By Ambroise Bricet, Patrick Fumenier and Marie-Pierre Hoo

The French government announced a series of measures on 28 September 2012 that would make the rules governing the deduction of finance charges, loss carryovers and long-term capital gains more stringent. These new rules will be included in the 2013 finance bill that Parliament is expected to discuss at the end of October (with the law to be finally voted at the end of December). More than EUR 10 billion in additional corporate income tax revenue is expected to result from the measures.

Global cap on finance charges

Interest on loans generally is deductible for French corporate income tax purposes, although under the thin capitalization rules, interest paid to shareholders on related party debt may be disallowed. A deduction for interest on a loan obtained to acquire a participation in another company also may be disallowed in the following circumstances:

• If the acquisition involves jointly controlled companies and the acquired company enters into a group consolidation with the acquiring company (Charasse rule);
• If the French borrowing company is unable to demonstrate that decisions on share-related transactions are made in France and that the acquired subsidiary is effectively managed in France (Carrez rule).

Under the proposals, independently of the above rules, finance charges incurred by companies liable to corporate income tax would be capped at 85% of their net amount as from fiscal year 2012. (The cap would be further reduced to 75% as from FY 2014.) However, the cap would not apply if the total finance charges (including charges disallowed under the thin capitalization rules) incurred were below EUR 3 million.

Further restrictions of loss carryforwards

Further to the second amended Finance Law for 2011, as from FY 2011, the amount of loss carryforwards available in any given year is capped at EUR 1 million, plus 60% of the portion of the taxable profits of the relevant fiscal year exceeding EUR 1 million. The remaining 40% of income is taxed at the standard corporate income tax rate.

Under the proposals, the amount of carried forward losses that could be used to reduce the taxable profits of the fiscal year would be capped at EUR 1 million, plus 50% (instead of 60%) of the portion of taxable profit in excess of EUR 1 million. This measure could apply to financial years closed as from 31 December 2012.

Tightening of participation exemption for long-term capital gains

The participation exemption for capital gains currently applies to gains derived from the sale of shares that form part of a substantial investment and have been held for 24 months. For fiscal years opened as from 1 January 2011, 90% of the income is exempt (previously 95%). The remaining 10% is deemed to represent costs and expenses and is taxed at the standard rate (33 1/3% plus a 3.3% surcharge), giving rise to an effective tax rate of 3.44%. This taxable portion, which represents a lump sum charge, is calculated on net long-term capital gains, i.e. after the deduction of long-term capital losses.

As from financial years closed as from 31 December 2012, the 10% taxable portion of the long-term capital gain would be calculated on the gross amount (i.e. not reduced by capital losses) of the capital gain realized.

Fourth estimated tax installment broadened for large companies

Under the French Tax Code, corporate income tax for each fiscal year is payable in quarterly installments and one final payment. The quarterly installments are calculated with reference to the taxable results of the previous fiscal year. However the fourth quarterly installment of large companies is determined on the basis of the estimated profits for the current fiscal year, as follows:

• For companies with turnover between EUR 500 million and EUR 1 billion, with an increase in estimated profits of more than 50% as compared to the profits of the previous fiscal year, the fourth installment is 66 2/3% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid;
• For turnover between EUR 1 and EUR 5 billion, with an increase in estimated profits of more than 25% as compared to the profits of the previous fiscal year, the fourth installment is 80% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; and
• For turnover exceeding EUR 5 billion, with an increase in estimated profits of more than 11% as compared to the profits of the previous fiscal year, the fourth installment is 90% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid.

For fiscal years opened after 1 January 2013, the fourth installment of large companies would be determined under the following rules:

• For companies with a turnover between EUR 250 million and 1 billion, with estimated profits that increased by more than 50% as compared to the previous fiscal year, the fourth installment would be 75% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid;
• For turnover between EUR 1 and EUR 5 billion, with estimated profits that increased by more than 25% as compared to the previous fiscal year, the fourth installment would be 85% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; and
• For turnover exceeding EUR 5 billion, with estimated profits that increased by more than 11% as compared to the previous fiscal year, the fourth installment would be 95% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid.

For companies that do not fall in any of the above categories, the current rules on the payment of the fourth instalment would remain unchanged.