On September 25, 2013, the French government released its 2014 draft Finance Bill which currently contains four main measures that would affect entities operating in France. The first Parliamentary debates on the proposed budget begin October 15 at the Assemblée Nationale. These proposals could be adopted before year end.
Summarised below are the key tax measures concerning business taxation discussed in the text. For information on the measures concerning personal taxation, please refer to our Tax Alert specifically dedicated to this subject.
- New anti-hybrid financing/subject to tax rule
The government proposes adding a new test to the existing rules governing interest deductions for related party financing.
Under the proposed rule, interest deductions would be allowed only if the French borrower demonstrates that the lender is, for the current financial year, subject to a corporate tax on the interest income that equals 25% or more of the corporate tax that would be due under French tax rules. Where the lender is domiciled or established outside of France, the corporate tax determined under French law equals the tax liability that the lender would have owed on the interest had it been resident or domiciled in France.
Taxpayers must provide documentation to support the corporate tax calculation if requested by the French tax authorities.
The new measure would apply to financial years ending on or after September 25, 2013. In addition, the measure would apply to existing financing.
- Transfer of risks and functions
The bill would amend the transfer pricing rules to include a new provision applicable to business restructuring.
Enterprises operating in France would fall within the scope of this new transfer pricing provision if:
- They transfer one or more risks or functions to a related party
- They discontinue, either partially or fully, performing such functions or bearing such risks
- The transferor’s ‘excedent brut d’exploitation’ (EBE) (for a definition of the EBE, see comments below regarding the new EBE tax) accounted for during one of the two financial years following the transfer is 20% less than the average of the EBEs accounted for during the three financial years preceding the transfer.
These tests are cumulative.
Enterprises fulfilling the above tests must demonstrate that they received an arm’s length financial compensation or indemnification equivalent to what they would have received from unrelated parties in similar circumstances. In the absence of appropriate compensation, the profits that should have been realized by the transferor would be reinstated in its taxable basis. This provision would shift the burden of proof to the taxpayer to demonstrate that the transfer’s conditions are arm’s length.
The enterprise must provide the French tax authorities, upon request, with all documents and information needed to compute the income realized before and after the transfer of risks and functions for each entity involved in the transaction, including the beneficiaries of such transfer.
These new rules would not apply to isolated asset transfers or licensing provided such transfers or licensing are independent from any transfer of risks and functions.
Finally, when the transferee, located outside France, benefits from a privileged tax regime or is established in a NCST, the new rules apply even if such transferee is not a related party.
The proposed measures would apply to financial years ending on or after December 31, 2013.
- New EBE Tax
The government proposes to implement a new tax called ‘Cotisation sur l’excedent brut d’exploitation’(EBE).
French and foreign companies operating in France and fully or partially subject to corporate income tax (as well as listed real estate companies) would be subject to the new EBE tax when their gross revenue for the calendar year for which the EBE tax is due (or for the last 12-month financial year ended during the calendar year) exceeds EUR 50M.
In a French consolidated tax group, the gross revenue would equal the sum of the gross revenues of all the French company members but the EBEs would be determined at the level of each company members without any consolidation.
The EBE tax would equal 1% of the EBE, computed as follows:
the company’s added value, which is the positive difference between certain elements of income and expense (as defined by the French Tax Code provisions relating to ‘Cotisation sur la valeur ajoutee des entreprises’ tax).
- the wages, salaries and related costs as well as operating expense taxes (excluding corporate income taxes and taxes already deducted from the above added value computation).
The tax would be assessed and paid following corporate income tax rules and timelines. In a French tax consolidation, the French parent (head of the tax consolidation) would file and pay the tax. The tax authorities will create a specific filing for this new tax.
The EBE tax would not be deductible for French tax purposes.
The EBE would apply to financial years ending on or after December 31, 2013.
- Creation of an exceptional solidarity tax on high remuneration
Creation of a special tax, in the form of a 50% tax, due by employers paying individual gross remuneration in excess of Eur 1 million to their corporate officers and employees.
This tax is due on the remuneration accrued or granted in 2013 and 2014 by any company, group or organism which is a legal entity (“Personnalité morale”) or not, carrying-out business in France.
This tax is assessed on the portion of the individual gross remuneration in excess of Eur 1 million. The individual gross remuneration is the sum of the following amounts:
- Total compensation including variable remuneration and benefits
- Director's fees
- Pensions and related amounts
- Termination/severance payments
- Grants of qualified stock-options and free shares (i.e., satisfying the conditions provided by the French commercial Code)
- Grants of subscription rights on shares of company creators (“Bons de souscription de parts de créateur d’entreprise”)
- Repayment to third parties of items above (1 to 6)
Regardless their effective payment date, the above items are included in the tax calculation basis for the year:
- the corresponding expense is booked to determine the taxable profits of the employer (items 1, 2,3,4 and 7)
- the grant decision is adopted (items 5 and 6)
The tax basis is the gross amount expensed in the accounts of the company, or based on specific valuations rules for pensions and qualifying employee share schemes. For the latter, valuation rules are those applicable to the special employer social tax due at grant.
The tax is capped at an amount equal to 5% of the annual turn-over for the year the tax is due.
The tax will be payable by April 30 2014 (for 2013 remuneration) and by April 30 2015 (for 2014 remuneration) through a specific tax form created for this purpose.