On Friday 28 September 2012, the French Government released the draft Finance Bill for 2013 which will be examined by the French Parliament as from 16 October. The main provisions concerning corporations are detailed below. The key provision is the modification of tax deduction of interest charges. Most measures would require immediate attention since they would apply to ongoing financial years. A separate eAlert will be sent for provisions applicable to individuals.
Main provisions applicable to corporations
- New limitation to tax deduction of interest charges
The French Government intends to introduce a new limitation on interest deduction for companies subject to corporate tax in France. This new limitation would be applicable in addition to existing limitations such as the interest rate capping on related party debt, thin capitalization rules and the so-called "Amendment Carrez" that prevents the deduction of interest charges related to the financing of the acquisition of shares when the purchaser does actually make decisions relating to the shares and does not exercise control or influence over the target.
Under the new limitation, 15% of net financial expenses of a company would no longer be deductible in 2012 and 2013 (25% as from 2014).
In a French tax group, the limitation would apply to net interest charges related to debts with entities which are not member of the French tax group.
This is a permanent disallowance as there would be no carry-forward mechanism of the disallowed interest.
The net financial expense is defined as the total amount of financial expenses incurred as a consideration for financing granted to the company reduced by the financial income received by the company in consideration for financing granted by the latter.
In addition, the portion of the rent incurred by a company, as part of a leasing or rental agreement (with a duration exceeding 3 months), is also included in the financial expenses up to the portion of the rent which exceeds the depreciation of the asset.
The new limitation would apply to both related and third party financing regardless of the purpose of the financing.
A safe-harbor would be introduced to prevent the application of this limitation when the total amount of net financial expense of a company does not exceed €3 million (in a tax group, this safe harbor applies if the net financial expense of the tax group does not exceed €3 million).
The new limitation would apply "retroactively" to financial years closed on or after 31 December 2012.
- Tightening of the rules governing tax losses carried forward
Currently, a company is entitled to carry forward its tax losses with no time limitation.
However, tax losses carried forward are only available to offset €1 million plus 60% of the current taxable income exceeding that amount. The portion of the tax losses that cannot be offset in a given year can be carried forward and offset against future taxable profits. Accordingly, companies with annual profits of more than €1 million are subject to tax on 40% of their profits even if they still carry forward tax losses.
Under the proposed rule, tax losses carried forward would only be available to offset €1 million plus 50% of the current taxable income exceeding that amount (instead of 60% currently). The tax losses that cannot be offset in a given year would still be carried forward and offset against future profits with no time limit.
The new provision should apply to FYs ending on or after 31 December 2012.
- Capital gain tax on investment shares (“titres de participation”)
Presently, gains on investment shares owned for more than 2 years are taxed up to 10% of the gain, “net” of capital losses realized on investment shares realized during the same financial year.
In the future, the 10% taxation would be calculated on the “gross amount” of the gains realized and no longer on the net amount.
Subject to confirmation, this provision should apply to FYs closed as from or after 31 December 2012.
- Modification of the so called "5th installment" due to be paid by “Big companies”
The draft provides to reduce to €250 million (instead of €500 million presently) the threshold of turnover as from which companies are required to pay the so called “5th installment” which is indeed a revised calculation of the 4th installment (to be paid as an example by 15 December 2013 for FYs closing on 31 December 2013).
The revised calculation of the 4th installment - which is due to be paid on top on 3 installments previously paid - must bring the level of total installments paid up to a minimum percentage of estimated taxable income of the current FY (i.e. not yet closed):
- 75 % (66% presently) for companies with a turnover between €250 million and €1 billion;
- 85 % (80 % presently) for companies with a turnover between €1 billion and €5 billion;
- 95 % (90 % presently) for companies with a turnover exceeding €5 billion.
This provision should apply to FYs opened as from 1st January 2013.
- Enlargement of eligible R&D expenses incurred by SMEs
The R&D tax credit is extended to innovation costs incurred by SME’s downstream the genuine R&D activity, i.e. those incurred for the conception of prototypes of new products or pilot installations.
Such new eligible expenses will be capped to €400,000 per year.
Eventually it is proposed to secure the R&D tax credit in France by the possibility to obtain advanced ruling from the FTA even where the R&D activity already started.
- Taxation of capitalization reserves of insurance companies
Capitalization reserves which were deducted from taxable income will be subject to an additional 7% taxation following the 10% taxation which took place in 2011.
The total of the 7% and the 10% tax will however be capped to 5% of stockholders equity of the insurance company.