The Amending Budget Act for 2017 ("ABA 2017") and the Budget Act for 2018 ("BA 2018") introduced several significant modifications of the French tax law. The key measures of interest to businesses (I) and individuals (II) are summarized below.
I. Measures targeting Businesses
► Reduction of the standard corporate tax rate (BA 2018, Art. 84)
The standard corporate tax rate is to be gradually lowered to 25 percent according to the following timetable:
- In 2018, the rates as approved in the Budget Act for 2017 will apply, i.e., 28 percent for up to EUR500,000 in profits and 33.33% thereafter;
- In 2019, the standard rate will be lowered to 31 percent and the first EUR500,000 in profits will continue to be taxed at a rate of 28 percent;
- In 2020, the standard rate will be lowered to 28 percent, then to 26.5 percent in 2021, and ultimately to 25 percent in 2022.
► Repeal of the 3 percent tax on the distribution of profits and creation of additional taxes on CIT (BA 2018, Art. 37)
The 3 percent tax on the distribution of profits introduced in 2012, is repealed for the distribution of amounts paid since 1 January 2018.
The conformity of this tax to the Constitution and to the EU law has been challenged for the last couple of years which eventually led to two decisions in which, first, the ECJ declared the tax was not compatible with the Parent subsidiary directive and then the French Constitutional court struck down the tax for not being compatible with the French Constitution.
If the French government did not wait for the Constitutional court decision to propose the repeal of the tax (in the budget bill), the decision of the Constitutional court had a much broader impact as it entitled taxpayers to claim approximatively € 9 billion for the recovery of the unduly paid tax.
To finance half of those reimbursements, two new additional taxes to the corporate income tax (CIT) were introduced:
- An "exceptional" tax targeting companies subject to corporate income tax (CIT) whose turnover exceeds EUR1bn: the tax is 15 percent of the amount of the CIT; and
- A "surcharge" of the "exceptional" tax targeting corporations subject to CIT whose turnover exceeds EUR3bn: the tax is 15 percent of the amount of the CIT. It means that, for the latter corporations, the total amount of the taxes represents 30 percent of the CIT.
It is worth noting that these two new taxes will not only impact taxpayers who will be able to claim a reimbursement of the 3% tax. Indeed, taxpayers with high turnovers but which paid little to no dividends during the period in which tax was in force (such as mutualist banks)–will be in a difficult position, having up to 30 percent extra CIT to pay and little or no tax reimbursements to compensate.
► Easing of restrictions on financial expenses associated with the acquisition of participations (BA 2018, Art. 38)
Until 31 December 2017, under French tax law the deduction of financial expenses related to the acquisition of qualifying participations was denied when the company acquiring the participations could not demonstrate that the authority to make decisions or to control the acquired participations was exercised from France (this rules is referred to as “the amendement Carrez”). Since 1 January 2018, the restriction no longer applies if the French acquiring company is in a position to demonstrate that the decisions related to the acquired participations are made and that the effective control is exercised over the acquired entities either: (i) by the French acquiring company itself, or (ii) by a company established in France, or having its headquarters in the EU or in a country of the European Economic Area having concluded with France a treaty for the purpose of combating tax fraud and evasion, that controls or is directly controlled by the French acquiring company.
► Financial transaction tax (BA 2018, Art. 39)
The extension of the scope of the financial transaction tax to intraday transactions, which was supposed to occur on 1 January 2018, is repealed. As a reminder, the tax rate is of 0.3 percent (applied to the value of the financial titles concerned).
► CVAE (contribution on business value-added): group rate (BA 2018, Art. 15)
To counter the consequences of a decision of the French Constitutional Court on the group rate for the contribution on business value-added (cotisation sur la valeur ajoutée des entreprises, or CVAE), this article aims to apply the consolidation of turnover not only to tax-consolidated companies but to all companies that meet only the capital ownership requirements for belonging to a tax-consolidated group. This provision applies to the CVAE owed for 2018.
► CICE (tax credit for employment and competitiveness)/payroll tax credit (BA 2018, Art. 86 and Art. 87)
Both tax credits will be repealed for compensations paid as of 1 January 2019, at the time the reductions in the Social Security contributions, which were introduced in the Social Security Financing Law for 2018, would be implemented.
For 2018, the payroll tax credit (for corporate tax-exempt bodies) is maintained at a rate of 4 percent while the tax credit for employment and competitiveness (crédit d'impôt pour la compétitivité et l'emploi, or CICE for corporate tax payers), which increased from 6 percent to 7 percent on 1 January 2017, is lowered back down to 6 percent in order, as stated in the explanatory statement, "to manage the transition from one system to the other."
► Payroll tax (BA 2018, Art. 90)
The payroll tax (levied on wholly or partly non-VAT taxable persons) top rate of 20 percent applied since 1 January 2014 to the portion of compensation exceeding EUR152,279 is eliminated for the payroll tax owed on compensations paid as of January 1, 2018. The maximum rate will therefore be 13,6%.
► Transfer pricing documentation (BA 2018, Art. 107)
The existing French transfer pricing documentation rules described in Article L 13 AA of the French Tax Procedures Code (Livre des procédures fiscales) are amended to comply with the OECD's Master File and Local File models described in Action 13 of the BEPS Action Plan. The new documentation requirements apply for periods beginning on or after 1 January 2018 (for fiscal years starting before that date, the previous rules still apply).
► Changes to the corporate reorganization rules (ABA 2017, Art. 23)
Article 23 of the ABA 2017 brings substantial modifications to the French rules on corporate reorganizations, mainly in order to comply with the EU law. Among the major changes are the following:
- The anti-abuse rule from the Merger Directive, aimed at tax fraud and tax evasion, is transposed into French Law;
- The requirement, in order to benefit from the corporate reorganization preferential treatment, to obtain the approval of the tax administration whenever a foreign company is involved is repealed (and replaced by a mere tax return);
- A new tax ruling procedure is created in order to secure corporate reorganization operations before they are actually carried out;
- The rules applicable to transfer of asset are softened (mainly, the commitment for the contributing company to hold for three years the shares received in exchange for transferring a complete and autonomous branch of activity is repealed);
- The rules applicable to spin-offs are softened.
These provisions are applicable to operations performed since 1 January 2018.
► Decrease of the interest for late filing or late payment and of the interest on arrears (ABA 2017, Art. 55)
The rate of interest owed by a taxpayer for a late payment of taxes or with respect to tax reassessments is reduced from 0.4 percent down to 0.2 percent per month. The rate of interest paid to a taxpayer by the French tax authorities in instances when the taxpayer is successful with tax refund claims or reimbursements is also reduced from 0.4 percent down to 0.2 percent per month, This new rate of interest applies to interest owed as from 1 January 2018.
► Non-deductibility of foreign withholding taxes (ABA 2017, Art. 14)
This article provides for an amendment of Article 39-1-4º of the French Tax Code, in order to forbid the tax deductibility of "taxes levied by a State or territory in accordance with the provisions of a double tax treaty aiming at avoiding double taxation concluded between France and this State or territory." However, withholding taxes levied in the absence of a double tax treaty or outside the framework of a treaty remain deductible from the taxable result of the French companies.
II. Measures Applicable To Individuals
► Repeal of the existing wealth tax and creation of a real property wealth tax (BA 2018, Art. 31)
The wealth tax (ISF) is repealed and replaced by a real property wealth tax (IFI). This new tax, which applies only to real estate assets not tied to the professional activity of their owner, has kept the essential aspects of the ISF's characteristics: its threshold, its rate scale, its periodicity, its evaluation rules (subject to certain exceptions), its payment methods (including by means of donations to general interest associations), and even the ceiling rule (in respect of the taxpayers' income). Taxpayers' reporting requirements remain very close to those formerly in force for those subject to the ISF. The primary features of the IFI are the following:
- A tax base including real estate properties held directly by individuals, as well as shares in companies (regardless of legal status and localization), at the level of the portion of their value represented by real estate properties or real property rights; all movable assets are therefore excluded (including shares in companies not holding real estate assets, and other financial assets);
- Specific rules for the deduction of debts, with various measures limiting or capping deductions when debts exceed 60 percent of the value of real estate assets (if this value is greater than EUR5m);
- Various exemptions focusing in particular on real estate properties or shares of companies whose main activity is real estate, where real estate assets are primarily used in the course of an industrial, commercial, artisanal, agricultural or independent activity.
The IFI is applicable since 1 of January. Donations and payments made between the ISF filing deadline for 2017 and 31 December 2017 under the ISF-SME rules, donations to general interest associations, and subscriptions to the capital of solidarity-based enterprises of social utility are taken into account to reduce the IFI tax due in the year 2018.
► Reform of taxation on capital gains, life insurance gains, dividends and interest (BA 2018, Art. 28)
This Article establishes a flat-rate tax of 30 percent (i.e., 12.8 percent income tax and 17.2 percent social security tax as planned by the Social Security Financing Act for 2018) for some revenues from movable capital and certain gains made from 1 January 2018. The Exceptional Tax on High Income (3 percent or 4 percent depending on income) may be added if applicable. The option for taxation according to the rules of the income tax scale is given each year. It is decided at the time of tax return filing and is applied globally (foregoing the fixed-rate taxation of any income that could benefit from it). This article modifies the taxation regime for capital gains on movable assets (with some substantial modifications), the dividend taxation regime, the interest taxation regime, and the taxation regime applicable to life insurance contracts. The rates applying to non-residents are also modified. Of particular note are the following measures:
- For life insurance contracts, the flat-rate tax applies to gains relating to premiums paid since September 27, 2017;
- A fixed allowance of EUR500,000, subject to conditions, is maintained for the gains of directors entering retirement;
- A new reform applies to the taxation treatment of acquisition gains when free shares are attributed to employees or directors.
These new rules replace the former rules, which as a reminder, taxed revenues from movable capital based on the progressive income tax scale (maximum marginal rate of 45 percent), plus social contributions (i.e., CSG and CRDS, for a total of 17,2 percent), plus exceptional tax on high income when applicable (3 percent or 4 percent depending on income), meaning a top earner could pay upwards of 60 percent in taxes.
► Delayed effective date of PAYE withholding system (ABA 2017, Art. 11)
As of 1 January 2019, France will operate a pay-as-you-earn (PAYE) system to collect the income tax relating to various types of income. This regime was originally intended to be applied as from 2018, but the French Government decided to postpone the introduction for a year in order to test and evaluate the system.