In those pre-election times, the main changes introduced in French tax law by the recently enacted tax Acts are mainly technical ones. Some of them directly result from judicial review by the French Constitutional Court, which emphasizes the Supreme Court’s predominant role as it has jurisdiction over both enforced provisions (a posteriori review) and newly voted ones (a priori review).
The purpose of this article is to provide with an overview of the main evolutions in the fields of general corporate taxation (I) and transfer pricing (II) and focus on a few enhanced tax incentives (III).
I. General corporate taxation
A) Decrease of the French CIT rate from 33.1/3% down to 28% in 2020
The new 28% CIT rate will be progressively generalized to all entities as follows:
- For fiscal years starting as of 1st January 2017, the 28% rate will only apply to SMEs to the extent of the first taxable €75.000.
- For fiscal years starting as of 1st January 2018, the 28% rate will apply to all entities to the extent of the first taxable €500.000.
- For fiscal years starting as of 1st January 2019, the 28% rate will apply, on the one hand, on the whole taxable income of entities the turnover of which do not exceed €1 billion (or aggregated turnover of consolidated groups) and on the other hand, on the first taxable €500.000 of entities the profits of which exceed €1 billion (or aggregated turnover of consolidated groups).
- For fiscal years starting as of 2020, the 28% CIT rate will apply to all entities, irrespective of their profits/turnover.
B) Extension of the 3% distribution tax exemption to French affiliates held at 95% or more by foreign groups
French law provides for a 3% tax on dividend distributions which comes in addition to corporate income taxation. On 30 September 2016, the French Constitutional Court ruled that the legal provisions which stated that only distributions made within a French tax consolidated group were to be exempted from the 3% tax on distributions were inconsistent with the Constitution as they breached the principles of equality before the law and equality before charges levied by the State.
Further to this decision, the 2016 Amending Finance Act extended the 3% distribution tax exemption to distributions made as of 1st January 2017, to qualifying companies (companies which fulfil the conditions set forth for the constitution of a tax group, in particular the 95% threshold holding requirement) located in France, in another EU Member State or in a State which has signed with France an administrative assistance agreement against tax evasion.
The 3% distribution tax exemption will not apply to distributions to entities located in a non-cooperative State or Territory (NCSTs) unless the French distributing company can substantiate that the activities run by the NCST entity relate to genuine economic operations that do not have, as an object of purpose, the localization of profits in an NCST with the view to avoid taxation.
C) Amendment to the French participation-exemption regime
The French participation-exemption regime, allowing an exemption of qualifying dividends received by a parent entity, used to be granted only where the parent held at least 5% of equity rights and voting rights of its subsidiary over a minimum two-year period.
In order to comply with a ruling by the French Constitutional Court, the 2016 Amending Finance Act cancels the 5% voting rights holding requirement to be entitled to the participation-exemption regime for distributions occurring as of 1st January 2017.
Yet, regarding the exemption of capital gains derived from the sale of qualifying participations that have been held for a minimum two-year period (long-term capital gains), the minimum 5% voting rights holding requirement is maintained. As a result, the exemption of capital gains remains subject to the minimum two-year holding of a minimum 5% of both capital and voting rights.
D) A new diverted profits tax is invalidated by the French Constitutional Court
A new anti-abuse rule introduced into the 2017 Finance Bill was passed against government’s approval. Under this new rule, a nonresident company was to be subject, under certain conditions, to CIT in France where it controlled a French of foreign enterprise that performed activities in France related to the sale of goods or supply of services of the nonresident company. CIT was to be assessed on the share of profits that had been derived from the activities performed in France had it not been diverted through an artificial arrangement. This new provision was expected to secure taxation in France of, inter alia, internet sales platforms.
Despite the fact that the scope of this new measure was limited by broad safeguard clauses as well as the application of tax treaty provisions, the Constitutional Court did not upheld the rule for the French tax authorities had discretion as to whether to rely or not on the rule during a tax audit. Contrary to the diverted profits tax which was passed in the UK in 2015, the measure did not pass the last test before enforcement as it faltered on a mere point of procedure, which questions its validity had the procedural conditions been different.
II. Transfer Pricing
A) Public Country by country report is rejected by the French Constitutional Court
Country by country reporting (CbCR) was introduced in French law by the Finance Act for 20166 and the details of the procedure were set forth in a September 29th 2016 ministerial decree. For the record, in line with the OECD’s recommendations, CbCR applies in France to multinational companies whose annual consolidated turnover exceeds € 750 million. For financial years starting as of 1st January 2016, the filing corporation must file the CbC report with the tax authorities within the next 12 months following the end of the financial year - then by 31 December 2017 if the financial year started on 1st January 2016.
In a comprehensive anti-corruption Act, so-called “Loi Sapin II”, the lawmaker introduced a public CbCR which would have made the information required by the CbCR procedure available to the public without any restrictions. In practice, CbCR-compliant companies would have added a report on the group’s global profit and tax data to their annual public reports. The French Constitutional Court voided such an unrestricted disclosure as it would impede freedom of trade to the extent that CbCR-compliant companies’ ability to compete with foreign rivals not subject to a similar measure would be harmed.
Yet, a draft European directive dated April 12th 2016 provides for public disclosure of CbC reports. If this draft directive was to become European law, it would have to be implemented into French law. If the transposition was to be the letter of the Directive, review by the French Constitutional Court would prove to be impossible since the Supreme Court has constantly denied the review of the consistency of a European directive to the French Constitution.
B) The scope of the annual return on transfer pricing transactions is extended
This other less controversial transfer pricing measure introduced by the Loi Sapin II survived the constitutional review. The threshold set for the filing of the annual “abridged” report on transfer pricing transactions is reduced from € 400 million to € 50 million of turnover or gross assets, effective for accounting periods closing on or after 31 December 2016.
This reduced threshold, which is bound to result in some SMEs to be affected, is applicable not only the level of the French entity, but also at the level of any other company within the tax group. Therefore, if a French company or one of its affiliates companies (parent, sister or subsidiary) has a turnover or gross assets exceeding €50 million, then the related French entity must file the annual transfer pricing report with the French tax authorities within six months of the deadline set for filing the CIT return.
C) New possibility granted to the French tax authorities to hear any person at any time
The 2016 Amending finance Act provides for a new measure whose general stated objective is to strengthen the fight against international tax avoidance. It is then not limited to the transfer pricing field. Yet, it may prove to be a weapon of choice of the tax authorities’ in their search for inconsistencies in a company’s transfer pricing policy.
Since 31st December 2016, during a tax audit or at any other time, the tax authorities are enabled to hear any person they deem necessary – an extended list is provided for in the parliamentary materials, including clients, suppliers, accountants, employees, former employees or any other related professionals – except the taxpayer himself, that may have any relevant information related to potential tax avoidance. This new hearing procedure is not coercive and specific tax procedure rules are applicable. In particular, the person must be notified by the French tax authorities at least eight days prior to the hearing and may be assisted by a lawyer or an interpreter if need be. A statement of the hearing is to be signed by both the tax authorities official and the person heard. As for the taxpayer, he must be granted access to the information provided by the person if it led to a tax reassessment.
III. Various tax incentives
A) Enhanced tax credit in favour of competitiveness and employment
In 2013, a tax credit in favour of (CICE: crédit d’impôt pour la compétitivité et l’emploi) was introduced to promote business investment, innovation and R&D. For compensation paid as of 1st January 2017, the rate of the CICE is increased from 6% up to 7%. The CICE is to be granted to any entity which hires employees. It is based on the overall compensation paid to all employees whose annual compensation does not exceed 2.5 times the annual minimum wage. In practice, the CICE will be offset against the entity’s CIT or if it exceeds CIT liability, it will be carried forward to the next three years. Any portion of the CICE that could not be used within the three-year window will be refunded to the taxpayer.
B) The Research and Development (R&D) tax credit is confirmed
In recent years, the French government has clearly demonstrated its strong willingness to promote and encourage R&D in France by enhancing France’s R&D tax credit. Since the 2008 Finance Act, France has offered a 30% tax credit based on first €100 million of qualifying R&D expenditures incurred during the tax year. The rate is reduced to 5% of any amount in excess of the €100 million threshold. From a practical standpoint, the R&D tax credit will be offset against the taxpayer’s CIT with the same carry forward possibility as for the CICE tax credit.
In order to reduce uncertainty, the taxpayer is allowed to request a ruling from the French tax authorities in order to secure the eligibility to the R&D tax credit of its various R&D projects. Since 1st October 2016, where an R&D project spans several years, the taxpayer is entitled to have a ruling reviewed by the tax authorities in order to have the R&D tax credit eligibility confirmed.
C) Extension of the French impatriate tax regime
Under various conditions, qualifying employees assigned to France (intra-group transfers) or directly hired by a French company are entitled to an income tax exemption on the portion of their salary compensating the transfer to France (prime d’impatriation – impatriation premium or bonus).
The 2017 Finance Act extents the benefit of this favourable tax treatment until 31 December of the eighth year following the year of the transfer to France (it used to apply until 31 December of the fifth year following the year of the transfer to France), for employees who assumed their duties as of 6 July 2016.
In addition, for these employees, the impatriation premium paid as of 1st January 2017 is to be excluded from a specific payroll tax (taxe sur les salaires) basis.