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France: Draft budget for 2019 unveiled, includes tax proposals

France, tax proposals for 2019

The French government this week unveiled the draft budget for 2019 that contains tax provisions of the draft Finance Bill for 2019 that would affect companies and individual taxpayers.

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Tax proposals affecting companies

Reform of the regime of tax groups

Reform of the tax group regime would apply with respect to financial years opened as from 1 January 2019 and would to conform the French regime with EU regulations (and thus avoid new EU litigation). The proposal would make certain changes of a technical nature including:

  • Subsidies and forgiveness of debts between companies that are members of the same tax group would no longer be “neutralized” in computing the taxable result of the group. Indirect subsidies resulting from the delivery of goods (other than fixed assets) and of services for a price below market value would remain neutralized to the extent, however, that the price equals at least the cost price of the goods or services.
  • In calculating the aggregated result of the group, the taxable portion of capital gains on sales of qualifying shares within the group would no longer be neutralized. Conversely, such taxable portion would be reduced from 12% of the gain to 5% of such gains for all companies.
  • The tax treatment of dividend distributions within a group not benefitting from the participation exemption would be aligned to the tax treatment that applies to similar distributions benefitting from this regime (i.e., a 99% exemption).
  • The tax rules applicable to intragroup distributions would be extended, under certain conditions, to apply in situations when a French company (whether a member of a group or not) receives dividends from companies established in another EU Member State and that could have been a member of the same tax group of the French beneficiary company, had the other dividend-distributing companies been established in France.

 

Reform of regulations regarding the deductibility of financial charges for companies subject to corporate tax

The proposal to reform the rules concerning the deductibility of financial changes for companies subject to corporate tax—proposed to apply to financial years opened as from 1 January 2019—would implement certain provisions of the EU Anti-Tax Avoidance Directive (ATAD 1) and would aim to simplify the existing regulations, as follows:

  • A mechanism limiting the deductibility of financial charges to the greater of €3 million or 30% of a company’s adjusted EBITDA (earnings before interest, tax, depreciation and amortization) would replace: (1) the former capping of such net expenses to €3 million or 75% of the financial charges (referred to as a “general 25% haircut”); and (2) the application of the thin capitalization rules (both repealed).
  • If the debt/equity ratio of the company exceeds 1.5, the amount of the deductible financial charges would be reduced to €1 million or 10% of the adjusted EBITDA, whichever is greater.
  • If, however, the company can demonstrate that the ratio between its net equity and its assets is at least equal to a similar ratio computed at the level of the accounting consolidated group to which it belongs, then it could deduct up to 75% of the financial charges not deductible under application of the 30% adjusted EBITDA mechanism.
  • A proposal would allow a possibility to carry forward indefinitely the non-deductible portion of the financial charges and to carry forward, but only over the next five years, the unused EBITDA capacity.
  • All of these measures would be applicable at the level of the company subject to corporate tax on a stand-alone basis, or directly at the tax group level when the company is part of a group.
  • The “Carrez amendment” (article 209 IX of the French tax law) that limits the deductibility of financial charges incurred for the acquisition of shares when acquiring company (or another company in the same group established in France or another EU Member States) does not have decision-making authority relating to such shares would be repealed.

Certain other rules would remain unchanged—for instance, the rules relating to the maximum rate for interest paid to related parties; to the non-deductibility of interest paid abroad if the beneficiary is not subject in its country of residence to tax at a rate that is at least equal to 25% of the French corporate income tax, or to the “Charasse amendment” (that restricts the deductibility of financial charges relating to the acquisition from a related entity of shares in a company joining the same tax consolidation group as the acquiring company).

 

Modification of patent box regime

The proposed modification of the French patent box regime would aim to align the French regime with the OECD “nexus” approach. This taxpayer-favorable regime would only apply to the proceeds of exploitation of or sale of patents (or assimilated intangibles) if the research and development (R&D) operations leading to the development of such eligible assets have been conducted in France.

Also, the reduced corporate tax rate of 15% would apply only to the net result of the licensing of intangible assets (patents, original software, and industrial know-how).

The specific regime would be extended to software protected by copyrights. However, patent-able inventions that have not yet been patented would be excluded from the patent box regime.

Such a patent box regime would be optional.

 

Introduction of general anti-abuse clause for corporate tax purposes

Under this anti-abuse provision, the determination of the corporate tax basis would not take into account an arrangement or series of arrangements which were implemented in order to obtain (either as a main objective or as one of the main objectives) a tax advantage that is “not genuine” after taking into account all pertinent facts and circumstances. Such an arrangement could include several steps or parts. Under this proposal, the finding that an arrangement or several arrangements are “not genuine” would be based ultimately on whether the steps were put into place for valid commercial reasons that reflect the economic reality.

 

Modification corporate income tax installment payments by large companies

For the financial years opened between 1 January 2019 and 31 December 2019, the last installment due by “large companies” would have to cover the difference between:     

  • 95% (instead of 80% currently) for companies with revenues between €250 million and €1 billion, and 98% (instead of 90% currently, for companies with revenues between €1 and €5 billion) for companies with revenue above €1 billion of the expected amount of the corporate tax due for that financial year, and      
  • The amounts of installments already paid

 

Implementation of the EU directive, settlement of tax disputes within EU

The draft Finance Bill includes an article that would transpose into French law an EU Directive regarding the settlement of tax disputes within the EU in instances when double taxation arises as a consequence of the application of income tax treaties between EU Member States. The proposal aims to provide for a relief mechanism—the creation of consultative commissions that could issue arbitration decisions—that would apply when discussions between tax administrations fail to resolve the double taxation issue. The tax authorities of the countries involved could decide not to follow the commission’s arbitration decision only to the extent that they reach an agreement to settle the issue. The taxpayer then would have to be “notified” of the final decision, at which point, the taxpayer could decide not accept it, in which instance, the procedure would be closed.

 

Other measures 

Certain other measures, already passed last year, are scheduled to be fully effective beginning in 2019—these include the progressive reduction of the corporate income tax rate and the transformation of the CICE (a tax credit on compensation paid to the lowest wage earners) into a reduction of social charges.

Tax proposals affecting individual taxpayers

Modification of the “exit tax” regime

The existing provision referred to as the “exit tax” allows France to impose tax on the unrealized capital gains on shares and certain financial instruments owned by individual taxpayers who leave France if afterwards the individuals sell the shares or financial instruments before the end of a time period currently set at 15 years. Under the proposal, the time period during which the exit tax could apply would be reduced to two years.

Furthermore, taxpayers with such unrealized gains would no longer be required to provide the French tax authorities with financial guarantees if they leave France for another EU Member State, for a Member State of the European Economic Area, or for a state or territory with which France has concluded a tax treaty that includes an administrative assistance clause regarding the recovery of taxes.

These modifications would apply to individuals transferring their fiscal domicile outside France as from 1 January 2019. The current regime would still apply to individuals having left France before 2019.

 

Miscellaneous

Other proposals affecting individual taxpayers include the:

  • Introduction of a “PAYE” system for individuals, as of 1 January 2019—individuals now subject to a monthly withholding on their various types of income would receive in January, an amount equal to 60% of certain of their tax credits relating to the past year (as the rate of the monthly withholding is based on the gross, i.e. before tax credits, tax due on the previous year).
  • Repeal of the dwelling (or inhabitation) tax—the tax would be progressively phased out for about 80% of taxpayers.

 

 

For more information, contact a tax professional with Fidal* in France or with the KPMG member firm in France:  

Olivier Ferrari | +33 1 55 68 14 76 | olivier.ferrari@fidal.com

Gilles Galinier-Warrain | +33 1 55 68 16 54 | gilles.galinier-warrain@fidal.com

Laurent Leclercq | +33 1 55 68 16 42 | laurent.leclercq@fidal.com

Bruno Bacrot | +33 1 47 38 89 96 | bruno.bacrot@fidal.com

Patrick Seroin | + 33 (0) 1 5568 4802 | patrickseroin1@kpmgavocats.fr 

 

* Fidal is a French law firm that is independent from KPMG and its member firms.

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