France Tax Alert - 6 July 2012
New taxes proposed on businesses, banks and wealthy individuals
By Ambroise Bricet and Marie-Pierre Hoo
The French government announced on 4 July 2012 a series of new taxes (that would raise approximately EUR 7.2 billion) to fulfill campaign pledges to reduce the burgeoning deficit. The proposed measures, which will be included in a revised budget for 2012, will impact resident and foreign companies and
As announced during the Presidential campaign, the revised budget will focus on banks, oil companies and wealthy individuals. New anti-avoidance provisions will be included to attack tax optimization structures implemented by companies. Companies also will be affected by a new 3% surcharge on distributed profits, and the use and transfer of losses would be further restricted. In addition to onetime surcharges on the assets of wealthy individuals, the inventory of oil companies and banks, the revised budget will include more permanent proposals. The budget is expected to be approved by Parliament by the end of July, with many of the measures taking effect once the budget is enacted.
The main areas of change in the French corporate and individual income taxation rules are outlined below.
Corporate income tax
Temporary exceptional contribution: The fourth amended budget law for 2011 introduced a temporary contribution for companies subject to corporate income tax that have a turnover of at least EUR 250 million. The contribution, which applies for fiscal years 2011 and 2012, is 5% of the corporate income tax liability, giving rise to an effective tax rate of 36.10%. It was anticipated that the 5% contribution would be paid after the fiscal year-end; however, the revised 2012 budget would require an advance payment of the contribution on the due date for payment of last quarterly installment of corporate income tax.
Surtax on corporate dividends: A 3% surtax would be levied on dividend distributions and deemed dividends paid by French entities. In practice, the scope of application of the surtax may be limited within groups of companies since a specific exemption would apply to dividends benefiting from the EU parentsubsidiary directive or the domestic participation exemption, where a dividend is paid to a company that holds more than 10% of the share capital of the distributing entity (the French participation exemption currently applies when dividends are paid to a company that holds more than 5% of the capital of the payer company). The surtax would not apply to collective investment funds, such as SICAVs, or to small and medium-sized enterprises.
The surtax is expected to apply to distributions made as from the date the budget measures enter into force (i.e. as from the date the law is published in the official gazette). It is worth noting that the 3% tax will apply not only to actual dividend distributions, but also to any amount that is characterized as a dividend under the law.
Intragroup forgiveness of debts: Intragroup forgiveness of debts granted for financial reasons would no longer be tax deductible (currently, such debts are deductible up to the amount of the parent company’s stake in the negative net equity of the subsidiary benefitting from the forgiveness). Conversely, when granted for commercial reasons (i.e. in the normal course of trade) rather than for financial reasons, a waiver still would be deductible.
Banks and oil companies: Banks and oil companies would be subject to special measures:
- Banks are subject to an annual contribution equal to the systemic risk tax introduced by Finance Act 2011 (0.25% of the amount of the minimum capital requirements in excess of EUR 500 million), which was due at the end of April 2011 for the first time. The draft law provides for an additional one-time contribution, equal to the contribution paid in April 2012, that would have to be paid by the end of September 2012; and
- A one-time surcharge would be levied on the value of the inventory of oil products stored in France. The surcharge would be imposed at a rate of 4% on the value of the average inventory of products held during the last three months of 2011 by oil companies, refiners and traders. The surcharge would have to be paid on 15 December 2012.
Tax on financial transactions: France will impose a tax on financial transactions as from 1 August 2012. The 0.1% tax will be levied on the acquisition of shares of companies listed on a French, European or foreign regulated market, regardless of where the buyer or seller are located or where the transaction takes place, when the market capitalization of the French company issuing the securities exceeds EUR 1 billion on 1 January of the tax year. The revised budget would double the rate of the transactions tax to 0.2%.
Abusive transfer of losses: The draft legislation provides two types of measures to further restrict the conditions under which tax losses can be transferred and/or carried forward. These measures would apply to financial years ending on or after 4 July 2012.
- The rules governing the conditions to obtain prior approval for a transfer of losses in a restructuring would be made more stringent. Under current rules, mergers or similar transactions that benefit from the EU merger directive allow the tax losses of the absorbed company to be carried forward for offset against the future profits of the absorbing company if prior approval is obtained from the French tax authorities. Approval is granted automatically if: (a) the transaction is governed by the special merger regime; (b) the transaction can be justified from an economic perspective and is mainly motivated by reasons other than tax reasons; and (c) the activities that caused the losses for which the transfer is requested are continued for at least three years following the merger. The revised budget would introduce two cumulative conditions to replace (c), i.e. the activities that caused the losses could not have been changed significantly during the loss-making period in terms of clientele, employment, fixed assets, and the nature and volume of activities, and the activities that caused the losses would have to continue for at least the three years following the merger in respect of the same criteria. Additionally, losses incurred on passive income by companies whose assets are comprised primarily of financial holdings or the managing of property portfolios would no longer be able to be transferred.
- The concept of a “change in real activities” for purposes of the loss carryforward rules would be clarified. Currently, a change in a company’s activities can result in the forfeiture of its loss carryforwards if the change in activities is significant. This concept has been developed by the French courts on a case-by-case basis. It is now proposed to include objective guidelines in the tax code to determine whether a change in the activities of a company would adversely impact the carryforward of losses. For example, a change in real activities that would result in the forfeiture of losses would include:
- The addition of an activity that gives rise, as from its occurrence or as from the next fiscal year, to an increase of more than 50% of (i) the turnover the company or (ii) the average number of personnel and the value of gross fixed assets as compared to the year before the activity was added; and
- The full or partial surrender or transfer of one or more activities that results in a decrease of more than 50%, in relation to the year before the surrender or transfer of the activities, in the turnover of the company, or the average number of personnel and the value of gross fixed assets of the company.
Loss forfeiture could be avoided, however, where the addition, surrender or transfer of activities are essential to the activities that gave rise to the losses and the sustainability of jobs and the approval of the tax authorities is obtained.
It would be clarified that the elimination of a means of production needed to carry on business for a period of more than 12 months, except in cases of force majeure, would qualify as a termination of business, resulting in a forfeiture of loss carryforwards. Forfeiture of losses also would result when an elimination of the means of production is followed by a sale of the majority of the company’s shares. The consequences of a termination of a business could be avoided if the elimination of the means of production (even if exceeding 12 months) was intended to be temporary, it could be justified by non-tax reasons and approval is obtained from the French tax authorities.
CFC rules: The revised budget proposes several changes to France’s controlled foreign company (CFC) rules, which subject a French entity to French corporate income tax on profits of certain foreign entities that benefit from a beneficial tax regime and in which the French entity holds an interest (i.e. CFCs).
Under the proposed rules, for fiscal years ending on or after 31 December 2012, a French entity would have to demonstrate that the purpose of the operations of its foreign (non-EU) CFC was mainly non-tax driven to avoid the application of the CFC rules. Currently, if a CFC is outside the EU, the rules do not apply if the CFC carries on industrial and commercial activities in the jurisdiction in which it is located, unless (1) more than 20% of the profits of the CFC are derived from passive income; or (2) more than 50% of the profits are derived from passive income and income from intragroup services (including financial services). In both cases, the French company can still avoid the application of the CFC rules if it can show that the main effect of the CFC’s activities is other than to allow the localization of taxable income in a jurisdiction in which the CFC benefits from a privileged tax regime. The passive income percentages applying under the existing rules would no longer be needed and, hence, would be eliminated.
Taxation of individuals
Exceptional wealth tax surcharge: For 2012, a special surcharge would be levied on individuals whose taxable net assets (worldwide assets for residents and French assets for nonresidents) exceed EUR 1.3 million. The surcharge would be calculated according to a progressive scale at rates ranging from 0.55% to 1.8% (scale applicable until 2011 for wealth tax purposes), and wealth tax paid for 2012 would be deductible from the special surcharge. Individuals who were domiciled in France on 1 January 2012, but were not so domiciled on 4 July 2012 would only have to pay the surcharge on the net value of their French assets as at 1 January 2012.
Social levies on income from immovable property: French-source income from immovable property earned by a nonresident (which is already subject to French personal income tax) also would be subject to social levies (the current accumulated rate of which is 15.5%), as is the case with resident individuals. This measure would apply to capital gains on immovable property derived as from the date the law enters into force and for rents collected as from 1 January 2012.
Social security contributions on stock options and bonus shares: Stock options and bonus shares granted since 16 October 2007 are subject to a specific social contribution on the option gain when the option is exercised and/or on the value of the shares granted at the time the shares are sold. The revised budget would increase the individual social contribution rate from 8% to 10%. Additionally, the employer contribution payable on the value of an option at the time of grant would be increased from 14% to 30%.
Social contribution: An employer must make a special social contribution on earnings and wages that are outside the scope of social security contributions, i.e. compulsory or optional profit sharing, etc. The revised budget proposes to increase the rate of the contribution from 8% to 20% for compensation paid on or after 1 September 2012.
The “social VAT” (i.e. the earmarking of a defined amount of VAT revenue to finance social security) would be repealed, and the 1.6 point increase in the standard rate (from 19.6% to 21.2%) that is due to take effect on 1 October 2012 would be eliminated. The reduced VAT rate of 5.5% would be restored for books, regardless of the medium. This measure would apply to transactions for which VAT is payable on or after 1 January 2013.