On August 24, the French Government announced an austerity package aimed at reducing the budgetary deficit by up to €1bn for 2011 and €11bn for 2012. This alert provides a brief summary of two of the key changes which have been proposed to the corporate income tax (CIT) system.
French participation exemption regime
Currently, capital gains arising from the disposal of participating shares held for more than two years are 95% tax exempt - the residual 5% of the gain is subject to CIT at the standard rate of 34.43%, i.e. effective taxation of such gains at 1.72%.
It is proposed that the exemption is restricted to 90% of such gains in future, i.e. the taxable part of the gain is increased to 10% - this would result in a doubling of the effective French CIT rate for such gains to 3.44%.
Based on the information available at the moment, this new measure would impact CIT due for FY11.
Under current provisions, tax losses can be carried forward without restriction for an unlimited period of time (unless there is a fundamental change in the business). Alternatively, losses can be carried back against the three preceding profitable tax results of the company.
It has been proposed, in the context of discussions regarding the "common corporate tax base" between France and Germany, that German tax rules regarding tax losses are adopted in France.
- Carry back of tax losses: this would be limited to the fiscal year immediately preceding that in which the losses arise - any surplus would only be available for carry-forward;
- Carry forward of tax losses: companies would be entitled to use tax losses to shelter only 60% of taxable profits (i.e. CIT would be payable on at least 40% of the taxable result). Those tax losses that would not be used in a given year would be carried forward in their entirety (i.e. there would be no forfeiture of unused tax losses). However, in order not to penalise small and medium sized companies, this limitation would only apply to that part of the taxable result exceeding €1m. This measure should apply from FY 2011.
There is no clarification at this stage regarding the application of these proposals to tax groups.
A number of other proposals which will impact on the business tax environment were also announced, including:
- changes to the taxation of company cars (expected to apply from 2012);
- increase in social contributions (applicable to payments made by employers to employees which are exempt from social tax, e.g. profit-participation) from 6% to 8% (applicable 2012);
- changes to the taxation of alcoholic and sugared drinks (applicable 2012).
The proposed measures will be discussed during the next meeting of the French Government on 31 August 2011. Following debate in the French Parliament, the measures should be enacted by the end of December 2011.