Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
Except for the acquisition of real-estate companies or contributions constituting a full line of business within the meaning of the tax-deferral regime applicable to mergers and spin-offs, the transfer tax on the acquisition of stocks in a company is lower than the transfer tax on the acquisition of business assets (see question 6).
The buyers of business assets and liabilities receive a step-up in the tax basis of the acquired business assets, whereas they are not allowed to obtain a step-up in the tax basis of the target corporate entity’s assets for an acquisition of stock (see question 2).
In the case of acquisition of stock in a company, the tax losses of the company can continue to be carried forward regardless of the percentage of shares capital the buyer acquires. The acquisition of the business assets and liabilities may create a permanent establishment in France for a foreign buyer, provided that all the conditions are met. In such a case, the permanent establishment is taxed in France on the taxable profit deriving from the activity performed in France. However, if the seller previously realised tax losses linked to the business assets and liabilities sold, such tax losses cannot be transferred with the business assets except in the case of a contribution considered as a full line of business within the meaning of the tax-deferral regime applicable to mergers and spin-offs, where the tax losses linked to the transferred activity can also be transferred upon specific authorisation from the French tax administration subject to certain conditions. On the contrary, the seller can continue to offset the tax losses (if they have not been transferred) against its future taxable benefits, provided that the contribution of business assets and liabilities did not trigger a change in the nature of the seller’s activity.
The buyer will acquire the tax history of the target company. Any potential tax risk is transferred with the company. The acquisition of stock will require a more in-depth audit of the company’s tax situation and the negotiation of tax guarantees in order to prevent any side effect in the event of a tax audit for a period when the buyer did not hold the target company.
Depending on their goal, certain buyers might prefer purchasing the assets instead of the stock. The seller will often prefer a share deal since capital gains on the shares will generally benefit from the participation exemption regime under certain conditions, including a two-year holding period (except for the acquisition of real-estate companies, for which the participation exemption regime is not applicable) with an effective corporate income tax rate between 3.36 per cent and 4.13 per cent, whereas capital gains on business assets will be subject to corporate income tax at a rate between 28 per cent and 34.43 per cent.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
When they acquire a French target company, acquiring entities are not allowed to obtain a step-up in the tax basis of the target company’s assets without any tax consequences for the target company. Therefore, the latent capital gains on the target company’s assets they acquired will be taxed in the future when these assets are sold and it will not be possible to depreciate the target company’s assets on their actual value when the corporate entity (holding those assets) was acquired. In practice, some buyers may claim for a discount for built-in capital gains tax in relation to the target company’s asset when they determine the price of the shares in a target company.
There was a market practice under which a purchaser of a transparent company holding real estate properties could achieve a tax-free step-up of the underlying real-estate assets base by winding-up the company shortly after acquisition owing to the specific rules of taxation of transparent entities as stated in the Quemener Case Law (CE 16 February 2000 No. 133296, 8e et 3e s-s). Such practices were stopped by the Lupa Case Law (CE 6 July 2016, min c/ SARL Lupa Immobilière France et min c/ SARL Lupa Patrimoine, No. 377904 and No. 377906), following which the Supreme Court reversed its decision. However, the Supreme Court overturned its own ruling and validated again the Quemener position on 24 April 2019 (CE 24 April 2019, SCI Fra No. 412503). This latest ruling again offers the possibility of a tax-free step-up strategy in the acquisition of pass-through entities (especially real-estate pass-through entities), provided that such an operation cannot be qualified as an abuse of tax law.
Intangible assets can be amortised if it can be proved that the benefits such assets have for the company will cease at a certain date. They are, in principle, depreciable over their period of normal use. As an example, patents can be amortised on a straight-line basis over a minimum period of five years, provided that the same depreciation accounting is retained. Development costs and software development costs must be amortised on a straight-line basis over a maximum period of five years.
Goodwill cannot be depreciated. Stock in a company cannot be depreciated. However, a provision for depreciation can be booked if the stock’s market value is lower than the booked value. This provision is not deductible for tax purposes on stock subject to the participation exemption tax regime. The deduction is subject to limitations for stock in real-estate companies.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
Whatever the acquiring company is, the transfer tax on the acquisition of French assets will, in principle, be due in France.
If the acquisition is debt-financed and leveraged in France, a French holding company can be relevant. Indeed, the French holding company and the target company may constitute a tax-consolidated group if they are both established in France. Forming a tax-consolidated group will enable the two companies to offset the losses of the holding company (deriving from the interest expenses of the acquisition company) against the profits of the target company. A tax-consolidated group requires a minimum, direct or indirect (ie, via other members of the tax group), ownership of 95 per cent of the target company. Such a minimum shareholding can be achieved via one or several EU subsidiaries.
Distributions between the companies in the same tax-consolidated group are only taxed on 1 per cent of their gross amount. Within a tax-consolidated group, an anti-avoidance provision may, however, deny, for a nine-year period, the deduction of (part of) the interest charge borne by a tax-consolidated group with respect to the acquisition, by a member of the tax-consolidated group, of shares in another member of the tax-consolidated group that were previously held by an entity (or an individual) that ultimately controls the tax-consolidated group. There are also new limitation rules to the deductibility of the financial charges since 2019, following the implementation of the Base Erosion Profit Shifting Directive measure. For the application of the limitation of the deductibility of net financial charges to 30 per cent of the tax earnings before interest, tax, depreciation and amortization (EBITDA) or €3 million, whichever is higher (10 per cent of the tax EBITDA and €1 million for thin-capitalised entities), the tax-consolidated group is considered as a stand-alone entity with a safe-harbour clause (see question 8).
Aside from the tax-consolidated group regime, the French holding company’s regime is attractive, given its 95 per cent exemption on dividends and 88 per cent exemption of capital gains realised in connection with stock (except for real-estate companies), either French or foreign (subject to a 5 per cent ownership or more for at least two years).
France also has a large network of tax treaties providing for the avoidance of double taxation. The corporate income tax standard rate will be reduced to 28 per cent in 2020, 26.5 per cent in 2021 and 25 per cent by 2022. The French corporate income tax rate will be in the average of corporate income tax rates within EU member states.
However, a foreign company may prefer acquiring the target company directly, especially if the double tax treaty concluded between its state of residence and France prevents France from taxing the capital gain on the sale of the stock and at the same time the foreign buyer can benefit from an exemption of the withholding tax on the dividends paid by the French target company. In case of an asset deal, a French acquisition company may be preferable if the acquired business will likely constitute a permanent establishment of a foreign buyer.Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
Company mergers or share exchanges are not common for structuring an acquisition, especially between unrelated companies.
A French seller may be interested in a share exchange when it can be carried out on a tax-neutral basis. For French corporate sellers, share exchange transactions as a result of a public tender offer on a French or European stock exchange give rise to a deferral of taxation. In other situations, participation-exemption on substantial shareholdings may apply if the conditions are met.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
Unless all the condition for the tax-neutral merger regime are met, there is no special tax benefit attached to a share-for-share deal for the acquirer.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
Transfers of stock are subject to a 0.1 per cent transfer tax for a non-listed company or 3 per cent transfer tax after the application of a €23,000 allowance to be prorated, as the case may be, on the basis of the number of shares transferred when the transfer relates to shares in a company, the capital of which is not divided into shares of stock. The acquisitions of real-estate companies’ share is subject to a 5 per cent transfer tax. There is also a financial transaction tax at 0.3 per cent due upon the acquisition of listed companies’ shares when the listed companies have a market capitalisation in excess of €1 billion on 1 December of the year preceding that during which the transfer occurs.
Except for real-estate companies, some operations are exempted from the transfer tax, such as the transfers of shares or participations within the same group of companies (within the meaning of article L.233-3 of the French commercial code or within a tax-consolidated group), or contributions of shares or participations constituting a full line of business within the meaning of the tax-deferral regime applicable to mergers and spin-offs.
Instead of proportional transfer tax, the acquisition of business assets may be subject to VAT in general at the 20 per cent standard rate (for certain isolated assets such as exploited patents or stocks of goods or buildings considered as new for VAT purposes) except if the transfer of the business assets constitute a transfer of a going concern. The transfer of a going concern will be exempted from VAT.
In the event of an acquisition of all the assets and liabilities constituting a going concern, the acquisition is subject to a 3 per cent and 5 per cent transfer tax, except if the transfer can benefit from the tax-deferral regime applicable to mergers and spin-offs where it is exempted from transfer tax.
The acquisitions of buildings are in general subject to a transfer tax between 5.09006 per cent and 6.40665 per cent, depending on the type and location of the building. A reduced rate of 0.815 per cent applies if an undertaking to resell the building within five years is made and met by the buyer.
The acquisition of a building considered as new (when it is acquired less than five years after its completion from a VATable acting as such) or developable lands (where VAT was deducted by the buyer when the initial acquisition was made) are subject to VAT at the 20 per cent standard rate, along with a transfer tax at 0.815 per cent (or a fixed fee of €125 if the buyer commits to erecting a building and completing the construction within a period of four years and complies with such a commitment).
The contributions of business assets and liabilities constituting a full line of business within the meaning of the tax-deferral regime applicable to mergers and spin-offs are exempted from transfer tax.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
A change in control of the target company does not limit the availability of tax losses, tax credits or any other type of differed tax asset.
Tax losses can be carried forward without time limitations, but they can be offset against the company taxable profit up to a cap per financial year of €1 million plus 50 per cent of the taxable profit of the current financial year. Tax losses can be carried back only for the previous financial year, with a €1 million cap. The carry-back of tax loss is forbidden in respect of a financial year in which the following occurs:
- a total assignment or cessation of business;
- a merger or similar transaction; or
- a liquidation following to an amicable settlement or a court-ordered liquidation of the company.
However, the company can lose tax losses if it goes through a significant change in its actual activity, its purpose, its tax regime or the disappearance of its means of production, which entail the cessation of business. This could, for instance, occur if a new line of business is started and the existing one is dropped or if the nature of the activity is changed (for instance, from a manufacturing to a selling activity). The notion of a significant change in the company’s activity leading to the removal of tax losses has been defined by French law as a discontinuance or transfer of an activity that entails, respectively, an increase or a decrease of over 50 per cent (relative to the previous fiscal year) in either revenue or the average headcount and gross amount of fixed assets.
If the target belongs to a tax-consolidated group, deconsolidation charges could increase the tax-consolidated group’s taxable profit if the acquisition leads to breaking the tax group or at least to the exit of the target from the tax group unless they are neutralised by existing tax losses at the level of the consolidating parent.
When the target company is an exiting subsidiary of a tax-consolidated group, it cannot recover the tax losses it incurred during its presence in the tax-consolidated group. In such a case, an indemnity may be considered based on the tax-consolidation agreement.
In the event of absorption of the consolidating company (merger or spin-off), the consolidated group’s tax losses can be transferred in certain proportions, provided that a prior ruling has been granted by the tax administration.
In an acquisition of 95 per cent or more of a company that is a consolidating parent, its consolidated tax group may terminate and deconsolidation charges might be due. The excess tax losses would be available against the profit of pre-listed members of the newly formed tax-consolidated group in proportion to a certain limit on a yearly basis.
If some member companies are sold pursuant to the liquidation of the consolidating company within the course of insolvency proceedings, the exiting member of the group may recover its tax losses transferred to the consolidating company during the tax-consolidation period. The recovery of tax losses also applies if the company leaves the group because it is itself subject to insolvency proceedings.Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
An acquisition company may get relief for borrowings to acquire the target company (whether French or foreign) subject to various restrictions:
- the interest rate limitation for interest payments to related parties for intra-group loans to the maximum rate set forth by article 39-1-3 of the French tax code;
- the anti-hybrid rule under which interest on related-party loans is tax-deductible only if the borrower can prove that such interest is subject to income tax in the hands of the lender at a rate equal to at least 25 per cent of the French standard corporate income tax rate (ie, at least 7 per cent for 2020);
- the Charasse amendment, which recaptures part of the financial expenses borne by a tax-consolidated group when:
- a tax-consolidated company acquires the shares of another company from an entity that is not part of the French tax group but that controls the acquiring company or is under common control with the acquiring company within the meaning of article 223B of the French tax code; and
- the acquired company joins the tax group; and
- the interest expense deduction limitation (transposition of the EU Anti-Tax Avoidance Directive by the 2019 French Finance Act), under which exceeding borrowing costs (such as interest expenses, guarantee costs or foreign exchange losses on borrowings) would be deductible only up to the greater of 30 per cent of the tax EBITDA (ie, the taxpayer’s EBITDA restated with tax-exempt income) or €3 million. Such a ceiling would be decreased to 10 per cent (or €1 million, if higher) for thinly capitalised companies (ie, companies for which the average amount of related-party debt exceeds 1.5 times their net equity). Any excess amount of borrowing costs may be carried forward without a time limitation, and unused interest deduction capacity in any given fiscal year may be carried forward for up to five years. For tax-consolidated groups, the above rules (tax EBITDA tests and the group safeguard clause) will be applied at the group level as if it were a stand-alone entity with a general safeguard clause (for example, members of a consolidated group are entitled to an additional 75 per cent deduction when the equity capital-to-assets ratio is higher at the level of the company than at the level of the group, with a 2 percentage points tolerance).
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
Whether stock or assets are acquired and whatever form it takes, buyers always require comprehensive protection against any tax and social liability relating to the period ending on and before the closing date.
This is usually given by sellers in the form of tax warranties and tax indemnities, under which the seller undertakes to pay back to the buyer all or part of the selling price in cases of disclosure of:
- a debt having its origin prior to the assignment in the accounts of the target company; or
- an overestimate of an asset’s value on the target company’s balance sheet at the date of the transfer (eg, adjustment clause, deferred payments clauses, representation and warranties, guaranties and covenants).
The tax treatment depends on the nature of the guaranty: a price adjustment clause or indemnity clause (in other words, a warranty clause in the restricted sense).
It results from case law that payments made by the seller under warranties or claims subsequent to the sale usually do not affect the capital gain previously computed (or the acquisition cost for the purchaser) but can be offset by the seller against taxable benefits of the financial year during which such payments occur. These will have to be added to the taxable profits of the purchaser.
If part of the indemnity exceeds the amount of the selling price, the courts allow the seller to deduct the excess amount from its taxable profit as damages (Administrative Court in Paris, decision dated 10 June 1993, No. 91-973). If the indemnification cannot be linked to an excess in the selling price, it can be totally deducted from the seller’s taxable profit (Administrative Court in Douai, decision dated 31 July 2012, No. 11DA00407, 3rd Ch).
When a payment is made by application of a price adjustment clause, the payment can be analysed as a reduction of the purchase price. The seller can claim for a reduction of the capital gain and a reimbursement of part of the corporate income tax paid within the statute of limitation, and the acquisition price can be modified by the buyer. In such a situation, the reimbursement of part of the price by the buyer does not constitute a taxable profit for the buyer.
Warranty and indemnity insurance has increased in popularity in recent years (and not only in the context of mergers and acquisitions). Initially viewed as too expensive and inflexible, brokers and underwriters adapted their policy to fit in the deals requirement and to be more flexible.
What post-acquisition restructuring, if any, is typically carried out and why?
Classic restructurings include debt-pushdown mechanisms, mergers between the target company and the buying company (when feasible) or the constitution of a French tax-consolidated group. The nature of any post-acquisition restructuring will be specific to each transaction. Also, post-acquisition restructuring may aim at improving the tax attributes of French companies that are part of the French group acquired, provided that it does not constitute an abuse of the law.Spin-offs
Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
Spin-offs may benefit from the tax-neutrality regime of mergers as regards corporate income tax and transfer tax, provided certain conditions are met, such as:
- the transfer relates to a full line of business (a collection of assets and liabilities of a company’s division able to carry out an activity autonomously); and
- the transferring company commits itself to calculate capital gains on the sale of shares with reference to the value that the assets had in its own accounts from a tax standpoint.
The contributing company’s commitment to hold shares for a three-year period under the neutrality regime for mergers was abolished as of 1 January 2018, except when assets and liabilities contributed do not qualify as a full line of business (in which case, the required pre-approval from the tax authorities is subject to a three-year holding commitment, among other things).
Contributions of shares representing the control of the issuing company are assimilated to a full line of business. In addition, a contribution of shares reinforcing an existing controlling situation is also assimilated to a contribution of a full line of business eligible to the neutrality regime for mergers as of 1 January 2018.
Tax losses of the spun-off business may remain available against the profits of the recipient company subject to a prior ruling from the tax authorities.
The shares issued to the contributing company by the recipient company can be distributed tax-free to the shareholder of the French contributing company. Shares must be distributed within one year of the contribution without pre-approval of the French tax administration.
In order to comply with European Court of Justice’s decisions, Parliament has abolished the tax ruling procedure for cross-border restructuring operations as of 1 January 2018. The neutrality regime for spin-offs may apply when a contribution is made to a company located in a country that has signed a treaty with France including a mutual administrative assistance provision, provided the transferred assets are recorded in the balance sheet of a French permanent establishment of the foreign company. A new specific tax return would then have to be completed in the context of the reorganisation.
The anti-abuse clause in article 15.1-a of the European Union Merger Directive has been introduced in French law. Under this clause, the tax deferral does not apply where it appears that the main objective, or one of the main objectives, of a restructuring transaction is fraud or tax avoidance (unless there is evidence to the contrary) or when the transaction is not carried out for sound business reasons, such as the restructuring or rationalisation of the activities of the participating companies. The French tax administration’s doctrine states that contributions of shares assimilated to transfer of a full line of business, which are made by foreign companies with the main purpose of taking advantage of a capital gains tax exemption, are likely to be considered as abusive (BOI-IS-FUS-10-20-20-20190410, paragraph 193).Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
The migration of a company residence outside France is considered as a liquidation of the company, triggering corporate income tax on the latent capital gains relating to the company’s assets and immediate taxation of the company’s taxable profits, unless the host country is another EU member state, Iceland or Norway and the company’s assets remain taxable in France (with the attribution of the related assets to a French permanent establishment, for instance). The taxation of the latent capital gains is due on the transfer if the host country is a non-EU state.
If the company’s assets are transferred at the same time as the company’s residence in another EU member state, Iceland or Norway, the corporate income tax is, in principle, due, but the company can opt for a fractionated payment of the corporate income tax on the latent capital gains over the year of transfer and the four following years, except for the transfer of shares under the participation exemption regime. If all the assets are transferred or if the partial transfer of the assets trigger a change in the company’s activity in France, it also triggers the immediate taxation of the company’s taxable profits.
If a company is not liable for corporate income tax, the migration of its residence outside France triggers the immediate taxation of the latent capital gains on its assets.Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
French source interest paid to a company established in another jurisdiction is, in principle, not subject to withholding tax in France, except where the beneficiary is a resident of a non-cooperating jurisdiction as defined by French law and established in a specific list or paid in a bank account located in such a non-cooperating jurisdiction. In such a case, a 75 per cent withholding tax is applicable unless the operation enters into some exemption, such as the demonstration that the debt does not intend and result mainly in the location of interest income in the non-cooperative state or territory.
French source dividends paid to a company established in another jurisdiction are, in principle, subject to a 30 per cent withholding tax (28 per cent for dividends paid in 2020 and 25 per cent for dividends paid in 2025), except where:
- the paid company is located in a non cooperating jurisdiction within the meaning of the French law or the dividend is paid on a bank account located in a non-cooperating jurisdiction (75 per cent withholding tax); or
- the paid company is located in a country that has concluded a double taxation treaty with France providing otherwise (exemption or reduced withholding tax rate).
Under French domestic legislation, dividends paid to a company qualifying with the EU parent subsidiary directive conditions is, in principle, exempted from any withholding tax if the parent company holds at least a 10 per cent participation in the French company for at least two years (5 per cent participation when the EU parent company cannot offset the withholding tax in its country of residency).Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
Profits may be extracted from a French company either by way of dividends, interest payments on loans made to the company by its shareholders or royalties. Dividends are not deductible for corporation income tax purposes. Interest payments are, however, deductible for the borrower (even where loans are advanced by a shareholder), subject to the restrictions outlined in question 8. Royalties are also deductible. However, France introduced on 1 January 2019 a limitation of the deductibility of royalties paid to a related ultimate beneficiary that is not a resident of an EU or European Economic Area (EEA) state and that benefits from a local tax regime listed as harmful by the OECD and offering a local effective tax rate below 25 per cent.
The non-deductible portion of the royalties is computed with a ratio equal to 25 per cent less the effective tax rate divided by 25 per cent.
In most cases, interest paid to a non-resident company are exempted from withholding tax (see question 13). Royalties may be subject to withholding tax in France at the corporate income tax standard rate (31 per cent or 33.33 per cent in 2019 and 28 per cent in 2020) unless a double taxation treaty provides otherwise (exemption or reduced rate) or payment in a non-cooperating jurisdiction (withholding tax at 75 per cent).
Finally, the royalties or interest rates have to be negotiated at arm’s length to avoid the assumption of hidden profit distribution by the French tax authorities.
Disposals (from the seller’s perspective)Disposals
How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
The sellers may prefer to sell shares in a local or foreign company (which is not a real-estate company) where the disposal would be expected to result in a gain. The sellers would, therefore, benefit from the participation exemption regime (ie, 88 per cent capital gain exception) if they have held at least 5 per cent of the company share capital for at least a two-year period.
The availability of the participation exemption regime is also applicable for EU and EEA companies upon claim when such sale is taxable in France (except for sales of shares in real-estate companies).
If the disposal would result in an economic loss for the seller, it may consider disposing of the business assets in order to offset the loss on the profit of the holding company.Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real-property, energy and natural-resource companies?
Under French domestic law, the disposal of stock in an operating French company (being a non-real-estate holding company) by a non-resident company is not taxable, unless the seller’s holding exceeds 25 per cent of the French company at any time within the five-year period before the sale.
In general, double taxation treaties concluded with France deny France the possibility to tax the capital gain on the sale of French company shares. However, some double taxation treaties include specific provisions allowing France to tax capital gain deriving from a substantial shareholding (generally at least 25 per cent of the French company share capital). In such a case, foreign selling companies are subject to a withholding tax at a rate corresponding to that of the standard rate of corporate income tax (28 per cent for 2020, 26.5 per cent for 2021 and 25 per cent for 2022). EU or EEA selling companies can claim for the application of the participation exemption regime if:
- they paid the withholding tax;
- they are subject in their country to a corporate income tax; and
- they comply with the condition of the participation exemption regime (see question 17).
Transfers of shares in real-estate companies (ie, private companies, the whole assets of which consisted directly, over the three-year period before the year during which the sale occurs, of more than 50 per cent in French real property, rights relating thereto or shares of other real-estate companies) are subject to specific tax provisions. The capital gain deriving from such transfers are included in the taxable result of the buyer in France and subject to corporate income tax at the standard tax rate (28 per cent for 2020, 26.5 per cent for 2021 and 25 per cent for 2022, plus eventually the social surtax for companies with a turnover exceeding €7.6 million for 2019). Capital gains arising from the transfer of shares in a listed real-estate company, such as the real-estate investment trust-like French structure (société d’investissements immobiliers cotée) regime, are subject to a 19 per cent tax, provided that such shares qualify as a significant interest and were held by the vendor for at least two years prior to the sale. Most of the double taxation treaties signed with France allow France to tax capital gains deriving from the sale of shares in a real-estate company holding mainly directly or indirectly French buildings.
In such cases, the non-resident selling company is subject to a withholding tax at a rate corresponding to that of the standard rate of corporate income tax (28 per cent for 2020, 26.5 per cent for 2021 and 25 per cent for 2022). For capital gains on the shares of real estate companies listed on the stock exchange (société d’investissements immobiliers cotée), any excess of the one-third (or 19 per cent) levy over the 28 per cent corporate income tax standard rate (for 2020) is refundable for EU and EEA selling companies under the conditions explained above.
The withholding tax does not apply if the real estate is used within the course of the business of the company, or if the value of the non-real-estate assets is at least equal to the value of the real estate owned.Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
Under the participation exemption tax regime, the capital gains arising from the transfer of shares are 88 per cent exempted under the French participation-exemption regime (ie, 12 per cent of the gain is taxable; capital losses may not be offset), provided the buyer held at least 5 per cent of the company share capital, and the shares were effectively booked as participations and were held by the vendor for at least two years prior to the sale. Transfers of shares in non-listed real-estate companies are excluded from the participation-exemption regime (see question 16).
Capital gains on the disposal of business assets are, in general, subject to corporate income tax at the standard rate (ie, 28 per cent for 2020, 26.5 per cent for 2021 and 25 per cent for 2022, plus a possible social surcharge for companies with a turnover exceeding €7.6 million for 2019).
As of 1 January 2019, capital gains derived from the sale of patents and similar assets (notably industrial manufacturing processes and copyrighted software) are taxed upon the option of the selling company at a 10 per cent corporate tax rate under certain conditions (ie, implementation of the patent box tax regime). The option can be made either by types of intangible assets, or by families of products or services. If they are not eligible for the new French patent box regime or if the corporate entity does not opt for it, capital gains resulting from intangible transfers are subject to corporate tax at the standard rate.
Corporate income tax may be deferred should the disposal of shares in a local company or assets qualify as a contribution of a full line of business to another company (without any holding period requirement for the shares received in exchange for contributions made since 1 January 2018). However, the deferred gain may be taxed twice in France if the beneficiary is a French company: first upon the disposal of the assets, and second upon the disposal of the newly issued stock, since the beneficiary company is required to calculate the capital gains on the share transfer on the basis of the tax value allocated to the transferred assets in its own accounts.
Update and trendsKey developments of the past year
Are there any emerging trends or hot topics in the law of tax on inbound investment?Key developments of the past year18 Are there any emerging trends or hot topics in the law of tax on inbound investment?
France has brought its requirements in line with the European Court of Justice jurisprudence in terms of cross-border restructuring. Cross-border transactions could previously benefit from the special merger regime in the same way that transactions between French companies did. However, prior approval had to be obtained for these transactions from the tax authorities in order to benefit from the neutral tax regime.
This mechanism was deemed to be contrary to European Union law, in particular to the principle of freedom of establishment (CJUE, 8 March 2017 aff 14/16).
Consequently, the pre-approval procedure has been abolished for cross-border transactions (subject to the transfer of a full line of business for spin-offs or partial transfer of assets). However, a specific obligation to declare such operations and an obligation to assign the contributed assets to a permanent establishment of the foreign legal entity located in France have been introduced. In addition, the condition related to holding the shares for a three-year period is abolished where the contribution relates to a full line of business or equivalent elements.
However, the contributing company is still required to calculate the capital gains on the share transfer on the basis of the tax value allocated to the transferred assets in its own accounts. The holding period for the shares received in exchange for the contribution is determined by reference of the date of acquisition by the contributing company of the contributed assets (provision introduced by the 2019 Finance Act).
The 2019 Finance Act transposed into the French general tax code the EU Anti-Tax Avoidance Directive provisions on interest limitation (article 4) (see question 8) and general anti-abuse rules (article 108). For corporate income tax purposes, anti-avoidance provisions have been implemented to condemn arrangements or series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage in contravention with the object or purpose of the applicable tax law, are not genuine with regard to all relevant facts and circumstances.
France introduced a 3 per cent digital services tax on revenues deemed to have been generated in France by digital companies, wherever they are established, which make annual supplies of taxable services of more than €25 million in France and €750 million worldwide. The French tax will apply to revenue from digital interfaces that enable users of platforms to interact with each other, including for the delivery of goods or services between users (with the exclusion of direct online sales of goods or services, streaming video or music, on-demand services, and mail, payment services, regular financial services or intra-group services). It will also catch revenue from targeted advertising on digital interfaces, including revenue from the transfer and management of personal data for advertising purposes. Only French transactions will be concerned. France’s digital services tax is intended to be an interim solution, which will enable France to tax some of the revenues of tech companies, while the OECD works on reforming the international tax system. About 30, mostly US-based, companies are expected to be hit with the new tax, which is expected to raise €400 million in 2019 and up to €500 million by 2020.