France budget law enacted France s Constitutional Court issued its decision on measures in Finance Law 2013 on 29 December 2012, concluding that the measures affecting companies were valid, but striking down the controversial provision that would have required wealthy individuals in France to pay a 75% income tax rate on professional income over EUR 1 million. The decision cleared the way for Finance Law 2013 and the third revised Finance Law for 2012 (which had received parliamentary approval on 20 and 19 December, respectively) to come into effect; both laws were published in the official gazette on 30 December 2012. The most significant measures in the two laws are the new global cap on finance charges, more restrictions on the use of loss carryforwards and the alignment of investment income and profits with ordinary income tax brackets. This article looks at the main new provisions. Corporate tax Competitiveness and employment tax credit Following the Prime Minister s presentation on 6 November 2012 on the National pact for growth, competitiveness and employment, the Third Amended Finance Bill for 2012 introduces a competitiveness and employment tax credit ( crédit d impôt pour la compétitvité et l emploi or CICE ) as from 1 January 2013. The tax credit is calculated on the portion of gross payroll not exceeding 2.5 times the national minimum wage (i.e. on gross monthly wages not exceeding EUR 3,564). The rate of the CICE is 4% for wages paid in 2013 (6% for wages paid as from 2014), with no cap on the total amount paid. Payment of the CICE can be offset against the corporate income tax liability for three years, with any excess reimbursed by the French tax authorities (as in the case of the R&D tax credit). Small and medium-sized enterprises (SMEs) will benefit from an immediate refund of excess CICE on an annual basis. The tax credit must be used for specific purposes stated in the law (mainly, investment, research, innovation, training, recruitment, etc.) and not for increasing dividend distributions or for salary packages of employees carrying out managerial functions. This is an area that the French tax authorities likely will scrutinize in future tax audits. Global cap on finance charges Interest paid on loans generally is deductible for French corporate income tax purposes, although under the thin capitalization rules, interest paid to shareholders on related party debt may be disallowed. A deduction for interest on a loan obtained to acquire a participation in another company also may be disallowed in the following circumstances: If the French borrowing company is unable to demonstrate that decisions on share-related transactions are made in France and that the acquired subsidiary is effectively managed in France ( Carrez rule ); or If the acquisition involves jointly controlled companies and the acquired company enters into a group consolidation with the acquiring company ( Charasse rule ). As from fiscal year 2012 (i.e. fiscal years closed as from 31 December 2012), the deduction of finance charges incurred by companies liable to corporate income tax is capped at 85% (reducing to 75% as from FY 2014) of their net amount on the portion of finance charges that remain deductible after application of the other more specific restrictive rules (the Finance Law 2013 provides for an order of priority in computing the finance charges that are to be disallowed under the thin capitalization, Carrez and Charasse rules). To the extent a company s finance charges exceed the 85% cap, they are forfeited, i.e. there is no carryforward of the excess amount. The interest cap does not apply when the total finance charges (including charges disallowed under other limitation mechanisms) are less than EUR 3 million (in the case of a taxconsolidated group, the threshold applies to the group as a whole). Further restrictions of loss carryforwards Finance Law 2013 further reduces the cap on the utilization of losses carried forward. The amount of loss carryforwards available in a year is capped at EUR 1 million, plus 50% (reduced from 60%) of the portion of the taxable profits of the relevant fiscal year exceeding EUR 1 million. The remaining 50% of income is taxed at the standard corporate income tax rate. This rule applies for fiscal years closed as from 31 December 2012. World Tax Advisor Page 1 of 5 Copyright 2013, Deloitte Global Services Limited.
Tightening of participation exemption for long-term capital gains The exempt amount under the participation exemption for capital gains, which applies to gains derived from the sale of shares that form part of a substantial investment that has been held for 24 months, is reduced from 90% to 88%. For fiscal years opened as from 1 January 2011, 90% of the income was exempt, with the remaining 10% deemed to represent costs and expenses and taxed at the standard corporate rate of 33 1/3% (plus a 3.3% surcharge), giving rise to an effective tax rate of 3.44%. The taxable portion, which represents a lump-sum charge, is calculated on net long-term capital gains, i.e. after the deduction of long-term capital losses. For fiscal years closed as from 31 December 2012, only 88% of the income is exempt. The remaining 12% taxable portion of long-term capital gains will be calculated on the gross amount (i.e. capital losses can no longer reduce the taxable basis) of the capital gains realized, bringing the effective marginal rate up to 4.33%. Exit tax for companies Finance Law 2013 makes changes to the French exit taxation rules to bring them in line with jurisprudence of the Court of Justice of the European Union (CJEU). The CJEU ruled in 2011 in the National Grid Indus BV case and Commission v. Portugal that the Dutch and Portuguese exit tax rules on companies were not compatible with the freedom of establishment since they trigger immediate taxation. In France, the migration of a company abroad triggers the immediate taxation of the latent capital gains attached to the transferred assets. This adverse tax consequence does not apply when the head office is transferred to another EU member state but a permanent establishment is maintained in France. For transfers taking place as from 14 November 2012, where a head office of a French company or permanent establishment migrate to an EU/EEA member state (except Lichtenstein), latent capital gains attached to the assets transferred will attract corporate income tax, which must be paid immediately, unless the taxpayer elects to make installment payments over a five-year period. It is unclear whether the five-year installment option is fully in line with European Commission views on exit taxes. Exceptional surcharge extended In response to the current economic climate, the 5% exceptional surcharge imposed on the standard corporate tax liability of companies whose annual turnover exceeds EUR 250 million (i.e. effective rate applicable to large profitable companies of 36.10%) will apply until 30 December 2015 (instead of 30 December 2013). Fourth estimated tax installment broadened Finance Law 2013 extends the scope of the companies subject to the payment of a fourth corporate income tax installment based on estimated profits of the current year (rather than on profits of the previous fiscal year) to companies with annual turnover exceeding EUR 250 million, and increases the amount of the installment. Under the French Tax Code, corporate income tax for each fiscal year is payable in quarterly installments and one final payment. The first three quarterly installments are calculated with reference to the taxable results of the previous fiscal year, but for large companies, the fourth installment is determined on the basis of estimated profits of the current fiscal year, as follows: For companies with turnover between EUR 500 million and EUR 1 billion that have an increase in estimated profits of more than 50% as compared to the profits of the previous fiscal year, the fourth installment is 66 2/3% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; For companies with turnover between EUR 1 and EUR 5 billion that have an increase in estimated profits of more than 25% as compared to the profits of the previous fiscal year, the fourth installment is 80% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; and For companies with turnover exceeding EUR 5 billion that have an increase in estimated profits of more than 11% as compared to the profits of the previous fiscal year, the fourth installment is 90% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid. For fiscal years opened after 1 January 2013, the fourth installment of large companies is determined under the following rules: For companies with turnover between EUR 250 million and EUR 1 billion with estimated profits that increased by more than 50% as compared to the previous fiscal year, the fourth installment is 75% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; World Tax Advisor Page 2 of 5 Copyright 2013, Deloitte Global Services Limited.
For companies with turnover between EUR 1 and EUR 5 billion with estimated profits that increased by more than 25% as compared to the previous fiscal year, the fourth installment is 85% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid; and For companies with turnover exceeding EUR 5 billion with estimated profits that increased by more than 11% as compared to the previous fiscal year, the fourth installment is 95% of the difference between the tax calculated on the estimated profits for the current fiscal year and the three installments already paid. The rules governing the payment of the fourth installment remain unchanged for companies that do not fall within any of the above categories. Standard Audit File-Tax The third Revised Finance Law for 2012 implements the requirement that companies submit a standard audit file (SAF-T) for corporate income tax and VAT purposes. The SAF-T is an electronic file that records key business information in a specified common format for tax audit purposes and aims to simplify tax compliance and tax audit requirements as they relate to information required for tax purposes from business and accounting systems. Mandatory use of the SAF-T will apply as from 1 January 2014. Penalties will apply for noncompliance, and the submission of an incomplete and/or unusable file may result in the application of the arbitrary assessment procedure. Personal income tax Alignment of investment income taxation with ordinary income tax brackets Many categories of investment income that previously were taxed at special flat rates (21% and 24% on dividends and interest, respectively, and 19% on capital gains in addition to the 15.5% social surcharge) now, in principle, will be taxed according to the standard progressive schedule applicable to ordinary income (i.e. progressive rates ranging from 0% to 45%). The 15.5% social surtax will continue to be levied, but 5.1% will be deductible from taxable income of the following year. Investment income and capital gains also still will be included in the tax base for purposes of the contribution on high income (a maximum rate of 4%). As from fiscal year 2013, the withholding tax on dividends and interest is 21% and 24%, respectively, and will be deducted from the individual s final income tax liability. However, individual taxpayers will continue to benefit from a 40% deduction of dividends from their taxable base subject to progressive income tax rates (with the social surtax due on the full base). Long-term capital gains derived in 2012 are taxed at a flat rate of 24%, but as from 2013, they no longer benefit from a fixed proportional rate, instead being taxed at the applicable progressive rate. A deduction of a percentage of the taxable gain will be available, depending on the number of years the shares were held: 20% for shares held between two and four years; 30% for shares held from four to six years; and 40% for shares held during more than six years. A 19% fixed rate continues to apply, under certain conditions, to business creators. The sale of shares representing more than 25% of the profits of a company made by nonresident taxpayers is taxed at a flat rate of 45% as from 1 January 2013. Taxation of share incentive plans Gains realized on the exercise of stock options and the acquisition of free shares are treated as salaried income for options and shares granted as from 28 September 2012. The taxable event continues to be the date on which the shares were sold, thus allowing beneficiaries to continue to benefit from tax deferral. The specific social tax regime applicable to qualified share incentive plans also remains applicable and these incentives remain exempt from ordinary social charges (up to 50% for companies and about 23% for employees), subject to compliance with specific formalities. However, they still will be subject to a special social contribution due at grant by the company (recently increased to 30%) and by the beneficiary at the time the shares are sold (a 15.5% social surtax and 10% social contribution). A deduction of 5.1% of the social surtax is available for income earned in the year in which the surtax was paid. Start-up stock options continue to benefit from a full exemption from social security charges and the imposition of a flat tax at a rate of 19%, plus the 15.5% social surtax (34.5%) on the date the shares are sold. These categories of income potentially remain subject to the contribution on high income (a 4% maximum). World Tax Advisor Page 3 of 5 Copyright 2013, Deloitte Global Services Limited.
Tax brackets The progressive tax brackets for personal income tax purposes remain unchanged, but an additional bracket has been added for income exceeding EUR 150,000, which will be taxed at a rate of 45%. The contribution on high income (3% or 4%) remains unchanged. Wealth tax The wealth tax rates are increased from 0.25% and 0.5%, to progressive rates ranging between 0.5% and 1.5%, on net wealth in excess of EUR 800,000, but there is a cap, so that total of wealth tax, income tax and the surtax, and specific social levies, cannot exceed 75% of annual income. While net wealth under EUR 1.3 million remains exempt, once the tax is triggered, the progressive rates apply to net wealth in excess of EUR 800,000. 75% tax on professional income above EUR 1 million rejected As noted above, the Constitutional Court declared null and void the provision under which a 75% tax would have applied on professional income over EUR 1 million earned in 2012. The court based its decision on the fact that the contribution would have applied unfairly on different households, i.e. that the 75% tax would hit the income of each individual, while similar levies are imposed per household. Specifically, in a case where each member of a household earned income of EUR 900,000, the tax would not apply, but the tax would be due where one member of a household earned EUR 1.1 million and the other nothing. The court invalidated this provision of the budget law without considering other challenges to the proposal, and it did not rule on the confiscatory nature of a 75% tax, as argued by some members of parliament. The Prime Minister has announced he intends to introduce a new draft law in accordance with the principles laid down by the Constitutional Court. However, the fact that the court did rule that proposed increases in certain levies (supplementary pensions, stock options and real estate gains) to a marginal global rate between 68% and 82% were excessive means that great care will need to be taken in redrafting the proposed tax on the wealthy. Whatever route is adopted, it is expected that the government will not introduce a new draft in the short term, but is likely to wait until the Finance Bill 2014 is introduced in September 2013. This material has been prepared by professionals in, French tax and legal firm, member of Deloitte Touche Tohmatsu Limited. Ambroise Bricet (Paris) Partner abricet@taj.fr Patrick Fumenier (Paris) Partner pfumenier@taj.fr Marie-Pierre Hoo (Paris) Director mhoo@taj.fr World Tax Advisor Page 4 of 5 Copyright 2013, Deloitte Global Services Limited.
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