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Charles Scheer, Myrtille Puyau and Marie-Aline Pierret Cabinet Charles Scheer, Paris
Charles Scheer, Myrtille Puyau, Marie-Aline Pierret work for Cabinet Charles Scheer in Paris.
The French Tax Package, which was the subject matter of a review by the Constitutional Council, was announced in December last year based on the decisions by the Council. This tax package, which includes the two finance acts for 2012 and 2013, has been examined in detail in the ensuing article, covering all changes including those affecting corporate and individual taxpayers and also indirect tax changes.
The tax package for years 2012 and 2013 was issued on December 30, 2012 after a review by the French Constitutional Council. This tax package included the third Amended Finance Act for 2012 and the Finance Act for 2013. This article also takes into consideration some other tax measures included in the Social Security Finance Bill issued on December 18, 2012.
As announced by President Francois Hollande during his election campaign, large companies and high net worth individuals are specifically targeted, and the tax and social contributions significantly increased. The main aims of this package are to collect around EUR 30 billion and treat the taxation of passive income at progressive tax rates instead of a flat-rate tax as is already the case for active income.
However, following the two decisions from the Constitutional Council dated December 28, 2012, the government will have to review and redraft some measures.
Although the Constitutional Council considered the tax package and its aforementioned aims as being in compliance with the French Constitution, in practice some measures were censured. Indeed, the Constitutional Council considered that some measures put in place an excessive financial burden on taxpayers or are in breach of the principle of equality between taxpayers.
Summarised below are the main provisions of the tax package. It is important to be aware of the government's intent to table a revised version of some of the rejected measures during the year 2013.
This increases the fiscal instability, as the new rules applicable to 2012 were finally agreed on December 28, 2012, whereas the rules applicable to 2013 can still be determined or changed until December 31, 2013, due to French retroactivity rules.
• Non deductibility of a portion of interest expenses
• Limitation on tax losses carry forward
• Extension of the application of the temporary additional 5 percent corporate tax
• Increase in the VAT rate from 2014
• R&D tax credit
• Exit tax for companies
• New tax credit for competitiveness and employment
• A new 45 percent income tax bracket
• New level for wealth tax and new cap
• Suppression of stock options' and free shares' special tax regimes
• Tax treatment of investment income (dividends, interest, capital gains)
• Social security contributions on some dividend distributions
The temporary surcharge applicable to companies with revenue above EUR 250 million -- equal to 5 percent of the tax due ie 5 percent x 33.33 percent = 1.66 percent, is extended to the years 2013 and 2014.
Taking into account the 3.3 percent permanent social surcharge for companies with income tax charge higher than EUR 763,000, the total 2012 and 2013 corporate tax rate for larger companies reaches 33.33 percent x 1,083 percent = 36,10 percent.
In addition except for smaller companies or those companies within a tax consolidated group, or in specific cases, a 3 percent tax applies to dividend distributions. Consequently, the aggregate tax rate reaches 39,10 percent for larger companies.
This new rules follow similar rules applicable in other European companies.
The deduction of interest is already limited by an annual maximum rate (for related companies), by thin capitalisation rules, by specific limitations within a tax consolidated group and by a limitation for interest expenses for the acquisition of investments.
A new measure limits the tax deductibility of interest expenses (net of interest income) when they reach EUR 3 million per year.
In such a case, as of fiscal year ending December 31, 2012, the total deduction of interest expenses is limited to 85 percent of the net expenses. The part of the non-deductible interest (15 percent) is permanently disallowed. This limitation is set at 75 percent as of January 1, 2014.
Within a French consolidated tax group, the EUR 3 million limit is globally taken into account at a group level.
The amount of tax loss carry-forward that can be offset against current taxable income is limited to EUR 1 million plus 50 percent of the balance instead of 60 percent previously.
New rules increasing the EUR 1 million limit apply in the event of debt forgiveness granted to firms involved in some insolvency proceedings. The unused tax losses can be carried forward indefinitely with the same limitation. The new limitation rules apply to fiscal years ended as of December 31, 2012.
The attractiveness of France for companies is mainly due to the R&D tax credit.a. Creation of a new tax credit specific to innovation expenses by small enterprises
The R&D tax credit is available for expenses related to research, applied research and experimental development. A new tax credit for innovation expenses is introduced for small and medium enterprises (EU definition) only, as of January 1, 2013.
This tax credit is equal to 20 percent of expenses exclusively related to innovation (depreciation, staff, operating expenses…) up to a basis of EUR 400K, i.e. a maximum tax credit of EUR 80K.b. Restriction to the R&D tax credit for all enterprises
As of January 1, 2013, the increased rates of 40 percent and 35 percent of research expenses applicable during the first two years of benefit of the R&D tax credit are cancelled. Only the general rate of 30 percent remains applicable.
The taxable portion of capital gains on the disposal of investments exceeding 5 percent of the capital and after a holding period of over 2 years was 10 percent of the total amount of the net capital gains for the full year after compensation with the tax year's capital losses.
This taxable portion is increased to 12 percent of the gross capital gains for the full year (as opposed to the net capital gain) as of fiscal year ended December 31, 2012.
In addition to the unchanged tax rate and income brackets (which are usually reevaluated each year), a new marginal rate of 45 percent has been introduced. This additional tax bracket applies to the portion of net taxable income which exceeds EUR 150,000 per family share (after application of the income splitting system). This new marginal tax rate is applicable to income earned in 2012.
Besides this additional 45 percent tax bracket, the exceptional tax introduced as of 2011 still applies to high income. For single, divorced or widowed people it amounts to 3 percent on taxable income ranging between EUR 250,000 and EUR 500,000, and 4 percent on the portion exceeding EUR 500,000.
For a couple, the exceptional tax applies to the aggregate taxable income and amounts to 3 percent of the combined income ranging from EUR 500,000 to EUR 1,000,000 and to 4 percent for the portion exceeding EUR 1,000,000.
A measure voted by the parliament, which is intended to create another rate of taxation of 75 percent for active income exceeding EUR 1 million per individual has been struck down by the Constitutional Council.
The threshold for eligibility for wealth tax purposes remains at EUR 1.3 million per household. The taxable basis is then computed on wealth exceeding EUR 800,000. The tax rates range from 0.5 percent up to 1.5 percent, for assets in excess of EUR 10 million. A new cap has been introduced for French tax residents, which limits the aggregate amount of wealth tax and income and social taxes to 75 percent of their worldwide net income for the previous year. The computation of this cap was partly struck down by the Constitutional Council to exclude unrealised income.
As of September 28, 2012, gains on the exercise of stock options and share grants are taxed as salary income upon disposal of the shares. The gains will also be subjected to social contributions. A specific additional contribution was reduced by the Constitutional Council so as to reduce the marginal tax rate to 64.5 percent.
As of January 1, 2012, the flat tax rate of 19 percent was increased to 24 percent. Social contributions are also applicable at the rate of 15.5 percent, thus bringing the aggregate tax levy to 39.5 percent.
As of January 1, 2013, capital gains will be subjected to progressive tax rates on income (plus to social contributions). This taxation will be reduced through a progressive allowance of:
• 20 percent for a holding period of 2 to 4 years;
• 30 percent for a holding period of 4 to 6 years; and
• 40 percent for a holding period above 6 years.
This allowance is not applicable to the additional social contributions.
Entrepreneurs who meet a certain number of restrictive conditions can elect to continue availing the 19 percent rate for 2012 and 2013 (plus 15.5 percent social contributions) on the sale of shares of the business they own.b. Taxation of capital gains realised by foreign tax residents
As of January 1, 2013, withholding tax applicable to capital gains is increased from 19 percent to 45 percent when the foreign tax resident owns more than 25 percent of the share capital.
This taxation can be reduced by the application of the progressive personal rate applicable to worldwide income. Also, tax treaties generally grant the right to tax these capital gains in the country of residence of the seller. However, in certain instances, treaties provide for the taxation of the capital gain on the sale of significant shareholdings in the country of residence of the company whose shares are sold.c. Dividends and interests subjected to progressive tax rates
This passive income becomes eligible to progressive tax rates instead of flat rate taxation as of January 1, 2013. The 40 percent allowance on the taxable amount of dividends, which takes into account the corporate tax already paid by the company, remains in force in 2012 and 2013. Social contributions are also due on top at the rate of 15.5 percent. Withholding tax on payments made to non-cooperative countries is increased from 55 percent to 75 percent for any payment made as of January 1, 2013.
The third amended finance law for 2012, approved by the Constitutional Council for the most part, contains measures focused on fighting against tax fraud and tax optimisation in France. Additionally, it contains some measures aimed to comply with European Union (EU) law.
Under the previous regime, the transfer abroad of all the assets of a French company triggered immediate taxation of income generated since the closing of the previous fiscal year, as well as provisions and unrealised capital gains. Moreover, the company loses the right to carry forward its tax losses, and its income and reserves are deemed to be distributed to its shareholders. When the transfer of the assets is only partial, only the taxation of unrealised capital gains applies, whereas the right to carry forward tax losses is maintained and the reserves and income are not deemed distributed.
As interpreted by the Court of Justice of the European Union (CJEU) in two recent decisions (National Grid Indus1 and Commission vs. Portugal2), such rules may be considered as an infringement of the freedom of establishment provided by EU law.
Therefore, the French legislation has been amended as follows
The company transferring its head-office or a branch to another EU member state (or to Iceland or Norway) will have the following choice concerning the taxation of the unrealised capital gains on its transferred assets:
• the immediate payment in the 2-month period following the transfer; or
• upon express election by the company, a deferred payment with an immediate payment of 20 percent of the amount of tax within 2 months of the transfer, and payment of the outstanding balance over the four following years.
The tax will be payable immediately if, during the 5-year period following the transfer, the assets are sold or transferred to a non-member state; or if the company misses a payment deadline or is liquidated. Each year, the company will have to send a special form stating the amount of the unrealised capital gains on the transferred assets to the French tax authorities. The new provisions are applicable to transfers effective as of November 14, 2012.
If all the assets are transferred, this measure does not modify the taxation of the income generated since the closing of the previous fiscal year, and of the reserves distributed to shareholders.
As of January 2014, the VAT rates will be modified as follows:
• the standard rate will increase to 20 percent from 19.6 percent;
• the reduced rate for basic necessities (products and services) will be reduced to 5 percent from 5.5 percent; and
• the intermediate VAT rate will rise from 7 percent to 10 percent (with a few exceptions).
In addition, some measures have been taken to comply with EU law to transpose the EU Directive 2010/45/EU dated July 13, 2010 in relation with the EU VAT system and invoicing (in particular territoriality rules and e-invoicing).
This tax credit applies to all companies, subject to French corporate tax (or personal tax on professional activities), which hire employees.
It is computed on the total salaries paid by the company (excluding those related to profit-sharing schemes) during a calendar year. In order to be taken into account the employees' salaries should not exceed a limit of 250 percent of the minimum statutory wage index, i.e. EUR 42,900 / year per employee in 2013. The rate of the tax credit is 4 percent for 2013 and 6 percent as of 2014. It can be offset against the corporate (or personal) income tax due for the year where the tax credit is computed. The excess tax credit - if any - can be carried forward and credited during the three following tax years and is then reimbursed. In several instances such as for newly created companies, small and medium sized businesses, companies conducting selected research and development activities or companies in bankruptcy proceedings, the excess tax credit can be immediately reimbursed.
This tax credit may not be used to increase dividend distributions or to compensate the company's management. During the discussion of this measure before the parliament, the government announced that other rules for the use of such tax credit would be enacted by a subsequent tax bill in 2013. The bill so far only provides general guidelines on how the tax credit should be used by the company in order to increase its competitiveness.
Nevertheless, the present bill already provides for various reporting requirements designed to track the use of the tax credit. Additional details about this new regulation will be included in subsequent regulations e to be issued.
This measure establishes a new tax surcharge on real estate capital gains realised by individuals as follows; computed according to a formula applicable to the gains ranging from:
• a 2 percent surcharge applicable at EUR 50,000: to
• a 6 percent surcharge on gains above EUR 250,000.
Capital gains on the sale of one's main residence and of land intended to be used for construction are exempted from this surcharge.
The law limits the ability of individuals to implement tax optimisation schemes based on combinations of gifts, ownership splitting (between usufruct and bare ownership), contribution to holding companies and deferral of capital gains. Nevertheless, the Constitutional Council rejected one of these measures. Therefore, the French government could redraft the measure.
As of January 1, 2013, taxpayers refusing to disclose details as to the source of sums unreported at least once during the last ten years (foreign bank accounts, foreign life insurance contracts) will be taxed at 60 percent, as it will be presumed that the assets come from a gift.
The statute of limitation for these unreported assets, including those put into a trust, is extended to ten years, instead of six, for wealth, gift, estate and transfer tax purposes.
The exit tax regulations for individuals (effective since March 2011), provide for an effective taxation of the unrealised capital gains on the sale of eligible shares held when leaving France under certain conditions for a period of eight years thereafter. Accordingly the statute of limitation is in such instances, extended to eleven years after leaving France.
This Act (Loi de Financement de la sécurité sociale pour 2013 -- issued December 18, 2012) also provides for increased taxation.
This tax acts as a substitute to VAT when the company is not subject to it on 90 percent of its revenue (banks, insurance companies etc.). As of January 1, 2013, a new top rate of 20 percent is introduced for the portion of annual compensation exceeding EUR 150,000 (instead of a 13.60 percent top rate in 2012 for annual compensation exceeding EUR 15,186)
Managers owning directly or indirectly more than 50 percent of the capital in some companies eligible to corporate income tax, such as SARLs (limited liability companies), are subject on their compensation to the social security regime of self-employed professionals, which generally triggers lower contributions - around 35 percent to 45 percent - (and benefits) than the general social security regime applicable to employees. As of January 1, 2013, dividends paid to these shareholders which exceed 10 percent of the paid-in capital and surplus and their shareholders' managers' current account will be subjected to such self-employed social security contributions.
The aggregate rate of social levy applicable to passive income remains unchanged at 15.5 percent (even though its components have changed as of January 1, 2013).
One can be sceptical on the impact of all these latest increases and the resulting instability for all taxpayers, which although motivated by the legitimate need to reduce budget deficit, may increase the existing gap in competition between France and the other OECD and emerging countries in terms of foreign trade and foreign direct investments in a globalised world.
Charles Scheer, Partner, Myrtille Puyau and Marie-Aline Pierret work for Cabinet Charles Scheer in Paris, a French firm specialising in taxation. They are lawyers and members of the Paris Bar. They may be contacted by e-mail at: email@example.com, firstname.lastname@example.org and email@example.com, respectively, or by telephone at +33 1 47 20 45 75
1 CJEU, 29 November 2011, C-371/10, National Grid Indus.
2 CJEU, 6 September 2012, C-38/10, Commission v. Portugal.
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