French Budget Would Cut Corporate Rates, Lure U.K. Investors

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By Rick Mitchell

France’s new draft budget for 2018, the first of President Emanuel Macron’s five-year term, makes good on his campaign vows to cut taxes for companies and households.

The draft budget issued Sept. 27 proposes more than 10 billion euros ($11.73 billion) in tax cuts for 2018, to increase consumers’ “buying power” and “free the capacity of French businesses to invest and grow.” It includes measures aimed at attracting foreign investment, such as a corporate tax cuts and reductions in labor taxes, and it reforms the wealth tax, often cited as a reason for investor flight from the country.

It includes Brexit-inspired measures to lure London-based French entrepreneurs—and financial and insurance companies and their managers—to Paris, practitioners said. “It’s a very political, very positive budget and it mostly corresponds to what Macron promised. Now, we have to see if he maintains these strong signals through his five-year term,” Gaelle Menu-Lejeune, a partner at Paris-based law firm Fidal, told Bloomberg BNA.

Laurence Clot, a Paris-based partner at Bird & Bird LLP, told Bloomberg BNA the draft includes “interesting measures for investors and entrepreneurs. But there are a lot of points, a lot of details, that still need to be clarified.”

Corporate Cut

The draft continues a plan introduced last year under the Hollande government to gradually cut the standard corporate tax rate from the current 33.33 percent rate to about 28 percent by 2020, but proposes going further to take the rate down to around the EU average of 25 percent by 2022. “This is a simple and clear measure from an international standpoint. It will strengthen the competitiveness of our economy by benefiting investments by national and foreign companies, and it will encourage savers to invest in French companies,” the government said in its presentation document.

For Clot, 2022 is a long wait for the 25 percent rate. “We’re happy, but that’s the end of Macron’s term. We just hope he doesn’t change course before that.”

The draft budget eliminates, as of Jan. 1, 2018, the Hollande government’s controversial 3 percent tax on dividends, imposed in 2012, but which which the European Court of Justice in May ruled violates EU law.

Menu-Lejenue noted that companies are still technically on the hook for the 3 percent dividend tax for years prior to its elimination on Jan. 1. However, France’s Constitutional Council could change that with an Oct. 6 ruling on whether the tax violates the country’s constitution, she said.

“Reducing Cost of Labor”

The text confirms Macron’s plan to replace the 20 billion euro ($23.48 billion) tax credit for employment and competitiveness, or CICE, that the Hollande government introduced in 2012 with a direct reduction in social welfare tax, starting in 2019. For 2018, the CICE rate will be reduced from 7 percent, down to 6 percent.

Menu-Lejenue said the new reduction will be simpler than the CICE and is generally a positive change. Clot said companies’ labor charges are very high in France, so “the CICE was really good news and we hoped it would be long-term. Now, we hope the new regime will reduce labor charges to the same degree, and that it’s long-term.”

Luring Foreign Investment

The draft includes several measures aimed at luring foreign investment and entrepreneurs. It targets financial institutions, insurers, and some holding companies, and their highly paid staff, the practitioners said. First, it would eliminate a 20 percent bracket for labor taxes that these employers pay on management salaries in sectors that are not subject to value-added tax.

The employer-paid tax applies to managerial-class salaries above 152,000 euros ($178,610) per year. For individuals, it reforms the wealth tax to apply only to real estate assets, and no longer to capital revenues.

Instead, capital revenues from securities, savings, capital gains and other sources would be subject to a 30 percent flat tax. Clot said many details remain to be worked out about how the flat tax, and real estate wealth tax, will work. “But this is clearly aimed at getting talent to either stay in France, or to return. These are the people that invest, that make an economy live.”

“When Brexit happens, companies and individuals in London will lose certain EU benefits. This budget shows that France is an attractive country to invest,” said Menu-Lejeune.

To contact the reporter on this story: Rick Mitchell in Paris at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

For more information: The Ministry of Economy's 212-page French-language presentation of the budget to the National Assembly: https://www.economie.gouv.fr/files/files/PLF2018/DP_PLF_2018.pdf

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