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France: Finance bill for 2020 includes measures affecting corporate taxpayers

France: Measures affecting corporate taxpayers

The French government on 27 September 2019 released the finance bill for 2020.

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The bill includes measures that may affect corporations such as a delay of the scheduled reduction of the corporate income tax “standard” rate for 2020 and 2021 for large companies; a new set of rules to address the use of hybrid instruments and entities in a cross-border context; and new domestic rules under which the tax residency of the persons heading or leading large companies would be deemed to be French residents. Further to comply with a recent judgment of a Court of Justice of the European Union (CJEU) case law, the withholding tax on certain French-source income paid to a non-resident loss-making company would be “frozen.”

Slowdown of scheduled reduction of the corporate income tax rate for 2020 and 2021 for large companies

Earlier this year, the French Minister of Finance announced a scheduled reduction of the corporate income tax standard rate would continue from 2020 to 2022 and ultimately to reach 25% for all companies in 2022 (pursuant to the 2018 finance law). However, for financial years starting between 1 January 2020 and 31 December 2021, the scheduled rate reduction would not follow the same plan, depending on whether the company’s sales (assessed at the level of tax grouping when applicable) is equal to or above €250 million. 

Companies and tax-consolidated group with a turnover equal to or above €250 million would be subject to corporate income tax at the standard rate of 31% for financial years opened between January 1 and December 31, 2020. However, a 28% rate would still apply to the portion of taxable profit up to €500,000 (already applicable for financial years opened as from 1 January 2019). For FY 2019, such large companies would not benefit from the 31% standard rate of corporate income tax that applies to other companies but would remain subject to corporate income tax at the standard rate of 33⅓% as a result of a first decrease in the phase-down as scheduled in July 2019 (read TaxNewsFlash).

For financial years opened as from 1 January 2021, these companies would be subject to corporate income tax at the standard rate of 27.5% on the full amount of profit.

Companies and tax-consolidated group with a turnover below €250 million would be subject to a 28% corporate income tax rate on the full amount of their profit for financial years open as from 1 to 31 December 2020 and to a 26.5% rate for financial years open as from 1 to 31 December 2021, as provided by the 2018 finance law.

As a consequence, the corporate income tax rate for the 2019-2022 period would apply as follows: 

France October 8

*modified by the law of the 24 July 2019 introducing a digital services tax, which also provides (in article 4 of that law) a modification of the downward trend of the French corporate income tax rate
 

The 3.3% surtax computed on the standard corporate income tax charge (after deduction of a lump-sum amount of €763,000) remains unaffected. Accordingly, the maximum aggregated corporate income tax rates reflecting the surtax would be:

  • 33.1/3% => 34.42%
  • 31.00% => 32.02%
  • 28.00% => 28.92%
  • 26.50% => 27.37%
  • 27.50% => 28.41%
  • 25.00% => 25.83%

Temporary freeze of withholding tax on certain French-source income received by a non-resident loss-making company

In November 2018, the CJEU issued a judgment concluding that a less favorable tax treatment applies to dividends paid to a non-resident loss-making company that does not benefit from the participation exemption regime compared to the tax treatment that applies to the dividends paid to a loss-making French resident company. The dividends paid by a resident company are subject to a withholding tax when the shareholder is a non-resident company, whereas when such dividends are received by a resident company, they are subject to corporate income tax at the end of the financial year in which they are received only if the French beneficiary is in a profit-making position. Such taxation could possibly never happen if that company ceases its activity without becoming profitable afterwards.

These rules thus created a cash-flow disadvantage, which constitutes a restriction on free movement of capital that is not justified (read the CJEU judgment (Sofina SA, Rebelco SA, Sidro SA, case C-575/17 (22 November 2018); read KPMG’s discussion of the case in EU Tax Flash). The CJEU judgment, as followed by the decision of the French administrative Supreme Court in April 2019, allowed taxpayers to present a claim with the French tax authorities in order to obtain a refund of the withholding tax amounts paid in the previous years.

In addition, the European Commission also started, in 2014, an infringement procedure against France in this respect. In response to this procedure, the French law was modified in 2015; accordingly, since 1 January 2016, dividends paid are not subject to the withholding tax if the EU company is a loss-making company and is subject, at the date of distribution, to judicial liquidation or comparable proceedings. However, the EC stated it considers that this evolution remains insufficient to put French domestic law in compliance with EU law. Considering this context, a further modification of the French law would seemed inevitable.

Consequently, for financial years opened as from 1 January 2020, a non-resident (EU or non-EU) loss-making company could obtain, under certain conditions, a temporary refund of the withholding taxes that were levied on dividend distributions (until it reaches a profit-making position). This refund mechanism would also be applicable on withholding tax on amounts paid in return for artistic services; some non-wage incomes; and real estate profits and capital gains realized by EU companies as well as capital gains made by a EU company on sale of substantial participations.

Finally, the withholding tax exemption applicable when dividends are paid to a loss-making company that is subject, at the date of distribution, to judicial liquidation or comparable proceedings, would be extended to these withholding taxes and levies on amounts paid to non-EU companies as far as dividend distributions are concerned, and to EU companies only as far as artistic services, some non-wage income, real estate profits, and capital gains on sale of substantial participations.  

Measures addressing hybrid mismatches: implementation of ATAD 2

ATAD 2 (Directive 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 (ATAD 1) as regards hybrid mismatches with third countries) which must be transposed into national law before the 31 December 2019 for application as from 1 January 2020, would be implemented into French national law.

The French government also decided to implement Article 9a of the EU Directive on reverse-hybrid mismatches that must be implemented in national law before 31 December 2021. However, it would only be applicable to financial years opened as from 1 January 2022. 

ATAD 2 completes ATAD 1 since the latter’s scope is limited to hybrid mismatches resulting from interactions only between EU Member States’ tax regimes. ATAD 2 aims at introducing a new set of rules broadening the measures initiated by ATAD 1 to address hybrid mismatches, especially when they result from an interaction between the tax regimes of an EU Member State and a third country. 

Tax residency of large companies’ business leaders

Under domestic rules, business leaders of companies that have their registered seat in France and realize in France revenues exceeding €1 billion (calculated at consolidated group level) would be deemed to principally exercise their professional occupation in France and, consequently, would be deemed to be domiciled in France.

This would concern officers of the company holding the following positions:

  • Chairman of the board of directors
  • Chief executive officer (CEO)
  • Deputy CEO
  • Chairman of the supervisory board
  • President and members of the management board
  • Managers and other officers with similar functions

This measure would apply as of the 2019 income tax year, but would remain subject to applicable income tax treaty provisions.

Other measures

Some other provisions are included in the finance bill, including measures concerning:

  • Research and development (R&D) tax credit:
    • Under current rules, an estimate of general and administrative expenses is taken into consideration to determine the R&D tax credit basis, equal to 50% of all R&D staff expenses. The proposed modification would reduce this lump sum from 50% to 43% and would apply to expenses incurred on or after January 1, 2020.
    • Entities benefiting from an R&D tax credit over €2 million (previously €100 million) would have to provide in their yearly tax credit return rather detailed information on their R&D human and material resources so as to better gauge the efficiency of the tax credit.
  • Implementation of the EU VAT Directive 2018/1910 of 4 December 2018 as regards the harmonization and simplification of certain rules in the VAT system for the taxation of trade between EU Member States (known as the “quick fix”)
  • Implementation of the EU VAT Directive 2017/2455 of 5 December as regards certain VAT obligations for supplies of services and distance sales of goods (e-commerce)
  • Allow a possibility, for the French tax administration, to collect and use data made public by individuals on their social networks or on any digital interface
  • Publication of a "black list” of non-collaborative platforms on the French tax administration’s website

 

For more information, contact a tax professional with KPMG Avocats in France:

Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 | mhoo@kpmgavocats.fr

Patrick Seroin | + 33 (0) 1 55 68 48 02 | patrickseroin1@kpmgavocats.fr

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