The Finance Act for 2019 was published in the Official Gazette. The main measures relating to corporations and managers are described below.
- Corporate income tax
Tax deductibility of financial expenses
Introduction of a new limitation rule based on the EBITDA
The 25% non-deductibility rebate which limits the deductibility of net financial expenses to 75% of their amount and the thincapitalization rules are repealed and replaced by a limitation based on the EBITDA of the company.
The new rule limits the tax deductibility of net financial expenses to 30% of the EBITDA of the company or €3 million (if higher), per fiscal year.
- The new regime provides for a definition of financial expenses that is wider than the one that was applicable for the 25% non-deductibility rebate.
- EBITDA equals to the taxable result of the company subject to CIT at standard rate with some adjustments (financial expenses, tax deductible depreciation, tax deductible reserve for impairment and gain or losses not subject to CIT at standard rate).
- A catch-up deduction of 75% of non-deductible interest is available when the equity/assets ratio of the company is higher than the ratio calculated at the consolidated group level.
- Disallowed interest can be carried forward without any time limitation or discount.
By way of exception, when the average amount of related party debt exceeds 1.5 times the equity of the company, the deductibility of net financial expenses is capped to 10% of EBITDA or €1 million (except when the debt/equity ratio of the company is lower that the group’s ratio).
In case of tax consolidation, this rule applies at the level of the tax group based on the tax group EBITDA.
Repeal of Carrez Amendment
Carrez Amendment limiting the financial expenses deduction incurred for the acquisition of substantial shareholdings where the decisions are not taken by companies located in the EU or in the EEA is repealed.
- These measures applies to FYs opened as from January 1 st, 2019.
Amendments of the tax consolidation regime
- Waivers of debts and subsidies
Waivers of debts and subsidies between members of a taxconsolidated group cannot be neutralized anymore.
- Capital gains
The neutralization at the tax consolidated group level of the taxable 12% portion of capital gains on share transfers eligible to the participation exemption regime is repealed.
Dividends not eligible to the parent-subsidiary regime will be tax exempt up to 99% of their amount for:
- Distributions performed between companies members of the same French tax consolidated group.
- Distributions to a French company, by a company that is a resident for tax purposes in the EU or in a State member of the EEA which has concluded a treaty with France and that could have been part of a French tax consolidated group for more than one FY with the French receiving company if it were established in France.
Dividends eligible to the parent-subsidiary regime received by a French company from a company that is a resident for tax purposes in the EU or in a State member of the EEA which has concluded a treaty with France and that could have been part of a French tax consolidated group with the French receiving company if it were established in France will be exempt up to 99% of their amount.
- At cost-transactions
The Finance Bill legalizes the ability to perform sales and provide services at cost between companies belonging to the same tax consolidated group.
- Termination of the consolidation
The merger of the parent company of a French tax consolidated group into another company belonging to the same tax group will no longer trigger the termination of the said tax group provided that certain conditions are met.
The transition from vertical integration to horizontal integration (or vice versa) does not lead to the termination of the group.
- Adjustments to soften tax consequences of the Brexit
The Finance Bill provides various adjustment mechanisms to avoid the termination of French tax consolidated groups or the exit of French tax consolidated companies from French tax consolidated groups that would result from the exit of the UK from the EU.
In a nutshell, the Finance Bill provides that French tax consolidated group can restructure themselves without triggering the exit of the considered companies from the tax group provided that conditions to be part of the tax group are met by the considered companies at the end of the FY.
- These measures apply to FYs opened as from January 1st, 2019.
Partial Contribution of Assets
In case of contribution of shares assimilated to a complete branch of activity, French administrative guidelines provide that newly shares received are considered as acquired at the time of such a contribution.
Contrary to the position of the FTA, the Finance Bill provides that shares received are deemed to be owned since the date on which the contributing company acquired the shares contributed.
- This measure is effective for FYs closed on or after December 31, 2018.
Reversible option for Corporate Income Tax
Companies and groups falling within the scope of the personal income tax regime can opt to be subject to CIT. This option was irreversible.
The Finance Bill provides that this option is now reversible, companies having five years to waive this option.
- This measure is effective for FYs closed on or after December 31, 2018.
Last corporate income tax instalment payment
The last corporate income tax instalment of the largest companies is increased and must equal to:
- 95% (instead of 80%) of the estimated FY CIT expense less instalments already paid for companies with a turnover between €250M and €1 billion;
- 98% (instead of 90%) of the estimated FY CIT expense less instalments already paid for companies with a turnover between €1 billion and €5 billion.
- This measure is applicable for FYs opened as from January 1st, 2019.
General anti-abuse clause (implementation of ATAD directive)
FTA can disregard operations performed by the taxpayer if the two following conditions are met:
- The arrangement (or series of arrangements) is set up for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law;
- The arrangement (or series of arrangements) is not regarded as genuine.
- This measure applies to FYs opened as from January 1st, 2019.
- General taxation
IP box regime Previous regime
French companies benefited from a reduced CIT rate of 15% on net income deriving from qualified IP assets.
This regime was not conditioned to the performance of R&D activities by the company in France. As such, it has been considered as non-compliant with OECD standards.
The Finance Act amends the French IP box regime introducing the nexus approach and decreasing the CIT rate applicable to net income deriving from qualified IP assets to 10%. In addition, copyrighted software is now considered as a qualifying asset.
Net income deriving from qualified asset is equal to income received from the operation of the asset less R&D expenses incurred directly or indirectly by the company for the creation or the development of the asset.
Pursuant to the nexus approach, only a portion of the net income can benefit from the 10% CIT reduced rate.
The nexus ratio is as follows: [eligible expenditure x 130%]/ total expenditure.
- Eligible expenditure: R&D expenditure directly related to the creation and development of the qualified asset carried out directly by the taxpayer himself or outsourced to unrelated entities (within the meaning of article 39, 12 of the FTC).
- Total expenditure: eligible expenditure, outsourcing costs to related companies and acquisition costs excluding ancillary costs (excluding interest and costs relating to land and buildings).
In case of tax consolidation, this regime applies at the level of the tax group as if the tax group was a single entity (i.e., R&D expenditure outsourced to a related tax consolidated entity are eligible expenditure).
- These measures apply to FYs opened as from January 1st, 2019.
Additional depreciation incentive for specific assets
Some listed assets in the following sectors can benefit from a 40% additional depreciation:
- Investments in robotics and digital transformation;
- Investments in less polluting trucks;
- Investments in refrigeration and air conditioning equipment with lower climate impact;
- Investments for clean energy used for river and maritime transport.
This tax incentive will only be applicable for assets acquired during a certain time period.
- This measure applies to FYs opened from January 1st, 2019.
R&D tax credit declarations
The submission of a description of the R&D works at the same time as the filing of the CIT return becomes mandatory for companies whose research expenditure are greater than €2M (previously €100M).
- This measure applies to the 2018 R&D tax credit returns filed on or after January 1st, 2019.
Patronage tax credit
Patronage tax credit equals to 60% of donations made by the company but is capped to 5 per thousand of its turnover.
The Finance Bill provides that, for SME, the patronage tax credit is capped to the above mentioned threshold or to €10k
In addition, companies that donate more than €10k during a FY have now to report it to the tax administration.
- This measure applies to FYs ending on or after December 31, 2019.
- Tax litigation
New anti-abuse of law provision
A new anti-abuse of law provision will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into.
The current anti-abuse law provision (exclusive purpose) is not repealed.
There are no specific penalties provided in case the FTA apply this new anti-abuse of law provision. However, FTA can apply the usual penalties (40% for a deliberate breach and 80% for a fraudulent scheme) if applicable conditions are met.
- This measure will be applicable to transactions performed as from 1 January 2020 and subject to a tax reassessment notice issued as from 1 January 2021.
Tax abuse committee Previous regime
When the case was referred to the tax abuse committee, the tax administration bore the burden of proof in the event of subsequent litigation if it had not complied with the committee's opinion. Conversely, when the tax abuse committee ruled in favour of the tax administration, the burden of proof was borne by the taxpayer.
The Finance Bill provides that the FTA carries the burden of the proof regardless of the tax committee decision.
- The measure applies to proposed tax reassessments notified as from January 1st, 2019.
Adjustment of the fine for irregular issuance of documents allowing a third party to obtain a tax benefit
The fine is only applicable to persons who knowingly issued documents allowing a taxpayer to unduly obtain a tax benefit.
The fixed rate of 25% is replaced by a new rate equal to:
- The reduction (or tax credit) in question;
- The tax advantage improperly obtained in the case of a deduction.
Implementation of the EU directive, settlement of tax disputes within EU
The Finance Bill implements the EU Directive regarding the settlement of tax disputes within the EU in instances when double taxation arises because of the application of income tax treaties between EU Member States.
The measure provides for the creation of consultative commissions that could issue arbitration decisions that would apply when discussions between tax administrations fail to resolve the double taxation issue.
The tax authorities of the countries involved could decide not to follow the commission’s arbitration decision only to the extent that they reach an agreement to settle the issue. The taxpayer then would have to be “notified” of the final decision, at which point, the taxpayer could decide not to accept it, in which instance, the procedure would be closed.
- This measure applies to any application filed with the tax authorities as from 1 July 2019.
- Individual taxation
Reform of the exit tax Previous regime
The existing provision referred to as the “exit tax” allows France to impose tax on unrealized capital gains on shares and certain financial instruments owned by individual taxpayers who leave France if afterwards the individuals sell the shares or financial instruments within 15 years.
The time during which the exit tax could apply is reduced to 2 years (5 years if the value of the securities at the time of the exit is greater than €2.57 M).
- This measure applies to transfers of tax residence outside France as from January 1st, 2019.
Broader scope of the flat tax Previous regime
Financial income and capital gains whose taxable event occurs on or after January 1st, 2018 are subject to a flat tax for personal income tax purposes.
The flat tax is made of a flat rate for personal income tax equal to 12.8% and a flat rate for social security contribution, equal to 17.2%.The global rate is equal to 30%.
In addition to above mentioned income, the following revenues are also subject to the flat tax:
- Gains not arising from a sale (payments pursuant to an earn out clause, distribution of assets or capital gains);
- Gains resulting from a donation of securities giving entitlement to the “Wealth tax” reduction;
- Gains resulting from an early withdrawal under a stock savings plan (PEA).
- This measure applies as from 2018’s taxation.
Subject to certain conditions, capital gain performed by individuals deriving from a contribution of shares to a company benefits from a deferral of taxation.
This tax deferral is notably terminated in the event of the sale of securities contributed by the company having received those securities as long as the latter does not reinvest a substantial part of the proceeds of the sale within two years. The minimum threshold of economic reinvestment goes from 50% to 60% of the proceeds of the sale.
- This measure applies to transfers of securities made by the company controlled by the contributor as from January 1, 2019.
Bitcoin regime Capital gains
Capital gains performed by individuals during the occasional sale of digital assets are taxed at the rate of 12.8% pursuant to a new article 200 C of the FTC, (i.e., an overall rate of 30%, social security included).
- This measure applies to sales carried out as from January 1st, 2019.
From 1 January 2020 individuals will have to declare their foreign digital asset accounts.
- Withholding tax on domestic dividend distribution
The Finance bill introduces a specific anti-abuse rule to prevent from arrangements aiming at avoiding the application of the French WHT on dividend distribution through a temporary transfer of the shares of the French distributing company from a non-resident entity to a French resident company.
Any payments of any kind, up to the portion that corresponds to a distribution of income arising from a shareholding (or an assimilated income referred to in articles 108 to 117 bis); performed, by any means, by a French company, directly or indirectly to another French resident, will be deemed to be a distributed income subject to the French domestic WHT applicable on dividends if the following conditions are met:
- The payment is performed in the course of a temporary transfer of the shares/rights of the French resident or any other transaction that gives rise to a right or an obligation to resale/return these shares/rights or any rights on this shareholding.
- The transaction is performed within less than a 45-day period, during which the right to the payment arises.
Such WHT is paid by the French paying resident upon the payment of the deemed distribution.
The beneficiary of the payment can get reimbursed of the WHT imposed provided that he can demonstrate that the payment corresponds to a transaction, the main object and effect of which are neither to avoid the application of a WHT nor to obtain a tax benefit.
- This measure is applicable to distributions made as from 1 July 2019.