Amendments to the rules of deductibility of interest expenses
Further restrictions to deductibility of interest expenses incurred in relation to a share purchase 1
The 4th Amended Finance Act for 2011 introduces a specific anti abuse mechanism designed to defeat the artificial allocation to a French corporation of debt in relation to the acquisition of shares of an entity (other than a real estate company) which is not controlled from France. Financial expenses borne by a French corporation acquiring participating shares (“titres de participations”) shall be fully or partially disallowed if the French corporation cannot justify by any means that it takes all decisions relating to such investment and, whenever a control or influence is exercised over the acquired entities, that it actually exerts such control or influence (decisions/control may as well be in the hand of a French affiliated entity of the acquiring corporation within the meaning of section L 233-3 of French Commercial Code).
For this purpose, satisfactory evidence is required to be provided for the fiscal years running over the 12-month period following the acquisition of the shares or, as regards past acquisitions (i.e., transactions completed in the course of a fiscal year opened before 2012), for the first fiscal year opened after January 1, 2012.
Where such a demonstration cannot be properly made, the company owning the shares will be required to recapture a portion of its financial expenses incurred during each fiscal year running over the 8-year period following the year of the acquisition.
In practice, these new rules may thus affect the deductibility of financial expenses related to acquisitions closed as from 2004. Specific provisions deal with the impact that a potential merger, spin-off or any similar reorganization may have on the reinstatement requirement if completed during the eight-year period.
The amount to be reinstated on an annual basis by the acquiring corporation will be equal to:
- the total amount of its interest expenses incurred in respect of the relevant fiscal year multiplied by
- the acquisition price paid for the participating shares divided by
- the acquiring corporation’s average indebtedness throughout the relevant fiscal year.
No reinstatement shall however be due if the overall value of the participating shares held by the acquirer is less than €1 million, or if the acquirer can justify either that the investment was not financed by indebtedness or that its debt to equity ratio is inferior to the one of its economic group within the meaning of Section 212-III of French Tax Code (FTC).
New exemption from thin capitalization rules in case the borrower faces bankruptcy2
The 2011 Finance Law extended French thin capitalization rules to loans granted by third party lenders when such loans are secured by an entity directly or indirectly related to the French borrower, subject to a certain number of exceptions. Notably, loans contracted for purposes of refinancing an existing debt which reimbursement would be mandatory as a result of a change in the control of the borrower fall outside the scope of thin capitalization rules. The 4th Amended Finance Act for 2011 extends this exemption to loans contracted for purposes of refinancing an existing debt in application of safeguard proceedings (procédure de sauvegarde) or a judicial reorganization (redressement judiciaire) for tax years closed as from December 31, 2010.
Anti abuse provisions to defeat misuse of IP regime3
Royalties derived from eligible IP (patent, invention potentially patentable) are taxable at a reduced rate of Corporate Income Tax (CIT) of 15 percent provided the IP qualifies as a fixed asset and has been held for a two-year minimum period by the French entity operating the IP (or said IP was created by such entity in which case no minimum holding period applies). In addition, for fiscal years opened as from January 1, 2011, the royalties paid on eligible IP to an affiliated company are fully deductible even if the licensor benefits from the 15 percent reduced rate (Finance Act for 2011). In order to prevent abusive schemes based on such new favorable regime, the Finance Act for 2012 has adjusted the IP regime to deny the full deductibility of royalties paid to an affiliated company in case of artificial arrangements or in situations where the licensee can not establish that it will actually create value over the duration of the license agreement by operating the patent. Furthermore, in the context of a sub-license agreement, the sub-licensor shall no longer be allowed, for tax years opened as from October 13, 2011, to apply the 15 percent reduced CIT rate on royalties received while benefitting from a full deductibility on royalties paid since the 15 percent CIT rate shall now be assessed on the net income generated by the sub-licensing of the IP.
No more capital gain tax deferral for intragroup transfers of participating shares4
Capital gains recognized by a corporation on the sale of participating shares (other than participations in real estate companies) held for at least two years benefit from a 90 percent corporate income tax exemption for fiscal years closed as from September 21, 2011, which leads to a maximum effective taxation of approximately 3.6 percent (for prior fiscal years, a 95 percent corporate income tax exemption was available).
In addition, for fiscal years opened as from December 31, 2010, the capital gain or loss recognized by a corporation on the sale to an affiliated company of participating shares held for less than two years (which is in principle taken into account in its profits subject to CIT at the ordinary rate of 33 1/3 percent) was subject to a tax deferral until the earlier of (i) the expiration of said two-year period or (ii) the sale of the participating shares out of the group. This provision mainly purported to defeat tax driven intra-group transfers of participating shares designed to recognize short term capital losses offsetable against ordinary profits. But the tax deferral could also be claimed by the seller, upon special election, in cases where the transfer generated a short term capital gain and not a loss.
The 4th Amended Act for 2011 resumes this option for fiscal years opened as from January 1, 2012. The tax deferral will thus only apply to losses in the future.
Temporary exceptional 5 percent contribution levied on corporate income tax payers5
Pursuant to the 4th Amended Finance Act for 2011, an exceptional contribution will be due for the fiscal years 2011 and 2012 by companies which are liable to CIT and have a minimum turnover of €250 million (reference is made to the consolidated turnover in the context of a consolidated tax group). The contribution shall amount to 5 percent of the CIT liability as assessed before the offsetting of any tax credit or tax receivable and no such credit or carryback receivable may be used to pay the exceptional contribution.
Increased rates for withholding tax on dividends6
The rates of the withholding taxes levied on dividends and similar income paid by French corporations to non resident beneficiaries are increased as from January 1, 2012. The standard rate is increased to 30 percent (previously 25 percent) and the reduced rate applicable to eligible dividends paid to EU or EEE resident individuals is increased to 21 percent (previously 19 percent). Dividends paid to non cooperative States and territories referred to in the list published on an annual basis by the French tax authorities are now subject to a 55 percent withholding tax rate (previously 50 percent).
Increased taxes on share transfers 7
Transfer of shares in corporations other than real estate companies (REC) Transfers of shares in stock corporations such as SA (“sociétés anonymes”) or SAS (“sociétés par actions simplifiées”) other than real estate companies were previously subject to a 3 percent transfer tax capped at a maximum of €5,000 per transaction.
The Finance Act for 2012 increases the tax for transfers of shares completed as from January 1, 2012. The €5,000 cap does no longer apply and graded rates are introduced: 3 percent for the portion of the purchase price below €200,000, 0.5 percent for the portion of the purchase price ranging from €200,000 to €500 million and 0.25 percent for the portion of the price exceeding €500 million. Transactions completed among corporations which are members of the same consolidated tax group will however now be exempt from transfer taxes.
Transfer of shares in a REC
A REC is a non-listed entity which assets are mainly composed of (i) French real property assets and rights or (ii) interest in a French or foreign unlisted REC. The transfer of shares in a REC is liable to a 5 percent transfer tax. This tax was assessed on the sale price or fair market value if higher, i.e. the net value of the REC shares thus taking into account the company’s overall indebtedness (including shareholders accounts, if any). As from January 1, 2012, the transfer tax shall be assessed on (i) the market value of the real estate property assets or rights, directly or indirectly held by the REC reduced by the sole liabilities incurred for acquiring such real estate assets or rights, increased by (ii) the market value of any other assets held by the REC.
Setting of a 7 percent reduced VAT rate 8
A new 7 percent reduced VAT rate is introduced by the 4th Amended Finance Act for 2011. It shall apply (as from January 1, 2012 in most cases), to the goods and services which were previously subject to the reduced 5.5 percent rate, although the 5.5 percent rate is maintained mainly for food products and certain essential items.