Global Tax Alert | 20 December 2013
France’s Parliament approves 2014 Finance Bill and Amended 2013 Finance Bill
On 19 December 2013, the French Parliament approved the Finance Bill for 2014 and the Amended Finance Bill for 2013.
Except for the constitutionality review to be made by the French Conseil Constitutionnel, the Bill, which will be published before year-end, is final.
The main tax provisions relating to companies are summarized below.
2014 Finance Bill
Increase of the temporary additional contribution to CIT
The initially proposed 1% tax on EBITDA1 (Earnings Before Interest, Taxes, Depreciation and Amortization) was replaced by an increase of the temporary additional contribution to Corporate Income Tax (CIT) from 5% to 10.7%, that applies to companies (or tax consolidated groups) with an annual turnover exceeding €250m. The increase will apply to Fiscal Years (FYs) ending between 31 December 2013 and 30 December 2015. The maximum CIT rate will thus amount to circa 38%2 instead of the current 36.1%.
Limitation on deductibility of interest accrued to low taxed related party lenders
The 2014 Finance Bill introduces new rules that disallow the tax deduction of interest accrued to related parties if the French taxpayer cannot justify, at the request of the French Tax Authorities (FTA), that the lender is liable to CIT on such interest that amounts to at least 25% of the CIT which would have been due, had the lender been established in France.
This new limitation on deductibility of interest specifically addresses the situation where the lender is a qualifying transparent entity or a collective investment fund.3 In such case, the “subject to tax” test is carried out at the level of the owner(s) of such entity or fund.
These new rules will apply in FYs ending on or after 25 September 2013.
In the course of the debates before the French National Assembly, it has been mentioned by members of the Government that interest that is paid to a foreign low taxed lender but subject to CIT in France as a result of French CFC legislation would satisfy the “subject to tax” test, and that this test should be considered as satisfied when a listed real estate company (Société d'Investissements Immobiliers Cotée, SIIC) receives interest that is included in its taxable income although the company is tax exempt on its core activities and may thus have an overall effective tax rate below the threshold.
Wider scope of general anti-abuse rule
The scope of the French general anti-abuse rule is extended to transactions that are “principally” tax driven, whereas the current wording of the law refers to “exclusively” tax driven transactions. The new definition will apply to tax reassessments notified as from 1 January 2016 for transactions entered into or performed on or after 1 January 2014.
Mandatory disclosure of tax planning schemes
Tax planning schemes will be subject to mandatory disclosure. These schemes are defined as transactions combining legal, tax, accounting or financial processes or instruments with the main purpose to reduce, postpone or obtain the reimbursement of any taxes or contributions. Additional criteria will be provided by decree. The disclosure requirement will apply as from 1 January 2015 to any person marketing or developing and implementing a tax planning scheme. Failure to disclose will entail, for the person marketing a scheme, a 5% penalty of the fees received and, for the person developing and implementing a scheme, a 5% penalty based on the tax saving achieved.
Requirement to provide accounting statements and consolidated accounts in case of tax audit
The 2014 Finance Bill introduces a requirement to communicate analytical and consolidated accounts upon a tax audit for taxpayers exceeding certain thresholds,4 to the extent they keep any such accounts.
Taxpayers who fail to provide their analytical and consolidated accounts (if any) upon the opening of a tax audit will be subject to a penalty of 0.5‰ of the turnover per audited tax period (as adjusted by any tax reassessments), with a minimum penalty of €1.5k.
These new rules will apply to tax audits opened as from the date of entry into force of the Finance Bill.
Strengthening of transfer pricing rules and disclosure of foreign tax rulings
The 2014 Finance Bill introduces new provisions which:
- • Require the communication of tax rulings from foreign tax authorities obtained by associated companies as part of the transfer pricing documentation;
- • Increase penalties for the failure to comply with transfer pricing documentation requirements from 5% of the transfer pricing reassessment to 0.5% of the turnover per tax period under audit (with a minimum of €10k per tax period);
- • Repeal the possibility for French companies to postpone the payment of taxes resulting from transfer pricing reassessments in case of mutual agreement procedures.
The first two changes will apply as from the date of entry into force of the Finance Bill whereas the third one would apply to mutual agreement procedures launched as from 1 January 2014.
Note that a law against tax fraud and financial criminality dated 6 December 2013 includes other changes to transfer pricing regulations, notably an obligation to file a summary of their transfer pricing documentation for certain companies within a six month period following the deadline to file CIT returns.
Shift of the burden of proof to the taxpayer in case of business restructuring
The 2014 Finance Bill introduces new rules shifting to the taxpayer the burden of proving (upon request) that he received an arm's length compensation where:
- • Functions or business risks are transferred by a French entity to a related party; and
- • The operating income of the French entity in the two FYs following such transfer is 20% lower than the average over the three FYs preceding the transfer.
However, the rule will not apply to a mere disposal or licensing of an isolated asset, provided no other business risks or functions are being transferred.
In addition, “non cooperative States or territories” will be included in the category of countries in relation to which transfer pricing rules (including the shift of burden of proof mentioned above) will apply regardless of any link of control or dependence between the French taxpayer and the foreign entity. Currently this applies only to low tax jurisdictions, i.e., countries in which the tax burden is less than half the tax burden that would apply in France.
The new rules would apply in FYs ending on or after 31 December 2013.
Exceptional solidarity surtax on remunerations exceeding €1m
The 2014 Finance Bill introduces an “exceptional solidarity tax” of 50% borne by companies on the portion of remunerations granted to an employee or director that exceeds €1 million. Remunerations taken into account are, in principle, those deductible for CIT purposes, including wages, pension payments or stock options. Specific computation rules apply for pension payments and stock options. The tax only applies to remunerations granted in calendar years 2013 and 2014, and is capped at 5% of the turnover of the civil year. The employer will need to file a specific return and pay the tax by 30 April of the following year.
The tax deductibility of such exceptional solidarity surtax is denied for the computation of the temporary additional contribution to CIT.
Increase of the systemic banking tax rate
The French National Assembly voted the French Government's proposal which would increase the rate of the systemic risk banking tax introduced by the Finance Bill for 20115 from 0.5% to 0.539%. The new rate will apply to the tax due as from 2014 (payable on 30 April 2014).
Research and development (R&D) tax credit
The 2014 Finance Bill introduces new provisions that simplify the computation of certain expenses eligible for the R&D tax credit with respect to personnel costs and IP protection costs. This new rule will apply for expenses incurred as from 1 January 2014.
Amended 2013 Finance Bill
Distributions by listed real estate companies
The Amended 2013 Finance Bill introduces provisions which make permanent the temporary 3% distribution tax exemption for dividends paid by listed real estate companies (Sociétés d'Investissements Immobiliers Cotées, SIICs) to the extent of their distribution requirements, which was scheduled to expire end 2013.
Besides, the new provisions increase listed SIICs' distribution requirements from 85% to 95% for profits derived from real estate rental activities, and from 50% to 60% for profits generated by the sale of real estate assets. This will apply to FYs ending on or after 31 December 2013.
In addition, the new provisions repeal the branch tax exemption currently applicable to French permanent establishments (PEs) of EU resident companies when these benefit from a tax exemption on the profits of the French PE. This is intended to cover French PEs of European real estate investment companies that benefit from the SIIC tax exemption regime in France. The domestic branch tax rate is 30%, subject to applicable tax treaties. This will apply to FYs ending on or after 31 December 2013.
New tax incentive for the investment in innovative Small and Medium Enterprises (SMEs)
The Amended 2013 Finance Bill introduces a specific tax depreciation regime over five years for companies liable to CIT to encourage investment in innovative SMEs.6 The depreciation will apply to shares in innovative SMEs or shares or units in certain venture capital funds that were subscribed for cash by the investing company.
The depreciation will be subject to the following conditions: (i) the investing company only has a minority ownership in each target entity (i.e., less than 20% directly or indirectly, together with related parties), (ii) the investing company commits to retain the shares for at least two years and (iii) the aggregate value of qualifying shares does not exceed 1% of the investing company's total assets. In case of a sale occurring before a two-year period or, more generally, if any of the conditions of the regime fail to be satisfied, any depreciation previously deducted is recaptured at the standard CIT rate (increased by an amount of 4.8% per annum). In case of a sale after a two-year period eligible to the long term capital gains tax regime, any gain is taxable at the standard CIT rate up to the amount of previously deducted depreciation.
A decree will provide the date of entry into force of the above incentive but, since it falls within the scope of EU State aid regulations, it will first need to be approved by the European Commission.
Securitization of R&D tax credits
The Amended 2013 Finance Bill allows R&D tax credits to be assigned to securitization vehicles. Currently, these credits can either be used to offset the CIT liability of the relevant FY and the following three FYs, after what any excess is refunded to the taxpayer, or monetized by being assigned to a financial institution under the so-called “Dailly” procedure.
This provision will enter into force on the day following the publication of the Amended 2013 Finance Bill.
Simplification of several filing and payments tax procedures
The Amended 2013 Finance Bill, among other simplifications, allows to postpone the date for paying the last CIT installment to 15 May (instead of 15 April currently) for companies having a calendar FY. This would allow a decrease in the time gap with the deadline to file CIT returns, which expires 15 days after the second business day of May (for companies having a calendar FY and filing electronic returns). This new rule would apply as from 1 January 2014.
2. Standard rate of 33.33%, increased by 3.3% (social contribution) and 10.7% (temporary additional contribution).
3. i.e., a company or a partnership that is subject to the French tax transparency regime or a collective investment fund or a similar entity formed or organized in a EU member State or in a (non-blacklisted) State that has concluded an agreement containing a provision for administrative assistance with a view to the prevention of tax evasion with France.
4. For analytical accounts, the requirement would apply to companies with a turnover exceeding €152.4m or €76.2m depending on the type of business activity, or having total gross assets equal to or greater than €400m, as well as to direct or indirect >50% parents or subsidiaries of such companies, and companies in the same French tax consolidated group as such companies.
5. For more details, see EY International Tax Alert, French Parliament enacts Finance Bill for 2011 and Amended Finance Bill for 2010, dated 7 January 2011.
6. Innovative SMEs are entities which meet the following conditions:
(i) Having the SME status as defined under EU law (i.e., among others, not more than 250 employees and either a turnover not exceeding €50m or total assets not exceeding €43m);
(ii) Being formed or organized in an EU member State or in a State that has concluded with France an agreement containing a provision for the exchange of information with a view to the prevention of tax evasion; and
(iii) Having at least 15% or 10% (depending of the type of activity) of their tax deductible expenses dedicated to research and development projects or being able to provide evidence for the creation of innovative products, processes or techniques for which economic development potential has been demonstrated.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, French Tax Desk, New York
- • Frédéric Vallat
+1 212 773 5889
- • Daniel Brandstaetter
+1 212 773 9164
- • Pierre-Eric Coquard
+1 212 773 7318
Ernst & Young LLP, Financial Services Desk, New York
- • Sarah Belin-Zerbib
+1 212 773 9835
EYG no. CM4052