French Parliament approves Finance Bill for 2024, including OECD Pillar Two rules

Executive summary

On 21 December 2023, the French Parliament approved the Finance Bill for 2024 (the Bill).

Except for the constitutionality review by the Conseil Constitutionnel (French Constitutional Council), the Bill is final.

This Global Tax Alert summarizes some of the key tax reforms included in the Bill that may affect corporations.

Detailed discussion

Transposition of the European Union (EU) Minimum Taxation Directive (2022/2523) into French domestic law

The Bill provides for a transposition into French domestic law of the EU Directive 2022/2523 introducing, per the Organisation for Economic Co-operation and Development (OECD) Pillar Two Global Anti-Base Erosion (GloBE) rules, a minimum tax of 15% on the profits of multinational (MNE) groups that operate in France and have a consolidated revenue of at least €750m generated during at least two of the last four fiscal years (FYs).

A top-up tax, distinct from the corporate income tax (CIT), will be established if the effective tax rate (ETR) of the MNE constituent entities (CEs) established in any given jurisdiction is lower than 15%. For each jurisdiction where the MNE group is established, the ETR is equal to the ratio between the adjusted covered income taxes imposed on the CEs and the adjusted financial accounting net income or loss determined based on the CEs' financial statements under the accounting standard that the Ultimate Parent Entity (UPE) uses in preparing the MNE group's consolidated accounts.

The top-up tax, equal to the positive difference between 15% and the ETR applied to the adjusted income of CEs, reduced by a substance-based exclusion, will be collected as follows:

i. Primarily, when the UPE or another parent entity (Intermediate Parent or Partially-Owned Parent) of the MNE group is established in France, under the Income Inclusion Rule (IIR), whereby the top-up tax is imposed on the relevant parent entity

ii. Secondarily, under the Undertaxed Profit Rule (UTPR), which reallocates a residual portion of the top-up tax to a jurisdiction where a CE of the MNE group is established if the total amount of the top-up tax failed to be collected under the IIR (e.g., because the legislation of the UPE's jurisdiction of residence does not include the IIR)

In addition, the Bill establishes a French Qualified Domestic Minimum Top-up Tax (QDMTT), which will be determined in the same way as the top-up tax under the IIR, with the possibility to use French Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) as an alternative to the consolidation GAAP. The QDMTT amount will be equal to the difference between 15% and the ETR of the CEs established in France. The French QDMTT will be creditable against the top-up tax determined under the IIR or the UTPR.

Finally, the Bill authorizes the French Government to adopt through ordinances any subsequent measures addressing the filing, collection, audits and penalties related to the additional taxes arising from this new regime.

The new measures will apply to FYs starting on or after 31 December 2023, except that the UTPR will apply to FYs starting on or after 31 December 2024.

Postponement of the repeal of the Business Contribution on the Added Value (BCAV)

The BCAV is a local tax owed by any person carrying out a trade or business in France and levied on the added value that the trade or business generates.

Instead of being abolished as of 2024, as initially scheduled, the BCAV tax rate will be gradually reduced under the Bill (i.e., 0.28% in 2024, 0.19% in 2025, 0.09% in 2026) and completely abolished in 2027.

Creation of a tax credit for investment in green industry

The Bill provides for the creation of a tax credit for investments in green industry. This tax credit will benefit companies setting up or developing production facilities related to batteries, photovoltaic panels, wind turbines and heat pumps in France.

As a matter of principle, the tax credit will correspond to 20% of the expenses incurred for the acquisition of qualifying tangible assets (lands, buildings, plant, equipment and machinery) or qualifying intangible assets (patent rights, licenses, know-how and other intellectual property rights) enabling the production of the above-mentioned equipment.

The total amount of the tax credit will, as a general rule, be capped at €150m, for all companies within the same group, and will be deductible from the CIT for the year during which the expenses are incurred; the unused portion of that credit will be directly refundable.

As per the Bill, the eligibility to this tax credit will require, in particular, that: (i) the investment project carried out in France does not result from a relocation from another EU Member State; (ii) the company commits to operate the investments in France for at least five years; and (iii) a ruling must be granted by the French tax authorities (FTA), to be issued by the latter within three months of the taxpayer's request.

Companies may begin submitting their ruling requests before the FTA on or after 27 September 2023 in anticipation of their being granted no later than 31 December 2025.

Enlargement of the 99% French dividend participation exemption regime

Prior to the Bill's approval, the 99% French dividend participation exemption regime could not apply to dividends (i) received by a French company, not member of a French tax consolidated group while the setting up of such a group would have been technically possible (but the option for the French tax consolidation regime was simply not made), and (ii) distributed by its EU or European Economic Area (EEA) subsidiaries that could have been part of a French tax consolidated group (with that French beneficiary company) if they had been French tax residents. Instead, in those situations, the French participation exemption was limited to 95%.

Yet, recent EU and domestic case law decisions (CJEU, 11 May 2023, cases C-407/22, Manitou and C-408/22, Bricolage Investissements; CE, 18 July 2023, n° 454107, min. c/ SA Manitou BF and CE, 18 July 2023, n° 458579, min. c/ SA Bricolage Investissement France) ruled out against the difference of treatment based on the absence of option for the French tax consolidation regime while that option was technically possible.

Accordingly, the 99% French participation exemption regime has been amended by the Bill to also apply, as from FYs closed on 31 December 2023, to dividends (i) received by a French company, not member of a French tax consolidated group while the setting up of such a group would have been technically possible (but the option for the French tax consolidation regime was simply not made), and (ii) distributed by its EU or EEA subsidiaries that could have been part of a French tax consolidated group (with that French beneficiary company) if they had been French tax residents.

Yet, the Bill adds a timing constraint to benefit from the 99% French participation exemption regime. As a result, the regime will apply:

• To dividend distributions performed between French resident companies that have been members of a French tax consolidated group for more than one FY
• To dividend distributions made to a French resident company, member or not of a French tax consolidated group, made by its EU or EEA subsidiaries that could have been part of a French tax consolidated group (with that French beneficiary company) for more than one FY, if they had been French tax residents

Criminalization of the provision of instruments supporting tax fraud

In the current state of law, individuals or companies promoting fraudulent tax schemes or arrangements can only be prosecuted on a case-by-case basis for the tax fraud committed by their clients.

The Bill introduces an autonomous criminal offense to be charged against individuals and companies that provide their clients with instruments facilitating tax fraud.

The applicable criminal penalty could result in five years of imprisonment and a €500k fine, increased to €2.5m for legal entities.

Strengthening of transfer pricing audits for MNEs

The Bill provides for the reinforcement of FTA resources to detect and take action against breaches of transfer pricing rules.

To that end, the Bill provides the following measures:

• Article L.13 AA of the French Tax Procedure Code (FTPC) will be amended to reduce from €400m to €150m the revenue/gross-asset threshold triggering the obligation to provide transfer pricing documentation to the FTA upon its request during a tax audit.
• The transfer pricing documentation will become binding to the taxpayer.
• The minimum amount of the fine for non or partial submission of documentation will be increased from €10k to €50k.
• The statute of limitations for the transfer of certain intangibles (i.e., hard-to-value assets) will be extended from three to six years and derogatory tax audit rules would be established.

The new measures will apply to FYs starting on or after 1 January 2024.

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

Ernst & Young Société d'Avocats, Paris

• Eric Verron
• Xavier Dange

Ernst & Young LLP (United States), French Tax Desk, New York

• Frédéric Vallat
• Mathieu Pinon
• Margaux Bondaz

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.