Efforts by the G20 on an international level to combat tax evasion have accelerated the conclusion of bilateral tax treaties. Concerning uncooperative countries that refuse to comply with international standards for the exchange of information, the revised French tax legislation (to be adopted by the end of 2009) will launch an attack by proposing tax provisions that will make relationships with those countries unattractive.
The reform promoted by the revised 2009 tax legislation would introduce the definition of “noncooperative countries.” A country may be designated as noncooperative if (i) it is a nonmember of the European Union; (ii) it has signed less than twelve bilateral tax treaties containing a clause providing for administrative assistance allowing the exchange of information and (iii) it has not signed a similar tax treaty with France. The list of the noncooperative countries would be published every year.
Several measures are proposed:
- The French participations exemption on dividends received by a French parent company currently applies regardless of where the subsidiary is incorporated. The reform would deny this benefit for distributions received by a French parent company from subsidiaries that are established in noncooperative countries.
- French withholding taxes levied on payments made to a noncooperative country would increase to 50 percent. This higher rate of withholding tax would cover payments made to persons established in noncooperative countries as well as to a bank account based in such country, regardless of the domiciliation of the beneficiary (an amendment would maintain the benefit of the current tax exemption on interest due for loans granted before January 1, 2010). The reform would also include a general exemption of withholding tax on interest, except for interest payments to individuals or entities located in a noncooperative country.
- The current condition under French law for the deduction of expenses paid or accrued to individuals or entities established in a tax haven requires proof that the expenses correspond to actual services and that there is no overpayment. The revised tax legislation would introduce a new requirement for payments made to an individual or entity established in a noncooperative country, namely that the French payor demonstrates that the main purpose of the payment is not to locate profits in a noncooperative country.
- The French CFC rules would be toughened. Current CFC rules trigger a French tax on income realized by a foreign entity which benefits a favorable tax regime and is controlled by a French corporation, unless the foreign company performs an industrial or commercial activity locally and the revenue from this activity exceeds certain thresholds. Under the new proposals, this exemption for local activity would no longer apply to companies established in a noncooperative country.
- Profits realized by a company located in a tax haven are taxable in France when a French resident individual holds ten percent or more of the share capital. The reform would introduce an assumption that this threshold is met if the French resident individual has transferred goods, rights or receivables to the foreign company.
- A French company would have to provide specific documentation on transfer pricing to the French tax authorities, if its annual turnover or the amount of its assets (or those of its controlling parent or controlled subsidiaries) exceed €400 million. Where transactions are realized with companies established in a noncooperative country, standard information on the activity, chart, relationship with the foreign entities would be required and the balance sheet and income statement of those companies would have to be disclosed. A failure to produce this documentation would be subject to a penalty of the greater of €10,000 or five percent of the profits transferred to a tax haven.
A temporary list of approximately twenty countries that could be regarded as noncooperative on January 1, 2009 has been prepared by the French authorities; it includes only countries appearing on the grey list of the OECD, but a more aggressive approach could be taken in the future, with France reserving the right to include any country that has signed tax treaties but has not in practice implemented its commitments to exchange information (or countries that have refused a proposal to sign a tax treaty with France). To our knowledge, the first version of the list should include Chili, Uruguay, Guatemala, Philippines, Costa Rica, Panama, Liberia, Brunei, Belize and several islands in the Antilles and in the Pacific area.