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France: Corporate tax provisions enacted in Finance Law for 2020

France: Corporate tax provisions in 2020 Finance Law

The French Parliament in December 2019 approved the Finance Law for 2020 (no. 2019-1479), and among the legislation’s tax measures are certain technical changes aiming at intensifying the efforts to address tax fraud and tax evasion.

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The following discussion provides an overview of certain corporate tax provisions included in the Finance Law for 2020—in particular, measures that may affect foreign taxpayers and their business operations in France.

Delayed implementation of reduced corporate income tax rate for large companies

The French Minister of Finance had earlier announced that the planned phased-in reduction of the corporate income tax rate (as previously enacted) would continue in 2020 and ultimately would be reduced to 25% in 2022 (in accordance with the schedule set by the 2018 Finance Law).

However, increased budget spending forced the government and French lawmakers to delay the scheduled decrease of the corporate income tax rate for large corporate taxpayers. As a consequence, the Finance Law for 2020 modifies the rate reduction for “large companies” (those with revenue equal to or greater than €250 million, with this threshold of revenue being determined at the level of a tax consolidation group, when appropriate).

  • For these large taxpayers, the standard corporate income tax rate is 31% for fiscal years starting on or after 1 January 2020, while a corporate income tax rate of 28% continues to be imposed on the first €500,000 of taxable profit (already effective for fiscal years opened on or after 1 January 2019).

KPMG observation
As a reminder, the applicable rate of corporate income tax continues to be 33⅓% for fiscal years opened on or after 1 January 2019. Read TaxNewsFlash. The transition to 31% as from fiscal year 2020 is the first corporate income tax rate decrease on the entire profit of large companies in more than 20 years.

  • For fiscal years starting on or after 1 January 2021, a corporate income tax rate of 27.5% is to apply for large companies on their entire taxable profit (instead of the previously enacted corporate income tax rate of 26.5%).
  • For companies and tax-consolidated groups with a revenue below €250 million, the previously proposed corporate income tax rates (pursuant to the Finance Law for 2018) remain unchanged:
    • 28% for fiscal years starting on or after 1 January 2020
    • 26.5% for fiscal years starting on or after 1 January 2021

The chart below presents the applicable rates for fiscal year (FY) 2019 to FY 2022 (and beyond):

FY opened from Profit range Corporate income tax rate
1 January 2019 €0 – 500,000 28%
Over €500,000 Revenue < €250 million 31%
Revenue ≥ €250 million 33⅓%
 
1 January 2020 All Revenue < €250 million 28%
€0 – €500,000 Revenue ≥ €250 million 28%*
Over €500,000 31%*
 
1 January 2021 All Revenue < €250 million 26.5%
Revenue ≥ €250 million 27.5%*
 
1 January 2022 All 25%


*Modifications resulting from the adoption of the Finance Law for 2020

 

The 3.3% surtax computed on the standard corporate income tax charge (after deduction of a lump-sum amount of €763,000) remains unaffected by the new law. Accordingly, the maximum aggregated corporate income tax rates—including the surtax—are:

  • 33⅓% => 34.42%
  • 31% => 32.02%
  • 28% => 28.92%
  • 27.5% => 28.41%
  • 26.5% => 27.37%
  • 25% => 25.83%

The 2020 Finance Law also clarifies that the rate of certain levies or withholding taxes (i.e., withholding tax on dividends; amounts paid in return for artistic services; certain non-wage income; and real estate profits and capital gains realized by EU companies as well as capital gains of a EU company from the sale of substantial participations) corresponds to the corporate income tax rate applicable to companies with revenues below €250 million.

The rates of these levies or withholding taxes are as follows:

  • 2019—31% (for all companies regardless the amount of their revenue) but 30% for the withholding tax on dividends
  • 2020—28% for all levies and withholding taxes
  • 2021—26.5% for all levies and withholding taxes
  • 2022—25% for all levies and withholding taxes

French withholding tax on certain income, compliance with EU law; opportunities for non-resident companies in “tax loss” position

Provisions of the 2020 Finance Law reflect a judgment of the Court of Justice of the European Union in the Sofina SA case (case C-575/17, 22 November 2018). In that case, the CJEU addressed the French law relating to domestic withholding tax paid by a non-resident company in a tax loss position, and specifically a company that did not benefit from the EU parent-subsidiary regime. Under French law (as then in effect), a French resident in a tax loss position had a cash advantage (the nonpayment of the withholding taxes or an exemption in the event of termination of the activity before the taxpayer returned to profitability), whereas non-resident companies were taxed immediately and definitively, regardless of their resulting profit or loss. The CJEU held that the rule under French law providing this advantage to French domestic taxpayers was contrary to the freedom of movement of capital. Read a KPMG report about the CJEU judgment.

The 2020 Finance Law addresses this finding by the CJEU and includes measures allowing foreign companies in a tax loss position to benefit from a temporary refund of the amounts of tax levied and the taxes withheld on distributed income, artistic non-wages income, current real estate profits, non-current real estate profits, and capital gains realized on the sale of qualifying participations. The benefit of this temporary refund mechanism ends, however, if and when the company returns to profitability or if the relevant annual tax compliance requirements are not fulfilled. The refund, nevertheless, becomes definitive (fixed) if the foreign beneficiary company is in a tax loss position and is subject to a judicial liquidation or equivalent procedure.

This temporary refund mechanism applies in the following situations:

  • Dividend distributions benefiting foreign entities located in a jurisdiction that has concluded with France an income tax treaty containing provisions: (1) to address and prevent fraud and tax evasion, and (2) a mutual assistance clause for tax collection (having a similar scope as the EU Directive 2010/24/UE) and that cannot be considered to be non-cooperative within the meaning of Article 238-0 A of the French tax law.
  • Other revenue and levies benefiting foreign entities located in an EU Member State or in a country that is part of the European Economic Area (EEA) that are not considered to be non-cooperative jurisdictions within the meaning of Article 238-0 A and that have concluded with France an income tax treaty containing: (1) an administrative assistance clause for the prevention of fraud and tax evasion; and (2) a mutual assistance clause for tax collection that has a similar scope as the EU directive.

KPMG observation
While this legislative change concerns dividends and other cross-border payments, it appears that there could be an opportunity to file a claim for refund of unduly paid withholding tax on prior years’ dividend distributions (subject to the statute of limitation).

Adjustment of basis, “branch remittance tax” paid on deemed distributions made to non-resident companies

The Conseil d’Etat (the French administrative supreme court) in July 2019 held that the method of calculating the basis for withholding tax on deemed distributions made to companies that are residents in an EU Member State, when profits were generated in France through the use of a permanent establishment (“branch remittance tax”) was contrary to the freedom of establishment. Under the then effective French tax rules, there was an irrefutable presumption that French-source profits made through a French permanent establishment were deemed distributed to the non-resident shareholders (Conseil d’Etat, 10 July 2019 n°412581, Société Cofinimmo).

As a rule, the branch remittance tax does not apply when the non-resident company has its place of effective management in an EU Member State (a country where it is subject to corporate income tax without any possibility of being exempted from tax or any option to be exempted from tax). The 2020 Finance Law extends this exemption.

Hence, companies located in an EU Member State where they are subject to corporate income tax without any possibility or option of being exempted from tax can also be relieved from the branch remittance tax—the sole criterion being the location of the non-resident company, without the need to prove that the location or seat of effective management is in an EU Member State.

Companies that are not within the scope of the exemption (EU companies that are not liable to or that are exempted from corporate income tax) typically would pay the branch remittance tax.

Refund opportunities are available under the changes made by the 2020 Finance Law if:

  • The sums on which the branch remittance tax was based ultimately exceed the amount of the distributions actually performed.
  • The company can prove that the beneficiaries of these distributions have their tax residence or registered office in France and that the amounts corresponding to the withholding tax have been transferred to them.
  • The company can demonstrate that the profits have not been divested out of France.

This measure is effective for fiscal years starting on or after 1 January 2020.

Measures addressing hybrid mismatches; implementation of ATAD 2

Until now, French domestic law only addressed hybrid mismatches in financing transactions through the requirement for a minimum taxation of the related lender, codified under Article 212. I, b of the French tax law. Interest accrued by a French borrower had to be subject to tax at the level of the lender, for a minimum taxation of 25% of the French corporate income tax that would have been due had the lender been established in France.

The 2020 Finance Law repeals this minimum taxation provision as a consequence of implementation and transposition of the EU Anti-Tax Avoidance Directive (ATAD) that provides measures to neutralize the effects of hybrid mismatches according to the methodology recommended by Action 2 of the base erosion and profit shifting (BEPS) project (EU Directive 2017/952 dated 29 May 2017 “ATAD 2”, amending the EU Directive  2016/1164, “ATAD 1”).

These directives (ATAD 1 and ATAD 2) define a series of hybrid mismatches and impose rules to resolve mismatches related to a difference in the tax treatment of the same revenue flow or same entity in an international context and leading to a deduction without the inclusion in income or providing a double deduction.

The 2020 Finance Law focuses on different situations when there are deductions without inclusion and double deductions, not only between or among EU Member States, but also in situations involving third countries. Depending on the nature of the hybrid arrangement, a provision of the Finance Law 2020 denies the deduction or requires the inclusion of the taxable profit at the French level. The new rules follow the implementation dates suggested by ATAD 1 and ATAD 2—beginning from 1 January 2020 for hybrids and beginning from 1 January 2022 for reverse hybrids.

“Naming and shaming” non-cooperative online platforms

The 2020 Finance Law introduces a new “naming and shaming” provision that requires publication, on the French tax administration’s website, of the identity of non-cooperative online platforms. These are defined as platform operators that repeatedly failed to comply with their French tax requirements. To be subject to the “naming and shaming” listing, a platform is given two chances—first, it must fail to comply with certain requirements and then this failure is followed by another default within 12 months.

The measures are effective 1 January 2020.

Tax residency of executives of large companies

The 2020 Finance Law broadens the definition of tax residence under the French domestic rules. Certain executives of companies that have their registered office in France and that have revenues exceed €250 million in France (calculated at the tax consolidated group level) are principally deemed to exercise their professional occupations in France and, consequently, to have their tax residence in France. Nevertheless, this presumption can be rebutted based on facts and circumstances.

This measure applies as from the 2019 income tax year (as of 1 January 2020 in respect of inheritance and gift taxes, as well as wealth tax on real estate) but remains subject to applicable income tax treaty provisions.

Research and development (R&D) tax credit

The French R&D tax credit—viewed as being one of the most advantageous R&D tax credit regimes globally—is equal to 30% of eligible expenses up to €100 million and 5% above that threshold. The main component of the R&D tax credit base often corresponds to the salary and wage costs of qualified R&D personnel. Under the prior rules, the R&D tax credit basis was increased by general and administrative expenses as set by law at 50% of eligible R&D personnel costs. The 2020 Finance Law reduces this tax credit “booster” from 50% to 43%.

The 2020 Finance Law also returns the threshold for R&D reporting requirements to €100 million (the threshold for R&D reporting had been reduced to €2 million by the Finance Law for 2019, and this change to the reporting requirement de facto did not apply). However, companies incurring R&D expenses between €10 million and €100 million are required to attach to their R&D tax credit return a statement specifying the proportion of individuals holding advance degrees (PhD holders) financed by these expenses or recruited on that basis; the corresponding number of full-time equivalents; and their average remuneration.

To address certain perceived abuses of the R&D tax credit, the 2020 Finance Law includes specific provisions regarding the subcontracting of research operations. Operations entrusted to subcontracting companies (either public subcontractors referred to in Article 244 quater B, II-d of the French tax law or private subcontractors referred to in Article 244 quater B, II-d bis) must be carried out directly by these companies, and if they fail to satisfy these measures, they will not qualify for the R&D tax credit. However, subcontractors can entrust these operations to companies that have themselves the status of subcontractors pursuant to the R&D tax credit criteria.

Moreover, in subcontracting to one of these public research companies (referenced above), the principal may benefit from the legally provided inclusion of the outsourced expenses (the rules allowing double the amount) only for the part relating to operations conducted by the research companies themselves, excluding expenses relating to operations subcontracted by the public companies themselves.

These measures are effective with regard to expenses incurred from 1 January 2020.


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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