France: Tax measures in Finance Law for 2021
France: Tax measures in Finance Law for 2021
The French Parliament on 17 December 2020 approved the Finance Law for 2021. With completion of this legislative process, the next step toward enactment is for the French Constitutional Court to declare that the legislation’s content conforms to the Constitution. A decision of the French Constitutional Court is anticipated before 31 December 2020.
Overview of tax provisions
The Finance Law for 2021 includes an expected decrease in production taxes, as well as the following tax measures intended to support French businesses in response to the coronavirus (COVID-19) pandemic:
- Improving taxpayer equity by providing temporary “tax neutral” regime for revaluations of assets (if an election is made); the taxation of capital gains realized on real estate assets in sale and leaseback transactions also would temporarily and on election, be postponed and spread over the length of the leaseback contract
- Providing a tax incentive to lessors that waived their receipt of rents on “professional premises” during the second lockdown period
- Adopting preventive measures for the “most fragile” companies
Regarding the research and development (R&D) tax credit, outsourced expenditures would be harmonized.
Value added tax (VAT) measures would clarify the rules concerning complex transactions, and postpone the effective date of an EU directive on distance (remote) sales of goods, and introduce a VAT group regime (as from 1 January 2023).
Finally, with regard to nonresident employees, the withholding tax regime that was repealed by the Finance Law for 2020 would be reintroduced.
More details about these provisions are provided below.
Production taxes – significant tax relief in 2021
There would be structural decreases to both the territorial economic contribution (Contribution économique territoriale—CET) and the company’s property tax (Taxe foncière) for 2021, the impact of which would be a decrease of the production taxes by €8.2 billion in total and with the main beneficiaries being entities in the industrial and retail sectors.
Companies engaged in a business in France are subject to CET, which is composed of two different taxes:
- The land contribution for enterprises (Cotisation foncière des entreprises—CFE)
- The contribution on added value of enterprises (Cotisation sur la valeur ajoutée des entreprises—CVAE)
The Finance Law for 2021 also would reflect three essential changes:
- The rate of the CVAE would be halved (the marginal current rate of 1.5% would be reduced to 0.75%).
- The taxable basis of the property tax on built properties of industrial facilities would also be divided by two. As a collateral benefit, the CFE (land contribution for enterprises) would be reduced in the same proportion, since it is assessed on the same tax basis.
- The CET is currently capped at 3% of the added value realized by the taxpayer; this cap would be reduced to 2% with the expectation that this treatment preserves the benefits of the rate and taxable basis reductions (as mentioned immediately above).
Revaluation of assets — temporary corporate “tax neutral” regime election
Tangible and financial assets can be revaluated under the conditions provided by the French commercial code (intangible assets are expressly excluded). In such situations, the difference in valuation is generally subject to immediate taxation at the standard corporate income tax rate.
The Finance Law for 2021 would allow a company that, for the first time, decides to revalue all of its tangible and financial assets (under the conditions of the French commercial code) to elect to defer the corresponding capital gain taxation. This tax deferral election would apply if the following conditions are met:
- The company would have to compute the capital gain or loss realized on the further transfer of non-depreciable fixed assets on the basis of their non-revalued value (i.e., their historical value).
- The company would have to make a book-to-tax adjustment regarding the depreciable fixed assets. The reevaluation surplus related to these assets would be spread over:
- A 15-year period regarding constructions, plantations, and modifications of depreciable lands
- A 5-year period regarding other fixed assets
This measure would be optional and would apply with regard to the first revaluation recorded at the end of a financial year ending between 31 December 2020 and 31 December 2022.
Sale and leaseback of real estate assets — spread of the capital gain
A sale-and-leaseback transaction involving a real estate asset is identified as a transaction when a company sells a real estate asset to a leasing company and then leases the asset back for a long-term lease period. Consequently, the company continues to use the real estate asset but no longer owns it.
Under the legislative measure, capital gains realized from the transfer of a real estate asset in such transactions would be spread into equal parts throughout the duration of the sale-and-leaseback period, for a maximum of 15 years. Only real estate used for commercial and industrial purposes would be eligible for this treatment.
This measure would apply with regard to the sale of real estate assets conducted between 1 January 2021 and 30 June 2023, following a financing agreement accepted by the lessee between 28 September 2020 and 31 December 2022.
In order to support French businesses closed because of the second lockdown (29 October - 15 December 2020), a 50% tax credit would be granted to lessors waiving their lessees’ rents due for the month of November 2020 (under certain conditions to be fulfilled mainly by the lessee).
This tax credit would be equal to:
- 50% of the total amount of the rent waivers if the lessee has a total salaried workforce below 250 employees
- 33 1/3% of the total amount of the rent waivers if the lessee has a total salaried workforce between 250 and 4,999 employees
- No tax credit if the lessee has 5,000 employees or more
In any case, the total amount of tax credits per lessee would be capped at €800,000.
This tax credit would be allowed as an offset against the amount of corporate income tax due in 2020 or 2021, depending on which financial year the rent waiver is granted (it can be granted until 31 December 2021). Any excess would be refundable.
R&D tax credit — harmonization of outsourced expenditures to comply with EU rules
Companies that incur R&D expenses would benefit from a tax credit that could be offset against their corporate income tax liability. The R&D tax credit would be 30% of the expenses regarding R&D operations up to €100 million, and 5% for the excess.
Qualifying expenditures include, inter alia, the depreciation of fixed assets allocated to R&D, staff expenses, and outsourced expenses. Regarding outsourced expenses, the qualifying expenses incurred on R&D activities outsourced to public bodies are multiplied by two to compute the R&D tax credit of the company that ordered the R&D.
Such expenses incurred as from 1 January 2022 would no longer be doubled. Therefore, operations outsourced to public bodies would be treated in the same way as those that are outsourced to third-party private bodies.
Nonresident withholding tax schedule ultimately maintained
Under prior law (the Finance Law for 2019), changes were made to the manner that nonresidents receiving wages, pensions, and life annuities from French source are taxed, and increased the minimum tax rate applicable to the French-source income of nonresidents from 20% to 30%. That law also repealed the specific nonresident withholding tax schedule with its three bands of 0%, 12%, and 20%, and removed the partially final nature of the withholding tax imposed on the lower brackets (0% and 12%) of income from 2020.
The Finance Law for 2020 then postponed the removal of the partially final nature of the withholding tax that was to apply to income received from 1 January 2021. Further, the specific nonresident withholding tax system with its three rates (0%, 12%, and 20%) was maintained until 1 January 2023. Wages, pensions, and life annuities received as from 2023 were then to fall under the withholding tax system (Prélèvement à la Source—PAS) introduced in 2019 and applicable to resident taxpayers.
The new legislation—the Finance Law for 2021—would reintroduce the withholding tax imposed on French-sourced wages and salaries received by non-resident taxpayers. The specific nonresident withholding tax schedule with its three brackets of 0%, 12%, and 20% (as well as the partially final nature of the withholding tax levied on the lower bands) would ultimately remain in place.
For more information, contact a tax professional with KPMG Avocats in France:
Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 | firstname.lastname@example.org
Patrick Seroin Joly | + 33 (0) 1 55 68 48 02 | email@example.com
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