France: Tax measures in Finance laws are finalized, enacted

France: Tax measures in Finance laws are finalized

In France, two laws—known in English as the “Finance Law for 2017” and the “Rectified Finance Law for 2016”—and their tax-related measures were finalized on publication in the official gazette, 30 December 2016.

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Publication of the laws followed completion of the legislative process and came after the laws were submitted to the French Constitutional Court (Conseil Constitutionnel) which found certain provisions were not constitutional.

Overview of tax measures: Finance Law for 2017

Phased-in reduction of corporate tax rate

The standard corporate income tax rate (currently 33.33%) is decreased, in phases over a period of years, to 28%. The schedule for the phase-in of the new corporate income tax rate is, as follows: 

  • For financial years opened as from 1 January 2017—the new rate of 28% applies to the portion of the profits of small and medium enterprises (SMEs) up to €75,000.
  • For financial years opened as from 1 January 2018—the new rate will apply to the portion of profits up to €500,000 earned over a 12-month period.
  • For financial years opened as from 1 January 1, 2019—the 28% rate will apply to all profits for companies with revenues (or revenues of a French tax group if such group exists) below €1 billion and profits up to €500,000 for companies with revenues in excess of €1 billion over a 12-month period.
  • For financial years opened as from 1 January 2020—the 28% rate applies to all companies.

“Surcharges” to the corporate income tax

The 10.7% “tax surcharge” that applies with respect to the corporate income tax of French companies or French tax group with revenues exceeding €250 million will no longer apply for financial years closed as from 31 December 2016. The “tax surcharge” was not extended by the Finance Law. 

The 3.3% “tax surcharge” that applies to companies that have a corporate income tax liability exceeding €763,000 and that is assessed on the portion of the corporate income tax in excess of €763,000 remains unchanged.

KPMG observation

Tax professionals with Fidal* have noted that the maximum rate of corporate income tax for all corporations will decrease from the current rate of roughly 38% to 28.92% as of 1 January 2020—this reflects the phased-in reduction of the rate of the corporate income tax to 28%; non-renewal of the 10.7% tax surcharge; and continuation of the 3.3% tax surcharge.

Corporate income tax installments by large companies

Companies with revenue in excess of €250 million must pay their corporate income tax liability in four installments, over the course of the year. Currently, the amount of the fourth and final installment is equal to the difference between: (1) 75%, 85% or 95% (depending on the amount of revenues of the companies) of the estimated corporate tax liability for the current year; and (2) the amount of installments already remitted. 

The new law replaces and increases the percentages of 75%, 85% or 95% with 80%, 90% or 98%, respectively. The aim is to accelerate remittances of corporate income tax due by the largest companies.

Depreciation of acquired software

Software acquired by companies and booked as a fixed asset previously could be depreciated over a 12-month period. This 12-month depreciation schedule is not available for software acquired during financial years opened as from 1 January 2017.

Increase in CICE (tax credit for employment and competitiveness)

The CICE—crédit d’impôt pour la compétivité et l’emploi—is a tax credit that can be set off against the company’s tax liability for the year during which the related salaries were paid. Any excess of the CICE can be carried forward three years, and any unused credit amount is then refundable.

Before the legislative changes, the CICE or credit previously was equal to 6% of the amount of salaries paid to employees up to a monthly individual amount of 2.5 times the minimum gross salary or roughly €3,650.

The amount of the CICE credit has been increased by the Finance Law of 2017 to 7% of the amount of salaries paid as from 1 January 2017.

Specific regime for “impatriates”

The “impatriate” regime, to encourage foreign investments and relocations in France, basically provides an exemption from income tax on the additional compensation paid or granted to executives moving to France and also an exemption from imposition of the wealth tax on foreign assets. Read more at TaxNewsFlash-Europe

The Finance Law of 2017 provides that period during which impatriates can benefit from the specific favorable regime is extended until 31 December of the eighth year (8th year), instead of the fifth year as originally proposed, following the beginning of their business operations and functions in France.  

Also, the payroll tax imposed on certain taxpayers (including banks and insurance companies) that are not fully subject to value added tax (VAT) and that is assessed on the compensation paid to employees will not apply with respect to the additional compensation paid to executives relocating and moving to France. 

KPMG observation

Tax professionals with Fidal* have pointed out that the aim of this measure is focused on attracting top executives of the financial services industry to relocate to France, following the Brexit vote in 2016.

Creation of withholding system on salaries, pensions:

The law establishes a withholding tax system that generally is similar to a “pay as you earn” (PAYE) system in other countries. The French system is effective beginning 1 January 2018, and it will apply to compensation and pensions. 

  • Employers and pension plans will be responsible for withholding, on a monthly basis, the amount of income tax owed on salaries paid and pension payments.
  • The withholding tax rate will be based on the average income tax rate of the individual taxpayer during the previous year. However taxpayers can elect to apply a “neutral tax rate” based only on the amount of compensation paid by the employer, and the taxpayer will then have to pay the difference directly to the tax collector. 
  • Individual taxpayers will have to remit monthly the amount of provisional payments of the income tax due on other income earned—i.e., non-salary or non-pension payments—such as amounts from commercial or industrial profits, non-commercial profits, rental income, etc.
  • Taxpayers will still be required to file an income tax return and pay any difference in tax, and any excess amounts of tax withholding or tax payments can be refunded by the tax authorities. 
  • To address issues of what could be a “double tax burden” in 2018 (since the income tax is currently paid in France during the year following the year during which it was earned), the income tax normally due in 2018 on the individual’s 2017 income will be “cancelled” (through a tax credit mechanism) except for the tax liability due on so-called “exceptional income.” There is an extensive list of what is deemed to be “exceptional income” included in the Finance Law. Also, Anti-abuse measures are intended to avoid an artificial shift of income from 2016 or from 2018 to 2017. 

Regime on “free shares” granted to employees

A favorable regime applicable to the granting of “free shares” (RSUs)—as introduced in 2015 by the legislation known as the “Macron Act”—has been modified by the Finance Law. The changes are viewed as not being taxpayer-favorable, and include measures such as: 

  • The benefit from a grant of “free shares” will be subject to income tax at progressive income rates, but eligible for an abatement of tax on an annual amount of gain of €300,000 (depending on the period that has lapsed since the granting of the shares). 
  • The excess portion of the gain over €300,000 will be taxable as a salary and will also be subject to social contributions due on salaries (versus those contributions that would be due on passive income such as dividends or capital gains). Furthermore, such excess portion will be subject to a specific 10% contribution (which previously had been repealed by the Macron Act).
  • The tax liability of the company granting the “free shares” will be increased from 20% to 30%. 

These modifications will apply to the tax treatment of grants of “free shares” made pursuant to a decision of the shareholders’ meeting after 30 December 2016.

Tax on financial transactions

The scope of the tax on financial transactions has been extended to apply to intra-day transactions. Also, the rate of the financial transactions tax is increased to 0.3% (up from 0.2%).

Wealth tax

An anti-abuse clause is provided to address certain schemes used by individual taxpayers to reduce their liability for the wealth tax. 

Tax on diverted profits

The French Constitutional Court held as unconstitutional the proposed treatment of the territoriality system for corporate income tax purposes. This has been referred to as the “tax on diverted profits” or as the “Google tax.”

In general, the diverted profits tax was largely inspired by the base erosion and profit shifting (BEPS) recommendations on permanent establishments. As codified by article 209C of the French tax law, the measures would have permitted the French tax authorities to assess corporate income tax, in France, on amounts realized by the entities established outside France when those entities realized in France income from the sales of goods or services through entities that could not be qualified as permanent establishments of the foreign enterprises (subject, of course, to the provisions of relevant income tax treaties). The entity liable for the tax would have been the foreign enterprise. Read TaxNewsFlash-Europe

The Constitutional Court concluded that this provision would have permitted to the French tax authorities to determine who would be liable to corporate tax in France—a competence that exclusively belongs to the legislature. Thus, it was concluded that this provision was unconstitutional—and the measure was removed from the enacted Finance Law.

Rectified Finance Law for 2016

Broadened scope of exemption, 3% tax on distributions

The French Parliament broadened the scope for application of the exemption from the 3% tax on distributions. Previously, the exemption from the 3% tax on distributions was limited to the distributions made within French tax groups. 

The rectified Finance Law provides that the exemption from the 3% tax on distributions is extended to distributions made from French companies to foreign companies subject to corporate tax and that hold, directly or indirectly, at least 95% of the share capital of the French distributing company. This exemption applies to distributions made as from 1 January 2017.

Parent companies established in “non-cooperative” countries will not benefit from this exemption unless they can demonstrate that the location of the parent company was not mostly driven by tax reasons. Read more in TaxNewsFlash-Europe

“Bonus depreciation” of fixed assets

Entities subject to corporate income tax are entitled (in addition to regular or standard depreciation) to an exceptional depreciation deduction. The additional or bonus depreciation deduction is equal to 40% of the original cost of fixed assets that are eligible for depreciation under the double-declining balance when the fixed assets are acquired or manufactured during a two-year period, beginning 15 April 2015 and ending 14 April 2017.

The rectified Finance Law for 2017 provides that this additional deduction will also apply to the qualifying assets ordered before 15 April 2017 provided that: (1) at least 10% of the total amount of the order has been settled prior to this date; and (2) the assets are actually acquired within two years following the date of the order.

French parent/subsidiary (participation exemption) regime

Following a decision of the French Constitutional Court in July 2016, the benefit of the participation exemption regime on dividends received from subsidiaries is extended to instances when the rights owned (that must represent a participation of at least 5% of the capital) by the recipient in its subsidiary are not voting rights. However, the benefit of a “quasi exemption” from capital gain taxation (effectively resulting in taxation of of the gain only at a rate of 12%) that applies with respect to sales of qualifying participations held for more than two years still requires that the disposing company own at least 5% of the voting rights in its subsidiary.

Measures regarding tax audits

  • There is a new type of “on-desk audit.” The audit, instead of taking place at the company’s offices, the audit can be conducted by the French tax authorities by means of an on-desk review of the company’s computerized accounting data, in the offices of the tax authorities.
  • There is a new procedure for accelerate review of claims for VAT reimbursements. Under this procedure, if the tax authorities doubt the validity of the VAT claims, they may examine the claims (with the examination being limited to these VAT claims, and not within a “full” tax examination) in the company’s offices. The tax authorities then will have to make a decision on the VAT claims within 60 days. The company can still challenge an unfavorable decision.
  • There are new tools made available to the tax authorities to address and counter international tax fraud. The tax authorities are authorized to audit any person (clients, suppliers, professional acquaintances, etc.) who might assist them uncover evidence of international tax evasion or fraud, pursuant to certain provisions of the French tax law. Records of meetings with the audited third parties must be maintained. Such persons also can refuse the audit request. 

Encouraging startups

A new kind of account—an account for SME innovation or “CPI”—is available for individuals who having their tax domicile in France. Managers or minority individual shareholders may take advantage of this new kind of account, with respect to shares of companies they create or in which they have invested (during the start-up phase) when the individuals sell the shares and reinvest the proceeds of the sale directly or via funds in new small and medium enterprises (SMEs). Taxation of the gains realized on such sales will, in the case of reinvestments, be deferred until the date when the funds resulting from the sale (or from successive buy/resale transactions) are not reinvested in qualifying “young” companies. 

However the social contributions or levies due on gains are still due at the time when the gain is realized—even when the proceeds are reinvested in qualifying young companies. Also, any dividends received from the participations during the eligible period(s) will also be immediately subject to tax and social contribution levies.

 

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 

Olivier Ferrari | +33 1 55 68 18 14 | olivier.ferrari@fidal.com

Laurent Leclercq | +33 1 55 68 16 42 | laurent.leclercq@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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