France: Corporate tax measures enacted for 2019 - KPMG Global
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France: Corporate tax measures enacted for 2019

France: Corporate tax measures enacted for 2019

The corporate tax measures in the Finance Law for 2019 (ref 2018-1317 of 28 December 2018 and promulgated on 30 December 2018) generally have an effective date of 1 January 2019 (or are effective as from financial years (FYs) opened as from 1 January 2019).

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Among the developments affecting multinational companies (and subject to clarifications expected from the French tax authorities) are the following items.

Tax consolidation regime

The Finance Law for 2019 introduced the following changes to the tax consolidation regime in an effort to provide that the French regime complies with EU regulations (and thus to avoid potentially new EU litigation):

  • Capital gains realized on the sale of qualifying participations between tax consolidated companies are immediately taxable at a rate of 12% of the capital gains amount during the financial year of the sale (thus and are no longer temporarily “neutralized”).
  • Subsidies and debt waivers between tax consolidated companies are no longer “neutralized” in computing the tax consolidated group result.
  • In order to mitigate the consequences of Brexit on tax consolidation and to address instances when Brexit could potentially close or end certain affected French tax consolidated groups, the French tax groups will be maintained until the end of the financial year during which the withdrawal of the UK (or any EU Member State) occurs, when such withdrawal (indirectly) affects the conditions for French companies to be part of a French tax consolidated group.

Dividend distributions

There is certain relief from the effects of the corporate income tax treatment of dividends distributed to a French parent company as follows:

  • Dividends distributed between French tax consolidated entities will now be 99% exempt from French corporate income tax, regardless of whether such dividend distributions are eligible (or not) under the parent-subsidiary regime.
  • Dividends distributed by an EU or European Economic Area (EEA) resident entity that could be part of a French tax consolidated group for more than one fiscal year if it were subject to corporate income tax in France will also be 99% exempt from French corporate income tax, even if the French beneficiary company is not a member of a tax consolidated group (unless this is a result of a failure to make an election for the French tax consolidation regime at a time when that election was technically possible).

Substantial changes to rules governing the limitations of interest deductibility

The Finance Law for 2019 implements Article 4 of the EU Anti-Tax Avoidance Directive (ATAD 1) in connection with the deduction of financial expenses, and thus aims at simplifying the existing financial expenses deduction restrictions under French law.

The new set of limitation rules replaces the general 25% interest-capping mechanism and the existing thin capitalization rules (both having been repealed):

  • The tax deductibility of financial expenses is now capped at the greater of €3 million or 30% of the company’s adjusted “tax EBITDA” (i.e., tax result subject to standard corporate income tax rate before interest, tax, depreciation and amortization expenses and offset of tax losses)
  • If the debt:equity ratio of the company exceeds 1.5, the amount of the deductible financial expenses incurred in connection with:
    • Related-party debts is reduced to €1 million or 10% of the adjusted “tax EBITDA,” whichever is greater. This test applies to the portion of interest deemed to be derived from related-party debts (calculated on the basis of a specific ratio).
    • Unrelated-party debt is capped to €3 million or 30% of the adjusted “tax EBITDA,” whichever is greater. Similarly, this test applies to the portion of interest deemed to be derived from external debts.
  • Safe harbor provision—If 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 (worldwide) consolidated group to which it belongs, then it can deduct up to 75% of the financial charges not deductible under application of the 30% adjusted "tax EBITDA" mechanism (specific computation rules apply).
  • There is a possibility, under certain conditions, to carry forward indefinitely the non-deductible portion of the financial expenses and the unused “tax EBITDA” capacity.
  • All of these measures are applicable at the level of the company subject to corporate tax on a stand-alone basis, or at the tax consolidated group level when the company is part of a tax consolidated group.
  • The “Carrez Amendment” (Article 209 IX of the French tax law) that limits the deductibility of financial expenses incurred in connection with the acquisition of certain participations, has been repealed.

The other existing financial expenses deduction restriction rules remain unchanged, such as:

  • The rules relating to the maximum tax deductible interest rate applicable to interest paid to direct shareholders—for financial years closed on 31 December 2018, the interest rate released by the French tax authorities is 1.47% (keeping in mind that a higher arm’s length rate may be applied under conditions)
  • The non-deductibility of interest paid abroad if the beneficiary of the interest income is not subject in its country of residence to tax at a rate that is at least equal to 25% of the French standard corporate income tax rate (a reform of this mechanism is expected on implementation into French law of the “ATAD 2” provisions related to hybrid instruments by 1 January 2020)
  • The “Charasse Amendment” restricts the deductibility of financial expenses incurred by a French tax consolidated group in situations involving the acquisition from a related entity of shares in a company joining the same tax consolidation group as the acquiring company

Enhanced patent box regime

The French patent box regime has been brought in compliance with the OECD and EU “nexus” approach derived from Action 5 of the OECD’s base erosion and profit shifting (BEPS) project. As a consequence, this optional regime now only applies to the proceeds from the licensing or the sale of patents or assimilated eligible industrial property rights (“IP rights”) if the research and development (R&D) operations leading to the development of such IP rights have been conducted in France by the taxpayer (or tax consolidation group) or have been subcontracted to unrelated entities.

  • The new French patent box regime provides for a 10% reduced corporate income tax rate (instead of a 15% tax rate until 31 December 2018) and is now applicable to software protected by copyrights and, subject to certain conditions, to patentable inventions that have not yet been patented (for small and medium size enterprises (SMEs) only).
  • The taxable basis corresponds to the net result derived from the licensing (or sublicensing or sale) of qualifying IP rights—i.e., the difference between the income generated by the IP rights and the R&D expenses related to them. A “nexus” ratio is then applied on the (positive) net result.
  • This “nexus” ratio corresponds to: (1) the eligible R&D expenses directly connected with the creation and development of the concerned IP rights and either incurred by the taxpayer (or tax consolidation group) in France or subcontracted to unrelated parties divided by (2) the expenses under (1) above, plus the eligible R&D expenses subcontracted to related entities and acquisition costs.
  • The eligible expenses under (1) above are taken into account, for the determination of the numerator of the “nexus ratio,” for 130% of their amount. (The ratio cannot exceed 100%).
  • All eligible expenses must be considered on a cumulative basis for each asset, product or product category. In application of a transitional phase-in mechanism, taxpayers (or tax consolidation groups) are authorized, for the FYs opened in 2019 and 2020, to compute the “nexus” ratio at the level of the company (that is, without performing a follow-up per asset or asset category) for the concerned FY and the past two FYs. For FYs closed as from 2021, all eligible expenses will have to be considered per asset, product or category of products, for the concerned FY and all previous FYs opened as from 2019.
  • Under specific conditions, an alternative ratio can be requested from the French tax authorities, under a strict ruling process.
  • This favorable regime is optional, and the election for this regime has to be formulated for each IP right (or group of IP rights if the French company or group can demonstrate that it is unable to monitor individually the specific IP rights because, for example, the R&D expenses are related to several IP rights).
  • Detailed information on the computation of the taxable basis will need to be attached to the annual corporate income tax return of the French company, and supporting documentation will have to be prepared and available upon request by the French tax authorities.

Limitation of royalties paid to related entities benefiting from a harmful tax regime

Similarly (although not identically) to the German mechanism adopted as from 1 January 2018, France has now introduced a limitation of the deductibility of royalties paid to a related ultimate beneficiary that is not a resident of an EU or an EEA country and which benefits from a local tax regime listed as harmful by the OECD and offering a local effective tax rate below 25%.

The non-deductible portion of the royalties is computed with a ratio equal to this formula:  (25% less the effective tax rate) divided by 25%.

Introduction of general anti-abuse clause for corporate income tax purposes

A general anti-abuse regulation (GAAR) is introduced into French law in line with the ATAD 1. According to this provision, an arrangement or series of arrangements that were implemented in order to obtain (either as the main objective or as one of its main objectives) a tax advantage that is “not genuine” after taking into account all pertinent facts and circumstances are to be disregarded when computing the corporate tax basis of a French taxpayer.

The finding that an arrangement or several arrangements are “not genuine” will be based ultimately on whether such arrangement or series of arrangements were put into place for valid commercial reasons that reflect their underlying economic reality.

Ultimate corporate income tax installment of companies with revenue exceeding €250 million

For financial years opened as from 1 January 2019, the ultimate or last corporate income tax installment due by the companies with revenue exceeding €250 million will have to be paid up to an amount totaling (when taking into account the other corporate income tax installments already paid for the said financial year): 

  • 95% (instead of 80% currently) of the estimated corporate income tax charge of the subject financial year for companies with revenue between €250 million and €1 billion
  • 98% (instead of 90% currently) of the estimated corporate income tax charge of the subject financial year for companies with revenue exceeding €1 billion

Implementation of the EU Directive 2017/1852—settlement of tax disputes within the EU

The Finance Law for 2019 transposes into French law the EU directive regarding the settlement of tax disputes between EU Member States resulting from the application of international tax treaties.

A relief mechanism is provided according to which consultative commissions could issue (non-binding) 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 enacted last year, are scheduled to be fully effective beginning in 2019, although the French corporate income tax rate for 2019 is likely to remain at the level of the 2018 rate (34.43% including the 3.3% surtax) for multinationals. These measures include:

Reduction of the standard corporate income tax rate

The French standard corporate income tax rate is progressively reduced to:

  • 31% for financial years opened as from 1 January 2019 with the first €500,000 of tax result being subject to a 28% rate. (However, it has been reported that the French government intends to restrict the 31% rate to companies whose turnover does not exceed €250 million. The bill is expected to be released on 6 March 2019. It is also expected to provide for a French digital service tax.)
  • 28% for financial years opened as from 1 January 2020
  • 26.5% for financial years opened as from 1 January 2021
  • 25% for financial years opened as from 1 January 2022. 

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 revised corporate income tax rates reflecting the surtax are:

  • 31.00% => 32.02%
  • 28.00% => 28.92%
  • 26.50% => 27.37%
  • 25.00% => 25.83%

Competitiveness and employment tax credit (CICE)

The CICE (crédit d’impôt pour la compétivité et l’emploi) is a (refundable) tax credit based on wages paid by companies that did not exceed 2.5 times the minimum wage (so-called SMIC). For calendar year 2018, it amounted to 6% of the subject salaries.

Since 1 January 2019, the CICE is replaced by a permanent 6% employer social security contributions reduction applicable to the same eligible salaries.

 

For more information, contact a tax professional with the KPMG member firm in France (KPMG Avocats):

Mustapha Oussedrat | + 33 (0) 1 55 68 48 01 | moussedrat@kpmgavocats.fr

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

Sophie Fournier-Dedoyard | + 33 (0) 1 55 68 48 24 | sfournier-dedoyard@kpmgavocats.fr

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