 1 January 2019, the standard rate of corporate income tax will be reduced to 31%, with the first €500,000 of profit being still subject to the 28% rate.
  • For financial years opened as from 1 January 2020, the 28% rate of corporate income tax will become the new “ordinary rate” (for all profits).
  • For financial years opened as from 1 January 2021, the ordinary rate of corporate income tax will be reduced to 26.5%.
  • For financial years opened as from 1 January 2022, the ordinary rate of corporate income tax will be reduced to 25%. 

The 3.3% surtax on the standard corporate income tax remains unaffected. Accordingly, the revised corporate income tax rates reflecting the surtax are:

  • 33.33% => 34.43%
  • 31.00% => 32.02%
  • 28.00% => 28.92%
  • 26.50% => 27.37%
  • 25.00% => 25.83%

Reduction of the withholding taxes and levies on dividends and capital gains earned by foreign companies

The Finance Law provides that the rate of withholding taxes (subject to the provisions of relevant tax treaties) assessed on dividends received by foreign corporations and the rate of the levy assessed on capital gains related to the disposal of substantial shareholdings realized by foreign corporations (again, subject to relevant tax treaties) will now be equal to the new rates of corporate income tax. 

The 75% rate will, however, remain applicable when the beneficiary of the dividends/gains is established in a “non-cooperative” state or territory.

Repeal of the 3% tax on dividend distributions

The 3% tax is repealed for dividend distributions paid out as from 1 January 2018. The repeal of the 3% tax on dividend distributions was required to conform French law to EU law. 

KPMG observation

Recall that the scope of this 3% tax on dividend distributions had already been substantially narrowed by a decision of the French Constitutional Court in October 2017—read TaxNewsFlash-Europe. This tax also had been addressed by the Court of Justice for the European Union which found that the tax was being levied in contradiction to the EU Parent-Subsidiary Directive. Numerous cases litigating this tax are still pending, and in light of the decision of the Constitutional Court, taxpayers may be able to seek refunds of the tax paid in 2016 and 2017.

Modification of “Amendment Carrez”

A provision in French tax law known as “Amendment Carrez” prohibits the deduction of interest incurred in the acquisition of shares when the French acquiring (purchasing) entity cannot demonstrate that the decision-making authority and control of the acquired shares rest either with the French acquiring entity or with another related company established in France (and that either controls or is controlled by the acquiring company). 

The draft Finance Bill would have repealed the rules for application of the “Amendment Carrez.” The change, however, was not adopted by the French Parliament. Hence, the “Amendment Carrez” remains in effect—but with a slight modification.

The Finance Law of 2018, in order to comply with EU law, provides that for purposes of the “Amendment Carrez,” companies having their registered office in an EU Member State or in a country that is part of the European Economic Area and that has in effect a tax treaty with France that includes an administrative assistance clause, will be “assimilated” with respect to a French company. This rule therefore broadens the possibilities for acquiring companies to demonstrate that the condition on decision-making authority and control is met.

Competitiveness and employment tax credit (CICE)

The CICE—crédit d’impôt pour la compétivité et l’emploi—is a tax credit based on wages below a certain threshold paid by companies. The aim of the CICE is to decrease the overall social costs of employees. Currently, the rate of the CICE is 7% of the paid qualifying salaries.

Under the Finance Law for 2018, the rate of the CICE is reduced to 6% for salaries paid during the calendar year 2018.

Beginning from 2019, the CICE will be replaced by a permanent reduction of social charges due by employers, under a mechanism that is provided for in the Social Security Financing Law for 2018. This reduction of charges will amount to 6% for the salaries up to 2.5 times the minimum wage (so-called SMIC).

Transfer pricing documentation

The Finance Law for 2018 updates the requirements for transfer pricing documentation for companies belonging to “large economic groups.” The aim is for the transfer pricing documentation to be in line with the standard provided for by Action 13 of the OECD’s base erosion and profit shifting (BEPS) project. 

The new documentation to be included (in addition to information already required) concerns information about: 

  • The supply chain for the main goods and services as well as a functional analysis of the role of the various entities of the group
  • Intangible assets and intragroup agreements regarding such assets
  • Information (not required before) regarding the substantial financing operations of the group, including transactions with unrelated entities

Local tax (CVAE)

A “technical measure” in the Finance Law for 2018 is made in response to a decision of the French Constitutional Court concerning the rate of the CVAE (Cotisation sur la Valeur Ajoutée). The new measure provides that the rate of the CVAE will be determined for companies that satisfy conditions to be part of a French tax group (generally concerning the shareholding levels) on the basis of the combined revenues of all companies that could be members of the group (even if no tax group was officially established) instead of on a stand-alone basis.

It is anticipated that this measure could increase the CVAE burden of certain companies in France.

Provisions concerning financial and insurance institutions

Specific tax on wages: Companies not fully subject to value added tax (VAT) on their revenue (in general, banks, financial institutions, and insurance companies) are subject to a progressive payroll tax on the amount of salaries paid (Taxe sur les Salaires—TS).

Before the Finance Law for 2018, a 20% rate of TS applied to the portion of individual annual salaries exceeding €152,279 paid by these entities. Below this threshold amount, the TS rate was 4.25% for the portion of salaries below €7,721; 8.5% for the portion of salaries between €7,721 and €15,417; and 13.60% for the portion of salaries between €15,417 and €152,279.

The Finance Law for 2018 revises the rate of the TS. Under the new measures, the portion of salaries above €152,279 will now be subject to the 13.60% rate (instead of the 20% rate).

Financial transaction tax: The scope of the tax on financial transactions previously was to be extended to intra-day transactions; however, given certain practical difficulties of implementing this extension, these intra-day transactions will not be subject to the financial transactions tax. 

Tax measures affecting individual taxpayers

Flat tax on financial income

Before the Finance Law for 2018, financial income (dividends, interest, capital gains) earned by individuals were subject to social levies at a cumulative rate of 15.5% plus income tax that was assessed at progressive rates (up to 45%, with certain abatements applicable to the taxable basis of dividends and of capital gains depending on the period during which the taxpayer has owned the investments). Overall, the total rate of taxation on financial income could reach 60% (or even more) of the realized amount of income.

Under the Finance Law for 2018, a comprehensive flat tax of 30%—comprised of social levies at a rate of 17.2% and the increased rate of 12.8% for a social levy (Contribution Sociale Généralisée—CSG) and income tax—will instead apply to all financial income earned by individuals as from 1 January 2018. Certain abatements no longer apply. 

Taxpayers nevertheless can elect to apply prior progressive income tax rates (but the portion of the social levies on this income remaining unchanged at 17.2%) so they could still benefit from the earlier abatements). However once the election is made, it would apply to all financial income of the taxpayer. Taxpayers would not be allowed to pick and choose only certain income for the election.

Given this change, the rates of withholding taxes levied on dividends and certain capital gains earned by non-resident individual taxpayers will also be reduced (subject to the application of relevant tax treaties) to 12.8%. The former 75% rate will, however, remain applicable when the beneficiary of the dividends/gains is established in a non-cooperative state or territory.

Real estate wealth tax replaces global wealth tax

The global wealth tax (Impôt sur la Fortune—ISF) was previously assessed on all net assets owned by an individual taxpayer when the taxpayer’s net wealth exceeded a certain threshold (€1.3 million). The global wealth tax basis included worldwide assets of taxpayers domiciled in France and French real estate for non-resident taxpayers.

The ISF has been repealed and replaced, as from 1 January 2018, by a new real estate wealth tax (Impôt sur la Fortune Immobilière—IFI). This tax will be assessed only on the net real estate assets owned by the taxpayer to the extent that the value of the individual’s real estate assets exceed the threshold of €1.3 million. 

All other assets—especially financial assets, except if such assets of a real estate nature—will no longer be subject to a wealth tax in France. Accordingly, debts that previously were allowed to reduce the global wealth tax base will have to be related to taxable real estate assets. Certain real estate or real estate rights, mostly those deemed used for professional purposes (under very strict conditions and criteria) by the taxpayer, will be excluded from the new IFI. The progressive rates of the IFI will be similar to those that applied for purposes of the ISF.

Increase of the CSG rate

The rate of the CSG (Contribution Sociale Généralisée), a social levy due on all income earned by taxpayers resident in France, is increased by 1.7 percentage points as from 1 January 2018. The increase will be partially compensated by a reduction of other social contributions due on active income (such as those imposed on salaries or professional income). The increase of the CSG rate will be deductible for purposes of computing the individual (personal) income tax.

Second Corrective Finance Law for 2017

As usual, this corrective finance law includes a certain number of technical measures, the most important of which are as follows:

Cross-border mergers

In a March 2017 judgment, the CJEU found that the French tax provision that requires a prior ruling of the French tax authorities in order for a taxpayer to benefit from the French corporate income tax deferral regime of mergers in situations of cross-border mergers (and similar) transactions, infringed the freedom of establishment principle as well as the EU Merger Directive.

As a consequence, the second Corrective Finance Law repeals the requirement for taxpayers to seek a prior ruling and also adds to the French general tax law measures dealing with mergers an anti-abuse clause similar to one in the EU Merger Directive.

The French contributing (or absorbed) companies now must file with the French tax authorities a declaration including basic information regarding the modalities of and reasons for the transaction. Furthermore, the requirement to hold the shares received in exchange of a partial contribution of assets or by reason of a spin-off for a three-year period is repealed—thereby possibly allowing greater flexibility in international restructuring operations.

Companies involved in a cross-border merger will nevertheless be able to request that the French tax authorities confirm, through a ruling, that the transaction satisfies the conditions required to benefit from the special merger deferral regime for purposes of the corporate income tax. This new provision applies to cross-border mergers or spin-off transactions as from 1 January 2018.

Also, the new measures broaden the ability of taxpayers to attribute, under the corporate tax deferral rules, the new shares issued by the beneficiary entity as a further contribution to the shareholders of the contributing entity, thereby making carve-outs and other restructuring operations less complex.

Foreign tax credits

To address the holdings in certain court decisions, a provision is added to the French general tax law that has the effect of prohibiting a deduction of credits for foreign taxes levied in accordance with income tax treaties entered into by France. 

The rationale for this new provision is that while in most cases, treaties provide that certain foreign taxes can be claimed as a tax credit in France, when the right to tax is shared by the country of source and France, most treaties do not explicitly prohibit the deduction of these taxes. Withholding taxes levied in violation of the provisions of a tax treaty will nevertheless remain deductible (reflecting the decisions by the courts). This new provision will apply to financial years closed as from 31 December 2017.

Rate of interest for late payments, refunds of overpayments

Taking into account the decrease in interest rates over the past few years, the rate of the interest due by taxpayers on late payments of tax or of tax reassessments—or the rate of interest due to taxpayers by the tax authorities in instances of successful claims by the taxpayer or of refunds or reimbursement of taxes—is reduced to 0.20% (instead of 0.40%) per month. This new rate will apply to interest running between 1 January 2018 and 31 December 2020. After 2020, it would be expected that the rate of interest would be revised or revisited.

Addressing tax fraud and evasion

The second Corrective Finance Law includes provisions to control the identification of persons and accounts for purposes of information to be forwarded to foreign authorities within the frame of the common reporting standard (CRS).

Control of the rules for taxpayer compliance with the applicable fiscal internal obligations (giving the taxpayer’s country of residence, fiscal identification number, etc.) will be carried out under the responsibility of the market and banking supervisory authorities (AMF and ACPR). In addition, the French tax authorities will be automatically informed in instances when a taxpayer refuses to disclose to the financial institutions, the information such as country of residence and tax identification number, as required.

Deferral of taxation of certain interim transactions

Certain interim transactions conducted by companies (for example, a division or regrouping of shares) normally generate a taxable capital gain or loss. Under certain conditions, the tax authorities have granted a deferral of taxation on these transactions. In order to increase legal certainty for taxpayers, this deferral regime has been codified as part of the French tax law.

Withholding system for individuals

A French PAYE system (that is, one that allows for contemporary withholding of tax on salaries or pensions by employers or pension schemes and contemporary payment of income tax by taxpayers on their other income) was part of the Finance Law for 2017 and was to have been effective on 1 January 2018. However, implementation of the PAYE system was delayed by one year by a government ordinance in September 2017.

The second Corrective Finance Law for 2017 confirms that application of the PAYE system will begin 1 January 2019, and the new law confirms most of the provisions regarding the PAYE system’s scope and modalities of its application, as included in the original measures (Finance Law for 2017).

 

For more information, contact a tax professional with Fidal* in France or with KPMG in the United States:

Gilles Galinier-Warrain | +33 1 55 68 16 54 | gilles.galinier-warrain@fidal.com 

Patrick Seroin | +1 (212) 954-2523 | patrickseroin@kpmg.com

* Fidal is a French law firm that is independent from KPMG and its member firms.

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