Global Tax Alert | 21 December 2016

French Parliament approves Finance Bill for 2017

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Executive summary

On 20 December 2016, the French Parliament approved the Finance Bill for 2017 (2017 FB).

Except for the constitutionality review by the French Constitutional court, the 2017 FB is final and expected to be published by 31 December 2016.

This Alert summarizes the main corporate tax provisions relating to companies.

Detailed discussion

Presumption of diversion of profits outside of France

The proposal to introduce a Diverted Profits Tax (DPT) made in November 20161 has been modified during the parliamentary debates. In its final version, the new provision establishes a presumption of diversion of profits outside of France that allows the French Tax Authorities (FTA) to subject a legal entity domiciled or established outside of France to French corporate income tax (CIT) on the profits that are deemed diverted.

This new presumption can be used by the FTA in the course of a tax audit, but it is not exclusive of the application of the French general anti-abuse rule (abuse of law procedure or French GAAR).

The presumption applies to a legal entity domiciled or established outside of France when:

  • Either an enterprise, established or not in France, carries out in France an activity consisting of the sale of goods or provision of services belonging to the above mentioned legal entity and the latter controls that enterprise or holds more than 50% of its shares, financial or voting rights.
  • Or, a legal person or individual carries out an activity in France related to the sale of goods or provision or services by the above mentioned legal entity and when “there are serious reasons to consider” that the activity of such legal person or individual aims at avoiding or reducing the tax burden that should be due in France. This would encompass the following situations: (i) persons acting on behalf of the legal entity domiciled or established outside of France and habitually concluding contracts in the name of that legal entity, or contracts pertaining to the transfer of title on, or concession of the right to use, goods that belong to the legal entity, or on which that legal entity has a right to use, or contracts related to the sale of goods or provision of services by the above mentioned legal entity (an exemption applies if the legal person or individual exercises its activity in an independent way in the ordinary course of its own business) and (ii) an internet website, hosted or not in France, carrying out, to the benefit of persons domiciled in France, an activity of the sale of goods or provision of services sold or provided by the legal entity domiciled or established outside of France.

The presumption also applies to enterprises exploiting electronic platforms through which persons can be connected with a view to contracting for the sale, exchange or sharing of goods or services.

Two exception clauses are provided:

  • For any legal entity domiciled or established outside of France, the presumption does not apply if that legal entity can establish that the activities carried out in France have mainly a purpose and an effect other than merely reducing French tax.
  • For legal entities domiciled or established in the European Union (EU), the presumption does not apply if the activities carried out in France cannot be regarded as being set up as an artificial arrangement to circumvent French tax law.

Subject to a potential constitutionality review by the French Constitutional court, this new provision will apply to fiscal years starting on or after 1 January 2018.

Decrease of the French CIT rate

The French CIT rate will decrease from 33.1/3% to 28%. The 28% CIT rate will be progressively extended to all entities as follows:

  • For fiscal years (FYs) staring on or after 1 January 2017, the 28% CIT rate would apply only to Small and Medium Enterprises (SMEs) with revenue below €50 million, on the first €75,000 of taxable income.2
  • For FYs starting on or after 1 January 2018, the 28% CIT rate would apply on the first €500,000 of taxable income of all entities.
  • For FYs starting on or after 1 January 2019, the 28% CIT rate would apply on both:
    • Taxable income of all entities for which revenue does not exceed €1 billion (or aggregate revenue of French tax consolidated entities).
    • The first €500,000 of taxable income of entities for which revenue exceeds €1 billion (or aggregate revenue of French tax consolidated entities).
  • For FYs starting on or after 1 January 2020, the 28% CIT rate will apply for all entities, irrespective of their revenue and profits.

Increase of the fourth CIT installment due by large entities

Large entities are subject to a fourth CIT installment3 payment based on a percentage of the estimated profits for the current FY (instead of the previous FY). For FYs starting on or after 1 January 2017, the fourth CIT installment will be due on the basis of higher rates:

  • 80% (instead of 75%) for entities with revenue over €250 million but less than or equal to €1 billion
  • 90% (instead of 85%) for entities with revenue over €1 billion but less than or equal to €5 billion
  • 98% (instead of 95%) for entities with revenue over €5 billion

Strengthening of the Tax Credit for Competiveness and Employment (CICE)

The rate of the CICE will increase from 6% to 7% for wages paid as from 1 January 2017.

The CICE is based on wages that an entity pays to its employees over the course of the calendar year. The wages paid by the company are taken into account for the calculation of the CICE within the limit of 2.5 times the minimum wage (SMIC). The CICE generates a receivable against the French Treasury, which can be offset against CIT or refunded after three years.

Changes affecting the French Financial Transaction tax (FFT)

The FTT is levied on the acquisition for consideration of an equity security or a similar instrument when such security or instrument is traded on a regulated/recognized market, the acquisition results in a transfer of ownership, and the security or instrument is issued by a French-listed company with market capitalization exceeding €1 billion on 1 December of the year preceding the taxation. The rate of the FTT will increase from 0.2% to 0.3% as from 1 January 2017. In addition, the application of the FTT will apply to intraday transactions as from 1 January 1 2018.

Extension of the French start-up regime to 31 December 2019

The French start-up regime, that applies to qualifying “innovative start-ups” (Jeunes Entreprises Innovantes or JEI), grants several exemptions or abatements from French CIT, local taxes and payroll tax.

This regime is extended from 31 December 2016 to 31 December 2019.

Acquired software no longer subject to a favorable tax amortization regime

As from FYs starting on or after 1 January 2017, the acquisition of software will no longer benefit from an exceptional amortization over 12 months.

As a consequence, the “straight-line” method (standard in French GAAP), based on the depreciation period of the asset, will be applicable. For instance, if the useful life of the software is five years, the straight-line depreciation rate will be equal to 20%.

Extension of the French impatriate tax regime

Under various conditions, the portion of the salary compensating a transfer to France (prime d’impatriation or expatriation bonus) paid to qualifying individuals assigned to France (intra-group transfers) or directly hired by a French entity in order to carry out professional duties for a limited period of time, benefits from a temporary individual income tax exemption until 31 December of the fifth year following the year of the transfer to the French host entity.

The 2017 FB extends the benefit of this French impatriate regime until 31 December of the eighth year following the year of the transfer to the French host entity, for people who have started performing their duties in France on or after 6 July 2016.

In addition, the expatriation bonus paid as from 1 January 2017, will be excluded from the payroll tax4 (taxe sur les salaires) basis, for people who have started performing their duties in France on or after 6 July 2016.

Endnotes

1. See EY Global Tax Alert, France includes proposed diverted profits tax in draft Finance Bill for 2017 and releases draft Amending Finance Bill for 2016, dated 21 November 2016.

2. The reduced tax rate of 15% will be maintained for the first €38,120 of taxable income, provided that: (i) the revenue of the entity does not exceed €7.63 million or €50 million as from FYs starting on or after 1 January 2019; (ii) the share capital of the entity is fully paid up; and (iii) the entity is held at least up to 75% by individuals or other entities meeting the above conditions.

3. The fourth installment is equal to the difference between: (i) various rates – depending on the revenue of the entities – applied to the forecasted profits for the current FY; and (ii) the amount of the first three installments already paid by the entity.

4. The following entities are subject to the payroll tax: entities not subject to VAT, or for which revenue was at least 90% VAT exempt in the preceding year.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Société d’Avocats, International Tax Services, Paris
  • Eric Verron
    +33 1 55 61 13 31
    eric.verron@ey-avocats.com
Ernst & Young LLP, French Tax Desk, New York
  • Frédéric Vallat
    +1 212 773 5889
    frederic.vallat@ey.com
  • Alexandre Peron
    +1 212 773 9164
    alexandre.peron@ey.com
  • Elie Boccara
    +1 212 773 0224
    elie.boccara@ey.com
Ernst & Young LLP, Financial Services Desk, New York
  • Sarah Belin-Zerbib
    +1 212 773 9835
    sarah.belinzerbib@ey.com

EYG no. 04498-161Gbl