Business tax – potential tax refund
All French entities pay the local economic contribution which is comprised of two parts:
- cotisation foncière des enterprises (“CFE”), which is assessed on the rental value of the property subject to land tax used by the entity. The tax rate is set by local authorities.
- contribution sur la valeur ajoutée des enterprises (“CVAE”), which is due from companies with a turnover exceeding €500,000 and is assessed on the added value of the companies. The rate of the CVAE is progressive and depends on the turnover.
|€500,000 to €3,000,000||0.5%|
|€3,000,000+ to €10,000,000||0.9%|
|€10,000,000+ to €50,000,000||1.4%|
However, for entities belonging to a tax group, the turnover is not assessed at their own level but at the level of the group. This means that entities belonging to a tax group may have to pay a higher CVAE than if they did not belong to such group. The example below clearly shows this difference:
|A tax group is comprised of 3 companies: A (the parent company), B and C, which have generated the following turnover for a given year:|
|Under the current rules, the calculation base of the progressive tax rate is €10,500,000 (5,000,000 + 4,000,000 + 1,500,000), which leads to a CVAE tax rate of 1.40% applicable to all entities that are members of the tax group.If the calculation of the progressive tax rate were based on the turnover of each entity in the group instead of the aggregate turnover of the member companies, the following CVAE effective tax rates would be applicable to the entities:|
|Thus, the fact that a company is member of a tax group results in an increase in its CVAE.|
On 19 May 2017, the French Constitutional Court declared unconstitutional this specific rule for entities belonging to a tax group. As a result, the CVAE rate must be determined based on the turnover of each entity whether or not they belong to a tax group.
As the French Constitutional Court has not limited the ability to claim overpaid CVAE to claims filed before its decision, it is still possible to file a claim within the statute of limitations period. Therefore, we would recommend to file such claims as soon as possible.
Cross-border mergers: tax ruling
A merger involving French companies usually triggers the taxation of latent capital gains at the level of the absorbing company unless the merger benefits from a favourable tax regime which notably provides for a tax deferral.
In the event that the merger is between French companies, the companies may opt for this preferential regime in the documentation, but it is not required to obtain a tax ruling prior to its implementation.
By contrast, where the French absorbing company is merged into a foreign company, a tax ruling is required in order to benefit from the favourable tax regime. This shows a difference of treatment depending on the location of the absorbing company, which may be viewed as an infringement of the EU Merger Directive or the EU Treaty.
The French Supreme Court decided to refer this question to the CJEU, which delivered its judgment in a decision dated 8 March 2017 (Euro Park Services). The CJEU decided that this procedure is not compliant with EU law and, in particular, the freedom of establishment.
The question that now arises is whether the ruling process will be abolished for all domestic and cross-border mergers (and equivalents, such as partial contributions of assets or spin-offs) or it will be required to obtain such a ruling for all mergers in the future. Once that decision has been made, the legislation will then have to be amended, but one should not expect this to happen before the end of the year. This creates some uncertainties for companies which will carry out such transactions in the coming months.