The draft of the second Amended Finance Bill for 2012 was adopted by the French Government on 4 July 2012. This text should be definitively adopted in late July or early August. Below is a summary in English of some of the key provisions.
The main provisions affecting business taxation are set out below:
- Additional 3% contribution on dividend distributions
The bill introduces an additional 3% tax on dividend distributions or on sums treated in the same way for tax purposes.
This tax is payable by French and foreign companies subject to CIT in France, with the exception of companies meeting the EU “SME” criteria i.e. companies with less than 250 employees, with annual turnover of less than €50m or a balance sheet total of less than €43m.
Dividends which are exempt from French WHT under the EU parent-subsidiary regime, corresponding to shareholdings of at least 10% of capital of the distributing entity would be outside the scope of the 3% contribution as well as dividends paid to mutual funds.
Therefore, dividends falling within the scope of the new 3% contribution will comprise:
- distributions to individuals,
- distributions to companies with a shareholding of less than 10% in the distributing entity,
- distributions made to government agencies.
The 3% tax treatment applicable to dividents paid to foreign parent companies located in third countries needs to be further clarified.
The contribution is equal to 3% of the distributed income and should be paid voluntarily before the last day of the second month following the payment of the distribution.
This 3% contribution applies to French PE of foreign entities at the time profits of the PE are remitted outside France (in principle non EU companies).
Tax credits would not be creditable with the possible exception of foreign tax credits eligible under a DTT.
The levy would apply to distributions made or payable as from the date of publication of the new law.
- Advance payment of the exceptional 5% corporate tax surcharge
The exceptional 5% CIT surcharge (which applies in addition to the standard rate of 33,1/3% and the existing 3,33% surcharge resulting in an effective French CIT rate of 36.10%) is currently payable with the balance of CIT. For companies with a FY ending on 31 December 2012, this surcharge is normally due by 15 April 2013.
The bill proposes to establish an advance payment for this surcharge, so that it will be paid at the same time as the fourth instalment payment of CIT for large companies i.e.by 15 December 2012.
The advance payment will have to be made by deemed “large” businesses, as set out below:
- 75% of the estimated amount for companies with annual turnover between €250m and €1bn
- 95% of the estimated amount for companies with annual turnover exceeding €1bn.
With regard to French tax groups, the thresholds above are applied at the group level.
Finally, late payment interest and penalties will apply where affected taxpayers make errors in payment of the surcharge - these will apply where the error is in excess of:
- 20% and €100 000 for companies falling under the 75% regime (above), and
- 20% and € 400 000 for companies falling under the 95% regime.
This advance payment is applicable to FY ending on or after 31 December 2012.
- Non-deductibility of financial debt waivers
This provision proposes to disallow, for French tax purposes, any financial aid provided by companies to their ailing subsidiaries. Therefore, the only waivers that would remain deductible would be those arising from commercial relationships.
This text is proposed as a deterrent to a parent company seeking to get a tax deduction while subsidising its ailing subsidiary, rather than undertaking a formal recapitalisation which would solely affect the value of the securities and not provide a tax deduction.
If one objective is to fight practices which bring foreign losses into France, the text makes no distinction as to whether the subsidiary is established in France or not in order to avoid any discrimination.
Taxation at the level of the entity granting the subsidy does not prevent taxation at the level of the entity receiving the subsidy.
These changes would apply to FY ending on or after 4 July 2012 and thus affect debt waivers already made during the current tax year.
- Taxation of profits arising from the capitalisation of impaired assets
This text proposes to end the accounting and tax discrepancies arising on the capitalisation of impaired assets (in practice mainly debts).
When a creditor contributes a receivable in exchange for shares of the debtor company, to the extent the fair value of the shares received is less than the nominal value of the debt contributed, the debtor will become taxable up to the difference between those two amounts.
In turn, on disposal of the shares received by the creditor, any gain or loss realized would be determined in accordance with the actual value of the securities received and not the face value.
These changes would apply to FY ending on or after 4 July 2012. In other words, for companies ended 31 December 2012, this provision will retroactively apply from 1 January 2012.
- Systemic Risk Tax doubled
Systemic risk tax is due by financial institutions with required equity funds of at least €500m. The provision provides for the payment of an additional contribution of the same amount as the tax on systemic risk already been paid in respect of 2012.
- Rate of the FTT doubled
The draft bill sets out that the rate of the financial transaction tax which is due to become effective in France as from 1 August 2012 will increase from 0.1 to 0.2%.
- Fight against the abusive transfer of French tax losses
On the one hand, the bill intends to limit the possibility of obtaining advance rulings for the transfer of tax losses in case of a merger or partial transfer of assets.
It is proposed that companies to which tax losses are transferred should commit not to undertake a significant change in the activity which gave rise to those tax losses, particularly with regard to clients, employment, nature and volume of the activities.
On the other hand, the possibility for a loss making company to keep its tax losses when it undertakes a change of its activities is now greatly reduced.
The notion of a change in activity is defined strictly. If the company adds a new activity, which
- increases its revenue or the average number of personnel by more than 50%, and
- increases the amount of fixed assets by more than 50%,
during the 2 years following the merger / partial transfer of assets, this would jeopardise the use of losses transferred.
Similarly, a decrease of 50% (compared to the initial activity) of these same elements and within the same time would also jeopardise the carry forward of tax losses.
In the event of a failure to comply with these conditions, it is proposed however that a new advance ruling procedure be introduced which will safeguard the carry forward of tax losses, when the changes taking place are essential to the continuation of the activities and sustainability of jobs.
These changes would apply to FY ending as from 4 July 2012.
This reform will in particular render ineffective in most cases the absorption by a loss making entity of a profitable entity to enable the tax losses of the loss-making entity to be used as such an operation is likely to lead to a change of activity of the loss-making entity.
- Anti abuse in respect of divestment schemes
This provision aims to target abusive divestment schemes such as that in which a company merges with a subsidiary (under the tax favourable regime) within 2 years following its acquisition, thereby claiming a deduction for the short term capital “loss” resulting from the cancellation of the shares in the absorbed company.
This text proposes to disallow at the standard rate of CIT an amount of capital loss claimed by the absorbing entity equal to the amount of dividends distributed tax-free by the absorbed entity since its acquisition.
This provision would apply to FY closed on and after 4 July 2012.
- Reversal of the burden of proof for the application of CFC safe harbor rules
French CFC rules currently do not apply to foreign controlled entities which carry on an active trade or business in a non EU country where they benefit from a privileged tax regime. On the other hand, the French controlling entity must bring evidence that the location is not mainly tax driven where 20% of the income of the foreign entity comprises passive income, or where at least 50% of the income of the foreign entity comprises passive income and income from intra-group services.
The bill proposes to extend the reversal of the burden of proof to all situations where the controlled entity is located in a low taw jurisdiction, irrespective of the 2 thresholds of income above mentioned.
Finally, the distinction with Non-Cooperative States or Territories (NCST) is eliminated.
This provision is applicable to FY ending on or after 31 December 2012.
- Removal of WHT on French source dividends paid to EU mutual funds
To address the consequences of the ECJ judgment of 10 May 2012 in the Santander case, under which the withholding tax applied to dividends paid to mutual funds situated in other EU Member states was ruled to be contrary to EU law, the provision has been removed so that the exemption already applied to French mutual funds extends to EU equivalent mutual funds.
Foreign mutual funds must operate under conditions similar to those applicable under French law.
This exemption would apply to income distributed as from the publication of the law.
- Repeal of so called “social VAT”
Despite recent recommendations for an increase in the standard rate of VAT for reasons of sound public finances, the increase in the standard VAT rate from 19.6% to 21.20% (which was decided by the Sarkozy Government and was to enter into force as from 1 October 2012) is to be repealed by the new Socialist Government in order to preserve the purchasing power of households.
The decrease in employer contributions that accompanied this increase in VAT is also proposed to be removed.
The principal provisions affecting individuals are set out below.
- Exceptional contribution to Wealth Tax
This provision introduces an exceptional wealth tax contribution for 2012. It consists of a payment on 15 November 2012, of an additional tax calculated on the basis of the 2012 net assets > €1.3m but by applying higher rates close to those which were applicable in 2011.
- Application of social taxes to income from property and real estate capital gains earned by non-residents
Non-resident individuals would be subject to French social security contributions of 15.5% on income and gains arising in respect of French real estate, to align the system of taxation with that applying to French residents.
The applicability of this provision to persons residing in another EU state is uncertain.
- Increase in employer and employee contributions on the granting of stock options and restricted stock
The employer contribution rate, due at the time of grant of options or free shares, is to be increased from 14% to 30%.
The rate of salary contribution, due on the sale of the securities concerned, is to increase from 8% to 10%.