After several reports commissioned by the State and after consultation with the representatives of the ultra-marine sector, the government proposed new measures aimed at rationalizing the tax provisions for encouraging overseas investments and, after several modifications, the Parliament adopted them.
Firstly, it should be emphasized that the current regime was kept for investments in overseas communities (Saint-Pierre and Miquelon, French Polynesia, Saint Martin, Saint Barthélemy, Wallis and Futuna and the Southern and Arctic Lands) and in New Caledonia.
In the overseas départements (administrative areas), and for productive investments made by companies, small companies (those with turnover less than 20 million euros), assessed on a consolidated basis if the company using the investment is part of a group) will have the choice between the current regime provided in Articles 199 undecies B and 217 of the French Tax Code (direct deduction or financing by a company subject to the partnership regime) and a tax credit (cf. below).
For other companies not covered above, the current system is eliminated and these companies alone will benefit from this tax credit.
The calculation base for the tax benefit is modified for replacement investments: this benefit will henceforth be based on the asset’s cost price minus the actual value of the replaced investment, when the investment’s purpose is to replace an investment that has already received a tax benefit.
In addition, the tax benefit’s retrocession rates in lease situations are increased.
For productive investments, a tax credit mechanism (optional for small companies), provided in Article 244 quarter W of the FTC, is put into place so as to allow for direct attribution of the tax benefit to the party using the investment. This tax credit, which is 35% for the corporate income tax and 38.25% or 45.9% for companies subject to the personal income tax, can be deducted from the corporate income tax (or the from the personal income tax) for the year the investment is used. In the case of a building being built, it will be spread over the construction period and, in the case of renovation work, it will be granted for the year in which the construction is completed. It will be refundable if there is a surplus, but a pre-financing mechanism may be used.
A tax credit mechanism, provided in 244 quarter X of the FTC, is also enacted for public housing organizations, including when they are not subject to the corporate income tax: they can, therefore, choose between the tax credit, which can also be pre-financed by financial institutions, and the tax exemption mechanism provided in Article 199 undecies C of the FTC.
As regards the latter mechanism, which is reserved for individuals, it should be noted that, in order to encourage public housing construction, the amount of the tax benefit’s retrocession was increased to 70%.
Due to the increase in the retrocession rates of the tax benefit provided in Article 199 undecies B and C of the FTC, the calculation of the specific cap for tax reductions on income from overseas investments is modified. In this respect, it should be remembered that the total tax benefits obtained by a taxpayer, within the 10,000-euro limit plus the overseas benefits, cannot exceed 18,000 euros.
These new measures will enter into force for investments made as of July 1, 2014, provided that the European Commission declares the provisions to be compatible with European Union law.
The current mechanisms will remain in effect for approval requests filed with the tax authorities before July 1, 2014, for real estate acquisitions for which a notice of construction commencement is issued before July 1, 2014, for acquisitions of tangible immovable property ordered before July 1, 2014 and for which a progress payment of at least 50% has been paid by such date (same rule for real estate renovation work), with the understanding, however, that companies will be able to request application of the tax credit explained above.
The co-existence of the two mechanisms —the tax exemption and tax credit— will continue until December 31, 2017, and after an evaluation phase, a decision will be made whether the former will be permanently replaced by the latter and if the tax credits, therefore, have to be renewed.