The draft of the second Amended Finance Bill for 2012 was definitively adopted by the French Parliament on 31 July 2012. This text will be published in the Journal Officiel (i.e. enacted) in the next few days.
Set out below is a summary in English of some of the key provisions.
The main provisions affecting business taxation are set out below:
- Additional 3% contribution on dividend distributions
The bill introduces an additional 3% tax on dividend distributions or on sums treated in the same way for tax purposes.
This tax is payable by French and foreign companies subject to CIT in France, including those entities benefitting from a tax exemption, with the exception of companies meeting the EU “SME” criteria i.e. companies with less than 250 employees, with annual turnover of less than €50m or a balance sheet total of less than €43m.
The tax will also apply to profits realised by French branches of foreign companies, at the point that these profits are remitted to the overseas head office.
The tax will not be payable in respect of distributions made within a French tax group.
Equally exempt from the tax charge will be distributions made between entities which have “SIIC” status, i.e. listed real estate investment companies, to the extent that they belong to the same French tax group.
Finally, it is also expected that the 3% tax charge will not be payable where the distribution is made in the form of an issue of new shares, as well as those made in the form of cooperative investment certificates. This exemption is available on the condition that, in the subsequent 12 months, the company does not carry out a capital reduction exercise which takes the form of a repurchase of its own shares.
On the other hand, the exemption included in the original draft, in respect of distributions made to companies with a shareholding in excess of 10% in the distributing entity (the parent-subsidiary exemption) was removed during the parliamentary debates.
The charge, which is taxable upon the distributing entity, is equal to 3% of the amount of the distribution and must be paid together with the first corporate income tax instalment payment falling after the month in which the distribution is made.
Tax credits would not be creditable with the possible exception of foreign tax credits eligible under a double tax treaty.
The new tax would apply to distributions made or payable as from the date of publication of the new law, i.e. following the decision of the Constitutional Council.
- Advance payment of the exceptional 5% corporate income tax surcharge
The exceptional 5% corporate income tax surcharge, which was introduced as part of Amended Finance Bill 2011, is currently payable at the same time that the balancing payment of CIT is made. For companies with a financial year ending on 31 December 2012, this surcharge would have been due by 15 April 2013.
Under the revised provisions, the due date for payment of this surcharge has been brought forward so it is payable at the same time as the fourth instalment payment of CIT for large companies i.e. by 15 December 2012.
The advance payment will have to be made by deemed “large” businesses, as set out below:
- 75% of the estimated amount for companies with annual turnover between €250m and €1bn
- 95% of the estimated amount for companies with annual turnover exceeding €1bn.
In the context of French tax groups, these thresholds are to be applied at the group level.
Finally, late payment interest and penalties will apply where affected taxpayers make errors in payment of the surcharge - these will apply where the error is in excess of:
- 20% and €100 000 for companies falling under the 75% regime (above), and
- 20% and € 400 000 for companies falling under the 95% regime.
Any excess payment made will be refunded within 30 days of the payment of the balancing payment for corporate income tax for the relevant financial year (i.e. by 15 May 2013 for a company with a financial year-end of 31 December 2012).
This advance payment is applicable to financial years ending on or after 31 December 2012.
- Non-deductibility of financial debt waivers
Financial aid provided by companies to their subsidiaries will no longer be deductible for tax purposes.
The only waivers that would remain deductible for tax purposes would be those that are imposed by the Commercial Court. The deduction would be available under the same terms as is the case currently, i.e. up to the negative net equity position of the subsidiary, with any excess over this amount only being deductible in proportion to the shareholding held in that subsidiary by shareholders other than the waiving company.
These changes would apply to financial years ending on or after 4 July 2012 and thus affect debt waivers made in the course of the current tax year.
- Non-deductibility of short-term capital losses on certain newly-issued shares
This proposal was completely modified during the course of the parliamentary discussions. It now provides that, where a company makes a contribution in exchange for shares, then any short-term capital loss arising on disposal of those shares (i.e. disposal within two years) will not be deductible if the actual value of the shares (on the date of the share issue) was less than the accounting value.
This provision applies to sales of shares received in exchange for contributions made on or after 19 July 2012.
- Doubling of the Systemic Risk Tax
Systemic risk tax is due by financial institutions which are required to have minimum equity funds of at least €500m. This provision provides for the payment of an additional contribution of the same amount as the tax on systemic risk which has already been paid in respect of 2012.
In addition, the rate of the systemic risk tax is to be doubled with effect from 1 January 2013.
- Rate of the Financial Transaction Tax (FTT) doubled
The draft bill sets out that the rate of the FTT which is due to become effective in France as from 1 August 2012 will increase from 0.1 to 0.2%.
The text also adds that depositary receipts (such as the American and European depositary receipts) are now within the scope of the FTT - this extension of the tax will only apply to acquisitions made on or after 1 December 2012.
Finally, the text also provides clarification on the party which is liable to pay the tax where a number of parties are involved and a chain of service providers act in turn on the same purchase order. The text explicitly states that the provider who is closest to the initial issuance of the purchase order is the person liable to tax.
- Measures to fight the abusive transfer of French tax losses
The text which has been adopted is identical to that which appeared in the initial draft.
In the context of a merger or similar operation, certain conditions will need to be met in order to obtain approval for any tax losses to be carried forward. The “absorbing” company or that which receives contributions must now undertake not to make "significant changes" to the activity which gave rise to the tax losses, particularly in terms of clientele, workers, operational structure and the nature and volume of its activities.
In addition, losses arising from the management of movable assets by a company whose business consists mainly of making financial investments and those arising from a property management business are specifically excluded from being available for carry-forward in the event of a merger or similar operation.
These provisions are, in reality, merely legislating what has been the recent practice of the authorities in this respect.
Even where there is no restructuring operation (e.g. merger), the possibility of carrying forward tax losses in the event of a significant change of activity is also substantially limited.
A “significant change of activity” is now defined according to strict criteria, i.e.
- the addition of a new activity, and
- an increase (or decrease) of over 50% in the two years following the merger (or similar) of:
- turnover OR the average number of employees, and
- the amount of fixed assets.
In the event of a failure to comply with these conditions, it is proposed that a new advance ruling procedure be introduced which will safeguard the carry forward of tax losses, when the merger (or similar) operation is essential to the continuation of the activity and the continued employment of staff.
These changes apply to financial years ending on or after 4 July 2012 and, as such, are retroactively applicable.
- Anti abuse in respect of divestment schemes
This provision aims to target abusive divestment schemes such as that in which a company merges with a subsidiary (under the favourable tax regime) within 2 years following its acquisition, thereby claiming a deduction for the short term capital “loss” resulting from the cancellation of the shares in the absorbed company.
Such a capital loss would be disallowed up to an amount equal to the dividends distributed tax-free by the acquired company since its acquisition.
This provision would apply to financial years ending on or after 4 July 2012 and, hence, has retroactive effect.
- Reversal of the burden of proof for the application of CFC safe harbour rules
French CFC rules currently do not apply to foreign controlled entities which carry on an active trade or business in a non-EU country where they benefit from a privileged tax regime. On the other hand, the French controlling entity must bring evidence that the location is not mainly tax driven where 20% of the income of the foreign entity comprises passive income, or where at least 50% of the income of the foreign entity comprises passive income and income from intra-group services.
The adopted text extends the reversal of the burden of proof to all situations where the controlled entity is located in a low taw jurisdiction, irrespective of the 2 thresholds of income above mentioned.
Finally, the distinction with Non-Cooperative States or Territories (NCST) is eliminated.
This provision is applicable to financial years ending on or after 31 December 2012.
- Removal of WHT on French source dividends paid to EU mutual funds
To address the consequences of the ECJ judgment of 10 May 2012 in the Santander case, in which the withholding tax applied to dividends paid to mutual funds situated in other EU Member states was ruled to be contrary to EU law, the provision has now been removed.
However, the adopted text goes further than was required by this judgement so that the exemption from the withholding tax which is currently applied to French mutual funds now extends to equivalent mutual funds established in other EU states, in non-EU states with which France has signed a treaty which contains an administrative assistance clause and excluding those located in non-cooperative states or territories.
For this, however, foreign organizations must operate under conditions similar to those applicable under French law.
The 15% withholding tax on dividends is maintained in respect of dividends distributed to mutual funds by:
- listed tax-exempt real estate investment companies (SIICs),
- tax-exempt real estate companies with variable capital (SPPICAV) and,
French tax-resident SPPICAV subsidiaries, for that part of the distribution which is made to non-SPPICAV shareholders if:
those shareholders are mutual funds which are:
- located in France, or
- in another EU state, or
- in a State which has a treaty with France which contains an administrative assistance clause, except
- those located in a non-cooperative state or territory
- and if the distribution is made from tax-exempt profits.
- those shareholders are mutual funds which are:
This provision is intended to prevent foreign investors investing in tax-exempt French real estate entities (e.g. SIIC, SPPICAV) via a mutual fund and, in this way, receiving a double exemption from French withholding tax.
This exemption would apply to income distributed as from the date of publication of the new law, i.e. following the decision of the Constitutional Council.
- Repeal of the proposed increase in the standard VAT rate
Despite recent recommendations for an increase in the standard rate of VAT to help balance the budget and as part of an EU harmonisation project, the increase in the standard VAT rate from 19.6% to 21.2% (an initiative of the Sarkozy Government which was to enter into force on 1 October 2012) has been repealed by the new French Government in order to preserve the purchasing power of households.
The decrease in employer contributions that accompanied this increase in VAT is also proposed to be removed.
However, the increase in payroll taxes on capital income is to be maintained.
The principal provisions affecting individuals are set out below.
- Exceptional contribution to Wealth Tax
This provision introduces an exceptional wealth tax contribution for 2012 - it takes the form of a recalculation of the wealth tax liability for 2012, calculated on the basis of the 2012 net assets > €1.3m but by applying higher rates close to those which were applicable in 2011.
Those taxpayers who are liable to pay the tax (i.e. those with taxable net wealth exceeding €1.3m) will be required to pay the tax in respect of their taxable net wealth exceeding €800,000.
The additional contribution is to be calculated on a sliding scale based on the wealth tax bands applied in 2011 and payment must be made no later than 15 November 2012.
This wealth tax liability is not capped with reference to the previously available “tax shield” (a mechanism which provided for a maximum tax contribution for individuals).
In addition, whilst payment will be due for the excess of the recalculated wealth tax liability over that already paid in respect of 2012, if the calculation leads to a recalculated liability which is lower than that paid already in respect of 2012, a refund will not be available for the excess payment.
The basis of the contribution is identical to that of the wealth tax. Therefore, the same allowances may be available to reduce the taxable assets of an individual, e.g. the 30% reduction in respect of the main residence, professional goods, works of art etc.
On the other hand, tax-reduction measures such as those provided in respect of investments in SMEs or in case of patronage cannot be deducted from the amount of the contribution.
This provision is amongst those which have been referred to the Constitutional Council.
- Application of social taxes to income from property and real estate capital gains earned by non-residents
In order to align the system of taxation with that applying to French residents, non-resident individuals are to be subject to French social security contributions of 15.5% on income arising as from 1 January 2012 in respect of French real estate, and on capital gains arising in respect of disposals of French real estate as from the date of publication of the law
The applicability of this provision to persons residing in another EU state is uncertain and has also been referred to the Constitutional Council.
- Increase in the forfait social on amounts paid to a profit participation pool
The forfait social is usually payable in respect of amounts which employers are required to contribute to the employee profit participation pool.
The rate of this contribution is to increase from 8% to 20% for amounts paid on or after 1 August 2012 (although the original text provided for this increase to be effective on 1 September 2012).
- Increase in employer and employee contributions on the granting of stock options and restricted stock
The employer contribution rate, due at the time of grant of options or free shares, is to be increased from 14% to 30%. This increase applies to options granted and to distributions made on or after 11 July 2012 (although the original text provided for this increase to be effective on 1 September 2012).
The rate of salary contribution, due on the sale of the securities concerned, is to increase from 8% to 10%. This will be applicable to disposals made as from the day after the publication of the law.
- Lowering the threshold for the applicability of social contributions in respect of severance payments
Currently, if an employee or director’s employment is terminated by a company, then social contributions are not required to be made in respect of any severance payment if this is less €1,091,160. If this threshold is exceeded, then the whole amount of the severance payment will be liable to social contributions.
Under the new regime, this threshold has been reduced to €363,720.
The new regime would apply to any severance payments made on or after 1 September 2012.