The draft 2nd Amending Finance Act 2012 was presented to the Counsel of Ministers on 4 July 2012. The majority of the measures envisaged for companies result in increased taxation.
Establishment of an additional corporation tax contribution on distributions of 3%
To comply with community law (cf. the decision of the Court of Justice of the European Union on 10 May 2012) the draft Act provides for the removal of French withholding tax on dividends distributed to foreign OPCVMs (undertakings for collective investment in transferable securities).
To make up for the loss of earnings for public finances, a contribution of 3% on dividends and more generally on the earnings distributed by all bodies liable to corporate tax (including those which are partially or totally exempt, with a few exemptions) is provided for.
Only the following would be exempt from this new tax:
- The bodies mentioned at I under Article L214-1 of the French monetary and financial Code, i.e. OPCs (collective investment funds): OPCVM, securitization funds, SCPIs, investment companies specialising in the forest industry, OPCIs (real estate investment vehicle)(and so SPPICAVs) and SICAFs (open-ended investment companies).
According to the appraisal contained in the draft Act, this measure would provide against "distortion between direct and indirect investments", the measure being judged "compliant in addition with the desire to relatively encourage reinvestment of company distribution profits".
- Small and medium sized companies under annexe I of community regulation n°800/2008 of 6 August 2008, i.e. companies fulfilling the following criteria:
- Less than 250 people;
- Yearly turnover less or equal to €50 million or a total yearly balance sheet that is less than or equal to €43 million.
For affiliates, even partners, under the community regulation, there is the possibility of taking a consolidated approach to the thresholds in question: notably in the case of a situation of control (for example, detention of the majority of voting rights).
- Dividends benefitting from the parent-subsidiary relationship (with a threshold of 10% detention)
The text as it is would essentially affect companies of diluted capital, those held by individuals and companies exempt (in whole or in part) from corporation tax due to the existence of a certain condition.
In terms of the latter, vehicles that might be "unfairly" implicated are the SIIC (French REIT) and subsidiaries of the SIIC or of the SPPICAV that have opted for the SIIC regime. The SIIC regime imposes distribution obligations on companies; a contribution that encourages them to reinvest, rather than distribute, seems to lack coherence. Interpositions by companies in the "SIIC" category would result in increased tax costs since a contribution of 3% would be due at every level.
The mechanism proposed is different from withholding tax (international tax agreements would therefore be without effect): the contribution would be a definitive charge affecting only distribution companies and, indirectly, all shareholders who have to cover the payment. Indeed this may be the case even if they are not the original shareholders or the beneficiaries of the said distribution, as the tax will be charged to the financial year of distribution, which will be inevitably subsequent to the realisation of the profits from which the dividends were issued.
90% of company A is held by company B (under the parent-subsidiary relationship) and 10% by a person C.
A distributes 1000. The sum received by B (i.e. 900) escapes contribution, the sum received by C (i.e. 100) is subject to the additional contribution to corporation tax, i.e. a contribution of 3, payable at the latest on the last day of the second month following distribution.
Company A will therefore have to plan for this cost, which will be deducted from the accounting result for the year of distribution and will therefore be born financially by the shareholders of company A (who will potentially be different). That's to say, notably, shareholders who have not triggered payment of the contribution, who will support it indirectly. In this example, company B would indirectly support a cost of 2.7 (corresponding to 90% of the contribution of 3).
This measure would apply to distributions on and after the date of publication of the law, i.e. in theory from the end of July / beginning of August. It's therefore a good idea to distribute reserves before the application of the contribution, as far as distribution is in line with the strategy of the company in question.
Expected payment of the one-off contribution of 5% on corporation tax
The amendment to the Finance Act of 28 December 2011 established a surtax of 5% which increased the overall rate of corporation tax from 34,43% (social contribution included) to 36,15% and which was due for the first time on 15 April 2012, at the moment of payment of the balance of corporation tax for 2011.
This temporary contribution (financial years ended up to 30 December 2013) is aimed at bodies liable to corporation tax in France, of which the annual turnover exceeds €250 million.
The fiscal guideline 4L-3-12 published on 29 March 2012 confirmed that the entities targeted included not only all forms of company but equally French branches of foreign companies carrying out an activity on French territory and vice versa. For the latter, to decide whether the €250 million threshold had been crossed, not only the turnover realised in France by the branch, but also the turnover of the foreign company, would be taken into account. This situation, questionable under EU anti-discrimination law, has already led to several claims for the reimbursement of surtax wrongly paid.
In order to speed up collection of this additional tax by the State, the draft Act provides that the companies concerned will pay a down-payment of 75% or 95% of the one-off estimated contribution (depending on whether or not the turnover of N-1 exceeds €1 billion), at the moment of payment of the last down-payment of corporation tax, i.e. on 15 December (for companies whose financial year ends with the calendar year).
In the case of a significant mistake in the estimation of the down-payment, a tax penalty of 5% and interest (at the annual rate of 4.80%) will be applied.
This measure will apply to the financial years ending as of 31 December 2012 and until 30 December 2013. The expected payments will therefore mainly take place on 15 December 2012.
Fight against the improper transfer of deficits, an anti-abuse condition relative to divestiture
These measures focus on:
- Tighter controls on the transfer of deficits in the case of restructuring or the 'survival' of deficits in the case of a change of activity.
The addition, discontinuation or transfer of an activity normally leads to the closing down of a business, and so the loss of deferred tax deficits (except tax agreements anticipated in the context of mergers under the tax regime in force). From now on, a real change in activity would be noted in the case of a change, be it an increase or decrease of more than 50% in turnover, or of the average number of staff and the gross amount of fixed assets, with regard to N-1.
- Preventing the distribution of partially exempt dividends under the parent-subsidiary relationship from allowing the beneficiary company to use its common law right to deduct from its profits a loss due to the "impoverishment" of the distribution company (currently, this loss does not always qualify as long-term capital loss).
We can for the moment raise a positive point concerning these measures: no single loss of tax deficit is expected in the case of a simple change of company shareholder (whereas that does happen in other European companies).
For the other measures, the following is noted:
An increase in tax affecting the company saving scheme as of 1 September 2012:
- increase in social contributions on stock options and gifted shares (total of employer and employee shares of 40% instead of 22%);
- increase in social contributions on sums paid by the employer for profit sharing / contribution / company savings plan (PPE)/ collective retirement savings plan... (20% instead of 8%)
This regime, already damaged by previous reforms, can now be considered hardly workable. It is probable that it will not concern more than the French subsidiaries of foreign companies having put in place stock-options plans on a global level.
- A rule of non-deductibility for writing off bad debts;
- A double rate of tax on financial transactions which would increase to 0.2% on the 1st August 2012;
- A one-off contribution due by certain lending institutions;
- And, the repeal of social VAT (the normal rate of VAT therefore remains at 19.60% for the moment).