France: Summary of new corporate tax law provisions for 2016

Corporate tax law changes in France

Several pieces of legislation—the Finance Act for 2016, the Amended Finance Act for 2015, and the Social Security Financing Act for 2016—that have provisions or implications for corporate taxpayers, have been published in the official journal.

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The first two, the Finance Act for 2016 and the Amended Finance Act for 2015, were published on 30 December 2015. The Social Security Financing Act for 2016 was published on 22 December 2015. Among the measures concerning corporate taxpayers are the provisions, summarized below.

Parent-subsidiary regime

The parent-subsidiary regime is modified by the Amended Finance Act for 2015 in order to comply with EU law.  These rules generally are effective for fiscal years ending on or after 31 December 2015. However, a “new anti-abuse” clause is effective for fiscal years opened as from 1 January 2016. 

Dividends paid to “bare-owner” parent company now within scope of parent-subsidiary regime: The scope of the regime is extended to shareholdings held by a “bare-owner.” In other words, dividends distributed to a bare-owner shareholder can benefit from the exemption and “bare property” shares are taken into account for the appreciation of the 5% shareholding condition. 

KPMG observation: Tax professionals with Fidal* note that this amendment complies with decisions of French courts (TA Paris, 8 July 2009, n°04-17286 and 08-3363 / CAA Bordeaux, 6 October 2015, n°13BX01909 / CE, 23 mars 2012, n°321224) and with a decision from the Court of Justice of the European Union (CJEU, 22 December 2008, C-48/07).  

 

Anti-abuse clause introduced to parent-subsidiary regime: Dividend distributions cannot benefit from the parent-subsidiary regime if distributed in the frame of an arrangement or a series of arrangements that has as one of the main purpose, to obtain a tax advantage in contradiction with the object or purpose of the regime and that is not “authentic” having regard to all relevant facts and circumstances. The Amended Finance Act specifies that an arrangement is to be regarded as not “authentic” if it is not set up for valid commercial purposes, reflecting the economic reality.

KPMG observation: This new rule aims at transposing EU Directive no. 2015/121/EU of 27 January 2015, into French law—this directive includes an anti-abuse clause and modifies Directive no. 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU Member States. This measure aims to prevent distributions for which the beneficial owner is actually a resident of a non-EU country from the benefit of the participation exemption regime.

 

“Safeguard clause” for dividends from a non-cooperative state or territory: Previously, dividends paid from a subsidiary established in a non-cooperative state or territory could not benefit from the parent-subsidiary regime. The Amended Finance Act for 2015 introduces a “safeguard clause” that allows such distributions to benefit from this regime, provided there is evidence that the operations or transactions conducted by the subsidiary neither have the purpose nor the effect to allow, with the intent of committing tax fraud, the localization of profits in these states or territories.

KPMG observation: This safeguard clause was introduced into French law in response to a decision of the French Constitutional Council (CC, 20 January 2015 no. 2014-437 QPC ) which held that the exclusion of subsidiaries established in a non-cooperative state or territory from the parent-subsidiary regime is only constitutional to the extent that companies have the ability to demonstrate that the subsidiary was acquired for a purpose other than tax fraud or tax avoidance. 

 

Adjustment to parent-subsidiary regime for parent companies held by non-profit organizations: The parent-subsidiary regime is adapted for parent companies held by non-profit organizations. The regime is extended to parent companies holding at least 2.5% of the capital and 5% of the voting rights of their subsidiary provided that the parent company (1) maintains its shareholding for a period of five years (instead of two years) and (2) is held by one or more non-profit organizations.

Withholding tax exemption regime, dividends paid to European parent company

The withholding tax exemption regime for dividends paid to EU parent companies is revised by the Amended Finance Act for 2015, to be in compliance with EU rules. To benefit from the withholding tax exemption, the beneficiary parent company must hold at least 10% of the capital of the distributing company. The Amended Finance Act states that shareholdings taken into account for the calculation of the participation threshold may be held in bare ownership.

The regime is now applicable to companies established in the European Economic Area (EEA). In practice, companies established in Iceland, Norway, and Liechtenstein can now benefit from this regime.

Parent companies established in another EU Member State or EEA country can benefit from the withholding tax exemption if they hold 5% to 10% of the capital of the distributing company and have no opportunity to offset French withholding tax against the tax due in their country (i.e., codification of an existing administrative position). 

In addition, the anti-abuse clause is replaced by an anti-abuse clause in accordance with the one included in EU Directive no. 2011/96/EU of 30 November 2011. 

As a consequence, the withholding tax exemption does not apply when the distribution is made within the framework of an arrangement or a series of arrangements that has as one of the main purpose, to obtain a tax advantage in contradiction with the object or purpose of the regime and that is not “authentic” having regard to all relevant facts and circumstances. The Amended Finance Act specifies that an arrangement will be regarded as not “authentic” if it is not set up for valid commercial purposes reflecting the economic reality.

These provisions are effective for fiscal years ending on or after 31 December 2015, except that the anti-abuse clause is effective for fiscal years opened as from 1 January 2016. 

Revenue distributed to foreign companies in liquidation

The Amended Finance Act for 2015 provides a withholding tax exemption for dividends that are distributed to foreign companies in liquidation and in a loss-making position. 

This exemption applies to revenue distributed to legal entities located in an EU Member State or in a third country, provided that country has an income tax treaty with France that provides for administrative assistance against tax evasion and fraud, and the revenue is subject to corporate tax in that country.

The distributing company must be in a loss-making position and subject to a procedure similar to the French liquidation procedure in the fiscal year of perception of the distribution.

These provisions apply to income received as from 1 January 2016.

 

KPMG observation: Tax professionals with Fidal* have noted that this modification follows formal notice from the European Commission, to the French government, concluding that the existing difference in treatment between (1) a French company in liquidation and in a loss-making position or not subject to tax on the dividends received, and (2) a foreign company in the same situation and subject to withholding tax, is contrary to the principle of free movement of capital. According to the opinion of the European Commission, the two conditions (liquidation procedure and loss-making position) should be alternative, and not cumulative.

Taxation regime of intragroup dividends paid between EU entities

The taxation regime of intragroup dividends paid between EU entities is modified by the Amended Finance Act for 2015. 

Following a recent judgment of the Court of Justice of the European Union (CJEU case C386/14, 2 September 2015, “Group Steria”), an amendment was inserted into the Amended Finance Bill for 2015, to modify the taxation regime of intragroup dividends. The CJEU found that the “neutralization” rules under the French tax consolidation regime, where the 5% share on dividends remained taxable under the parent company regime, was contrary to the EU freedom of establishment because this neutralization treatment was not available to European subsidiaries that could have been members of a tax consolidated group if they had been established in France.

Under the amendment, the rule providing for neutralization of the 5% taxable share for dividends paid between entities of a French tax consolidated group is repealed.

In order to limit adverse financial consequences for French tax groups, the taxable share is reduced to 1% for dividends that are received by a company (that is a member of a French tax group) from another company of the tax group or from a company established in an EU or EEA state if this company, had it been French, would have met the conditions of being a member of the tax group.

These modifications apply to dividends paid on fiscal years opened as from 1 January 2016.

 

KPMG observation: Tax professionals with Fidal* have observed that the government could have simply chosen to repeal the 5% share neutralization for French tax consolidated groups or to extend it to EU subsidiaries, but instead selected an “intermediary solution” that is favorable to EU subsidiaries. These modifications result in increased taxation of 0.33% (1% x 33⅓%) for dividends paid between members of a French tax group and in decreased taxation of 1.32% (4% x 33⅓%) for dividends received from EU or EEA entities that meet the above conditions. Note that the 1% taxable share applies to dividends paid by the group subsidiaries from the first year of their membership in the tax consolidated group whereas the neutralization of the 5% share did not apply on this first year.

Country-by-country reporting

The Finance Act for 2016 creates a country-by-country reporting obligation (Article 223 C of the French general tax code) in accordance with Action 13 of the OECD’s base erosion and profit shifting (BEPS) project. These reports will be subject to an automatic exchange between countries. 

This declaration aims at reinforcing the transfer pricing documentary obligations of multinational groups. Two types of companies are subject to this declaration.

  • Companies that (1) create and draw up consolidated accounts; (2) belong to a group with a consolidated turnover in excess of €750 million; and (3) have foreign branches or hold or control, directly or indirectly, foreign entities. [Companies that are held by entities subject to the requirement to file a country-by-country reporting are not subject to this obligation themselves.]
  • Companies held by entities established in countries that do not participate in the automatic exchange of country-by-country reports: (1) the companies are held, directly or indirectly, by a legal entity established in a state that does not participate in the automatic exchange and would be required to file the country-by-country report if it were established in France; and (2) the companies are designated by the group, to which it belongs, to file the report of that have not demonstrated that another entity of the group established in a country that participates in the automatic exchange of country-by-country reporting has been designated to file the declaration.

The country-by-country report must include a breakdown, by country, of the group's earnings and aggregate economic accounting and information on the location and activities of the different members and entities of the group. The format of the report, which would be based on the international standard, is to be defined and established by a separate decree (to be published within the four months of 2016). The report must be filed in the electronic form for each fiscal year.

A failure to produce the report would be subject to a penalty in an amount up to €100,000. Omissions or inaccuracies in the report would be subject to a penalty in an amount of €15 per omission or inaccuracy, with the total amount of such penalties not being less than €60 or more than €10,000.

The new country-by-country reporting requirements apply to fiscal years opened on or after 1 January 2016. Accordingly, the first reports are to be filed by the end of 2017 and automatically exchanged between the countries in 2018.

 

KPMG observation: Tax professionals with Fidal* note that the constitutionality of this measure was challenged before the French Constitutional Council which, on 29 December 2015, found that the country-by-country reporting measure complies with the French Constitution.

Transfer pricing declaration

The Finance Act for 2016 specifies the content and terms of an annual transfer pricing declaration, pursuant to Article 223 B of the French tax code.

In consolidated tax group, it is now the parent company that is required to file this declaration—both for itself and for each of its subsidiaries that are members of the tax group. In addition, the information entries of the transfer pricing declaration are specified in accordance with the existing administrative guidelines.

The Finance Act for 2016 also provides that the declaration must now be filed electronically. These new measures apply to transfer pricing declarations that are required to be filed on or after 1 January 2016. 

French “company social solidarity contribution”

As part of the removal or repeal of the French “company social solidarity contribution” (C3S), the Social Security Financing Act for 2016 increases the amount of the rebate on the tax base of the C3S to €19 million. These provisions are effective for C3S due as from 1 January 2016.

 

KPMG observation: In other words (as noted by tax professionals with Fidal*) companies whose turnover does not exceed this amount in 2015 will be exempt from C3S in 2016. In other instances, the basis of the contribution will be reduced by this amount. Also, the French government announced that this contribution will be repealed in 2017. 

“Exceptional depreciation” provided by the Macron Act

The Macron Act—published in the French official journal on 7 August 2015— introduced an “exceptional depreciation” allowing companies subject to corporate tax to deduct, from their taxable base, an amount equal to 40% of the original value of certain assets of equipment that the companies acquire or manufacture between 15 April 2015 and 14 April 2016. This deduction now also applies to companies that rent a property eligible under a leasing contract or a lease-purchase agreement during the same time period.

 

KPMG observation: The French tax administration has updated its official guidelines concerning this special deduction. In particular, the guidelines state that companies that are exempted partially or temporarily from corporate tax may benefit from this provision. 

 

For more information, contact a tax professional at Fidal* in Paris:

Olivier Ferrari | +33 (0)1 55 68 14 76 | olivier.ferrari@fidal.com   

Olivier Schmitt | +33 (0)1 55 68 15 92 | olivier.schmitt@fidal.com 

 

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

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