THE OVERHAUL OF FRANCE'S TAX LAWS HAS BEEN ENACTED WHAT WILL THE 2018 FINANCE ACT CHANGE?

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1 January 16, 2018 THE OVERHAUL OF FRANCE'S TAX LAWS HAS BEEN ENACTED WHAT WILL THE 2018 FINANCE ACT CHANGE? T Our Clients and Friends: On December 21st, 2017, the French Parliament apprved the first Finance Laws f Emmanuel Macrn's presidency (the "Finance Act")[1]. The general bjective pursued by the French Parliament thrugh this tax refrm is t sustain French ecnmy's attractiveness and cmpetitiveness and t attract a significant part f the ppulatin's savings int the prductive ecnmy and, hence, cmpany stcks. We lay ut belw sme f the key measures f the tax refrm, which brings abut new pprtunities fr ur internatinal clients. Such key measures can be summarized as fllws: Fr cmpanies: Prgressive reductin f crprate incme tax rate frm 33 1/3% t 25% as f 2022; Repeal f the 3%-distributin tax; Cancellatin f the Carrez interest deductin limitatin rule fr EU cmpanies. Fr individuals: Intrductin f a 30% "flat tax" n incme and gains frm capital fr individuals; Imprvement f the Free Shares scial and tax regime; and Narrwing the scpe f the wealth tax t real estate assets nly. I. TAXATION OF COMPANIES 1.1 Prgressive reductin f the 33 1/3% Crprate Incme Tax rate t 25% The Finance Law prvides fr a gradual decrease f the CIT rate frm 33 1/3% t 25% frm 2019 t Fiscal years beginning Applicable CIT rates % (28% belw 500,000) % % %

2 In 2022, the effective rate will be as lw as 25.8% (including the 3.3% scial surcharge which will cntinue t apply t the CIT fr prfit in excess f 2,289,000[2]). 1.2 Repeal f the 3%-distributin tax Since 2012, a 3%-tax is due by French cmpanies n their dividend distributins (in additin t the CIT applicable n their taxable prfits). Fllwing several curt decisins challenging the legality f such tax[3], the tax is repealed fr dividends paid as frm January 1, Hwever, the French Parliament has apprved an exceptinal cntributin n prfits in rder t finance the reimbursement f the 3%-tax refund claims (amunting t c. 10 billins) filed by taxpayers. The rate f such exceptinal cntributin depends n the cmpanies' turnver. Less than 300 cmpanies shuld be impacted by such temprary rate increase. In practice, fr financial years pened in 2017 nly: Cmpanies whse turnver exceeds 1 billin will be subject t an effective CIT rate f 39.5%; Cmpanies whse turnver exceeds 3 billin will be subject t an effective CIT rate f 44.5%. 1.3 Cancellatin f the Carrez rule n interest deductin limitatins fr EU cmpanies Applicable t financial years starting n r after January 1st, 2012, the Carrez rule disallws the deductin f financial expenses related t the acquisitin f shares in subsidiaries fr an eight-year perid if the hlding cmpanies are unable t demnstrate: that they effectively take the decisins regarding their subsidiaries in France; and that they effectively exercise cntrl r influence ver the acquired subsidiaries frm France. The purpse f this rule is t prevent the artificial allcatin f debt in France where French cmpanies cntrlled by nn-french investrs wuld be interpsed t acquire shares f French r freign subsidiaries. Due t the ptential incmpatibility f such prvisin with the Eurpean Unin freedm f establishment principle, the Finance Law repeals the Carrez rule fr the years ended as f December 31st, 2017, where the decisins, cntrl r influence are made by EU hlding cmpanies. On the ther hand, the Carrez rule cntinues t apply if such decisins and cntrl r influence are made by nn-eu cmpanies. Such a situatin culd raise a discriminatin issue with respect t French cmpanies held by sharehlders based in States having entered int a tax treaty with France cntaining a nn-discriminatin clause (such as the France/US tax treaty). 2

3 2. TAXATION OF INDIVIDUALS 2.1 Intrductin f a 30% flat tax n incme and gains frm capital as frm January 1st, 2018 The Finance Law intrduces a flat rate n persnal incme tax f 30% n investment incme (such as interest and dividends) and n capital gains n shares f nn-real estate cmpanies/entities (vs. a marginal rate that culd be as high as 60.5% fr prir years). A 3% t 4% additinal cntributin cntinues t apply fr high incme earners (abve 500,000 fr single r 1,000,000 fr cuples). 2.2 Refrm f the Free Shares regime Regarding Free Shares and up t K 300 f acquisitin gain (equal t the fair market value f the shares n the date f vesting), such gain will be taxed at the graduated scale f incme tax rates after the applicatin f a 50% rebate. Unlike the previus regime, the benefit f such rebate is nt subject t a minimal hlding perid f the shares. In practice, such gain will mst generally be taxed at the rate f 22.5%, plus scial cntributins at the rate f 17.2%, i.e. 39.7%. Abve K 300, the acquisitin gain remains taxed at the graduated scale f incme tax rates (up t 45%, plus, if applicable the 3% t 4% additinal cntributin fr high incme earners) withut any rebate and a 10% emplyee scial cntributin cntinues t apply t such gain. On the ther hand, the rate f the 30% scial cntributin due by the emplyer (which applies frm the first eur f acquisitin gain) is reduced t 20%. The new Free Share regime applies t Free Shares attributed pursuant t Free Shares plans apprved by AGM held after December 31st, Wealth tax's scpe narrwed t real estate assets nly Starting n January 1st, 2018, the French Impôt de Slidarité sur la Frtune will be replaced by the Impôt sur la Frtune Immbilière ("IFI"). In cmparisn with the frmer wealth tax, the taxable basis f the IFI is narrwed t real estate assets and prperty rights nly. It als includes securities f cmpanies r entities wned by the taxpayer up t the fractin f the real estate assets held directly r indirectly by such entities (except if such assets are used fr business purpses such as fr cmmercial, industrial r htel activities). Mst tax treaties cncluded by France with freign states shuld generally prevent such transparency rule t apply as far as nn-(french) tax residents are cncerned (except where mre than 50% f the value f the cmpany is derived frm French real estate assets). Units r shares f OPCVM, investment funds r investment cmpanies with fixed capital (Sciété d'investissement à Capital Fixe, SICAF) hlding real estate r prperty rights will be excluded frm the new taxable basis if the taxpayer hlds less than 10% f rights and if the assets f the fund are cmpsed 3

4 fr less than 20% f real prperty rights. Mrever, shares f listed real estate investment cmpanies (SIIC) will be exempt frm the tax if the taxpayer hlds less than 5% f the share capital f the SIIC. Several anti-abuse prvisins have been inserted in rder t disallw r minimize the deductibility f back-t-back family financings r bullet lans entered int by taxpayers. In additin, when the value f the taxable real estate assets is greater than 5 millin and the amunt f deductible debt f the taxpayer exceeds 60% f this value, nly 50% f the fractin f the debts exceeding this limit is deductible. The IFI threshld remains set at 1,300,000 and the tax brackets and rates are the same as fr the frmer wealth tax. Prtin f the net taxable value f the estate Rate (in percentage) Nt exceeding 800,000 0 Abve 800,000 and belw r equal t 1,300, Abve 1,300,000 and belw r equal t 2,570, Abve 2,570,000 and belw r equal t 5,000,000 1 Abve 5,000,000 and belw r equal t 10,000, Abve 10,000, [1] 2018 Finance Law n f December 30th, 2017 [2] Effective rates wuld therefre be respectively 32% (28.9% belw 500,000) in 2019, 28.9% in 2020 and 27.4% in 2021 fr prfit in excess f 2,289,000. [3] ECJ May 17, 2017, AFEP, C-365/16 ; French Cnstitutinal Curt Decisin n QPC Octber 6, 2017, Sciété de participatins financière. 4

5 Gibsn, Dunn & Crutcher lawyers are available t assist in addressing any questins yu may have regarding these issues. Please cntact the Gibsn Dunn lawyer with whm yu usually wrk, r the authrs, Jérôme Delaurière, Ariel Harrch and Jeffrey M. Trinklein. Jérôme Delaurière - Paris (+33 (0) , jdelauriere@gibsndunn.cm Ariel Harrch - Paris (+33 (0) , aharrch@gibsndunn.cm) Jeffrey M. Trinklein - Lndn/New Yrk (+44 (0) / ), jtrinklein@gibsndunn.cm) 2018 Gibsn, Dunn & Crutcher LLP Attrney Advertising: The enclsed materials have been prepared fr general infrmatinal purpses nly and are nt intended as legal advice. 5