Global Tax Alert | 20 November 2013

French National Assembly adopts draft 2014 Finance Bill and French Government releases draft Amended 2013 Finance Bill

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Executive summary

On 19 November 2013, the French National Assembly adopted the draft 2014 Finance Bill. It will now be discussed by the French Senate over the following weeks, with final enactment expected in late December 2013. The French National Assembly, in line with recent debates and several public reports,1 has introduced several amendments to the version initially proposed by the French Government on 25 September 2013,2 notably to strengthen anti-tax evasion rules and transfer pricing documentation requirements.

In addition, on 13 November 2013, the French Government tabled the draft Amended 2013 Finance Bill with the French National Assembly. This draft includes the simplification of several tax procedures, specific measures for listed real estate companies as well as a new tax incentive for the investment in innovative Small and Medium Enterprises (SMEs). Final enactment is also expected in late December 2013.

This Alert summarizes the main provisions of these draft Bills which may affect corporations.

Detailed discussion

Draft 2014 Finance Bill

Proposed 1% tax on EBITDA replaced by increase of the temporary additional contribution to CIT

The initially proposed 1% tax on EBITDA3 (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 would apply to Fiscal Years (FYs) ending between 31 December 2013 and 30 December 2015. The maximum CIT rate would thus amount to circa 38%4 instead of the current 36.1%.

Limitation on deductibility of interest accrued to low taxed related party lenders

The French National Assembly voted the French Government’s proposal to disallow the tax deduction of interest accrued to related parties if the French taxpayer can not 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.

An amendment was introduced in order to address the case where the lender is a qualifying transparent entity or a collective investment fund.5

These new rules would apply in FYs ending on or after 25 September 2013. It is worth noting that the French National Assembly rejected a number of amendments purporting to introduce a safe harbor clause for lenders established in EU member States or postpone the entry into force of the new rules.

Wider scope of general anti-abuse rule and mandatory disclosure of tax planning schemes

The French National Assembly introduced the following amendments in the draft Finance Bill, against the opinion of the French Government:

  • The scope of the French general anti-abuse rule would be extended to transactions that are “principally” tax driven, whereas the current wording of the law refers to “exclusively” tax driven transactions. The new definition would apply to tax reassessments notified as from 1 January 2016.
  • Tax planning schemes would be subject to mandatory disclosure. These would be 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 would be provided by decree. The disclosure requirement would apply as from 1 January 2015 to any person marketing or developing and implementing a tax planning scheme. The failure to disclose would 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

In line with the French Government, the French National Assembly introduced a requirement to communicate analytical and consolidated accounts upon a tax audit for taxpayers exceeding certain thresholds,6 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 would apply to tax audits opened as from the date of entry into force of the draft Finance Bill.

Strengthening of transfer pricing rules and disclosure of foreign tax rulings

The French National Assembly included amendments into the draft Finance Bill 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); and
  • 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 would apply as from the date of entry into force of the draft Finance Bill whereas the third one would apply to mutual agreement procedures launched as from 1 January 2014.

Note that a bill against tax fraud and financial criminality, voted on 5 November 2013 and currently under review before the French Conseil Constitutionnel includes other changes to transfer pricing regulations, notably an obligation to file a summary of their transfer pricing documentation 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 French National Assembly voted the French Government’s proposal on business restructurings but replaced the EBITDA threshold by a reference to the operating income.

As a result, the new rule would shift 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 would not apply to a mere disposal or licensing of an isolated asset, provided no other business risks or functions are being transferred.

In addition, as per the initial proposal, “non cooperative States or territories” would be included in the category of countries in relation to which transfer pricing rules (including the shift of burden of proof mentioned above) would 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 French National Assembly voted the French Government’s proposal introducing 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 would apply for pension payments and stock options. The tax would only apply to remunerations granted in civil years 2013 and 2014, and would be capped at 5% of the turnover of the civil year. The employer would need to file a specific return and pay the tax by 30 April of the following year.

An amendment was introduced in order to deny the tax deductibility of such exceptional solidarity surtax for the computation of the temporary additional contribution to CIT (see above).

Increase of the rate of the systemic banking tax

The French National Assembly voted the French Government’s proposal which would increase the rate of the 0.5% systemic risk banking tax introduced by the Finance Bill for 2011.7 However the increased rate initially proposed at 0.529% would finally be 0.539%. The new rate would apply to the tax due as from 2014 (payable on 30 April 2014).

Research and development (R&D) tax credit

The French National Assembly voted the French Government’s proposal without any changes. As a result, the computation of certain expenses eligible for the R&D tax credit with respect to personnel costs and IP protection costs would be simplified. This new rule would apply for expenses incurred as from 1 January 2014.

Draft Amended 2013 Finance Bill

Distributions by listed real estate companies

The French Government proposes to make permanent the temporary 3% distribution tax exemption for dividend 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 French Government proposes to 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 would apply to FYs ending on or after 31 December 2013.

In addition, the French Government proposes to 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 would apply to FYs ending on or after 31 December 2013.

New tax incentive for the investment in innovative Small and Medium Enterprises (SMEs)

The French Government proposes to introduce a specific tax depreciation regime over five years for companies liable to CIT to encourage investment in innovative SMEs.8 The depreciation would 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 would 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 through 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, even after the two-year minimum holding period, the capital gain would be taxed at the standard CIT rate.

Being a State aid under EU regulations, this incentive will need to be approved by the European Commission before entering into force.

Simplification of several filing and payments tax procedures

The French Government proposes, among other simplifications, to postpone the date for paying the last CIT installment to 15 May (instead of the current 15 April) 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.

A detailed Alert will be released when the 2014 Finance Bill and the Amended 2013 Finance Bill are final.

Endnotes

1. For more details, see EY Global Tax Alert, France postpones debates on anti-tax avoidance package to September 2013, dated 26 July 2013.

2. For more details, see EY Global Tax Alert, French Government releases draft Finance Bill for 2014, dated 25 September 2013.

3. For more details, see EY Global Tax Alert, French Government releases draft Finance Bill for 2014, dated 25 September 2013.

4. Standard rate of 33.33%, increased by 3.3% (social contribution) and 10.7% (temporary additional contribution).

5. 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 the exchange of information with a view to the prevention of tax evasion with France.

6. 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 group as such companies.

7. 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.

8. Innovative SMEs would be 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
    frederic.vallat@ey.com
  • Daniel Brandstaetter
    +1 212 773 9164
    daniel.brandstaetter@ey.com
  • Martin Birée
    +1 212 773 3065
    martin.biree@ey.com
Ernst & Young LLP, Financial Services Desk, New York
  • Sarah Belin-Zerbib
    +1 212 773 9835
    sarah.belinzerbib@ey.com

EYG no. CM3978