Annual International Bar Association Conference 2017 Sydney, Australia Recent Developments in International Taxation France Annabelle Bailleul-Mirabaud CMS Bureau Francis Lefebvre annabelle.bailleul-mirabaud@cms-bfl.com 1
1. Corporate Taxation 1.1. Corporate income tax rate The French standard corporate income tax ( CIT ) rate is 33.1/3 % 1, which is among the highest in the European Union. It will be progressively lowered to reach 28% in 2020 and the scope of the 15% reduced rate (currently applicable to SMEs with a turnover not exceeding EUR7.63m up to a taxable profit of EUR 38,120) will be extended, according to the following calendar 2 : - as from fiscal year 2017, the 28% rate will apply to SMEs taxable profits between EUR38,120 and EUR75,000; - as from fiscal year 2018, the 28% rate will apply to all companies on up to EUR500,000 of profit; - the EUR500,000 cap will disappear as from fiscal year 2019 except for companies achieving a turnover (consolidated or not) exceeding EUR1bn. In addition, the 15% rate scope will be extended to SMEs with a turnover not exceeding EUR50m; - as from fiscal year 2020, the 28% rate will become the standard corporate income tax rate. 1.2. Corporate income tax scope With the Finance Law for 2017, the French Parliament attempted to introduce into French domestic law the notion of permanent establishment deriving from Action 7 of the OECD BEPS Plan, in order to tax profits that a foreign company would realize in France through intermediaries. This so-called Google tax provision mainly aimed at targeting global tech and digital companies. Indeed, as from January 1, 2018, (i) profits derived by companies located abroad from the sale of goods or supply of services in France through dependent intermediaries (e.g. commercial agent), and (ii) profits derived by an entity that carries out a business in France in relation to the sale of goods or supply of services belonging to a company located abroad would have been taxable, subject to double tax treaties provisions. This provision was ruled out by the French Constitutional Council on December 29, 2016 since its application could only be triggered in the course of a tax audit at the discretion of the French tax authorities, which was regarded as unconstitutional. However, where the French political will would focus on tax policies, this measure may come back into discussion. 1.3. Taxation of dividend distributions Parent-subsidiary regime extension to shares without voting rights Under the French parent-subsidiary regime, dividends received by a parent company from its subsidiaries are, upon election, exempt from corporate income tax at the parent s level provided that the parent company (i) is subject to CIT and (ii) owns at least 5% of the share capital of its subsidiary for at least 2 years. In turn, a 5% recapture (deemed to represent the corresponding non-deductible expenses) is subject to CIT at the standard rate, resulting in practice in a 95% exemption of the dividend amount. The recapture is limited to 1% in the case of dividends paid between members of a French tax group and of dividends received by 95% or more EEA subsidiaries subject to corporate income tax. Such regime did not apply to shares without voting rights unless the parent company owned shares representing at least 5% of the share capital and of the voting rights of the subsidiary. Following recent 1 Leading to an effective rate of approx. 34.43% for companies with a standard CIT exceeding EUR763,000 due to a 3.3% additional contribution applying to CIT above this threshold. 2 Law n 2016-1917, Dec. 29, 2016, «Finance Law for 2017»; art. 11. 2
French Constitutional Council decisions 3, the law has been amended to cancel this exclusion as from fiscal year 2017. Based on the French tax authorities guidelines, this condition may be regarded as waived since February 3, 2016. Withholding tax exemption on dividends Under French domestic law, dividends paid by a French company to a parent company having its real place of management in an EU or EEA country that has entered into a mutual administrative assistance agreement with France (i.e. Iceland, Norway and Liechtenstein) are exempt from withholding tax provided that (i) the paying entity is organized as a capital company and subject to corporate income tax, and that (ii) the parent beneficiary is subject to corporate income tax and has held or has undertaken to hold at least 10% of the share capital of the distributing company for at least 2 years. Such dividend withholding tax exemption also applies where the beneficiary holds between 5% and 10% of the share capital of the distributing subsidiary if the conditions of the participation-exemption regime (see above) are met and the beneficiary cannot offset the withholding tax in its country of residence. Dividends distributed in the frame of an artificial arrangement having been put into place with the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the regime cannot benefit from the exemption. The former anti-abuse provision applicable to distributions until January 1, 2016, according to which parent companies controlled by non-eu residents had to be able to prove that this corporate structure did not have the elimination of withholding tax as its principal objective, is currently under examination by the Court of Justice of the European Union (CJEU) following a referral by the French tax supreme court. The Advocate General Kokott delivered her opinion on January 19, 2017 4 and submitted that this latter, by introducing a presumption of abuse on the taxpayer, is contrary to the principle of proportionality recognized by EU law. Should the CJEU follow this opinion, this would open up new perspectives for potential claims. Extension of the exemption of 3% tax on distributions A 3% tax applies to distributions made since August 2012 by companies subject to French corporate income tax. Distributions paid by tax investment companies and small companies are exempt. In addition, until January 1, 2017, distributions paid within French tax consolidated groups were also exempt, but not distributions paid to French companies which qualified for tax consolidation (95% direct or indirect holding) but had not elected for such regime, nor to distributions paid to foreign companies that would have qualified for tax consolidation if they had been established in France. This difference of treatment was regarded as unconstitutional by the French constitutional high court, which limited the effects of its decision to distributions made as of January 1, 2017 5. As a result, the 3% tax exemption has been extended to distributions made as of January 1, 2017 to (i) French companies owning directly or indirectly at least 95% of the distributing company, even in the absence of election for the French tax consolidated group regime and to (ii) foreign companies (either EU companies or companies residing in a State having concluded with France a tax treaty containing an exchange of information provision) owning directly or indirectly at least 95% of the distributing company 6. The 3% tax applied in similar situations before January 1, 2017 can still be challenged based on the EU freedom of establishment and on the European Convention of Human Rights (discrimination argument). 3 Const. Council decisions no. 2015-520, QPC, February 3, 2016. and no. 2016-553, QPC, July 8, 2016. 4 CJEU, Holcim, C-6/16, opinion of advocate general Kokott delivered on January 19, 2017. 5 Const. Council decision no. 2016-571, QPC, September 30, 2016. 6 Amending Finance Law for 2016, art. 95. 3
The 3% tax applicable to distributions made to EU companies owning less than 95% of the French distributing company can be challenged both for the past and the future, based on article 4.1. of the EU Parent-Subsidiary Directive (prohibiting double taxation of dividends at the level of the EU distributing company and of its EU parent company), subject to certain conditions. Indeed, the CJEU recently ruled that the 3% contribution applicable upon the re-distribution of dividend received by a French company from its EU subsidiaries is contrary to article 4.1 of the Parent-Subsidiary Directive 7. Considering the above, a number of taxpayers have filed 3% tax refund claims. 1.4. Challenge of prior tax authorities approval requirement for cross-border mergers Under French domestic law, mergers may benefit from a neutral regime (deferral of the taxation of the capital gains relating to the assets transferred) under certain conditions. Where the merging company is a foreign company, the benefit of the neutral regime is subject to a process of prior approval from the French tax authorities under which, in order to obtain that approval, the taxpayer must show that the operation concerned is justified for commercial reasons, that it does not have as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance, and that its terms make it possible for the capital gains deferred for tax purposes to be taxed in the future. On March 8, 2017, the CJEU 8 ruled that the requirement of prior approval from the French tax authorities was not required by the EU Merger Directive (Directive 90/434) from which this domestic regime is derived and that a derogation to the tax neutrality principle set by the EU Merger Directive was only possible if the cross-border merger has for principal objective, or one of its principal objectives, tax evasion or tax avoidance. Given that the French prior approval process resulted in the taxpayer bearing the burden of proof in this respect, the Court ruled that the French process introduced a general presumption of fraud and tax evasion and that the conditions provided to obtain the prior approval went beyond the EU Merger Directive requirements. It thus concluded that the French rule of the prior approval is contrary to article 11(1)(a) of the EU Merger Directive and to the EU freedom of establishment. As a result, the French special regime for mergers should be amended in this respect. 2. Individual Taxation 2.1. Income tax introduction of a pay-as-you-earn system This measure 9 is the most noteworthy of the year. Until now, French taxpayers pay their taxes on the current year based on what they earned in the previous year, or, as most do, they pay estimated amounts, monthly or in three installments, also based on the previous year's taxes. The Finance Law for 2017 initially provided an entry into force as from January 1, 2018 but the government announced on June 7, 2017 that the entry into force would be postponed to January 1, 2019. Pursuant to this reform, income tax would be automatically deducted from monthly salaries, in an employer based pay-as-you-earn (PAYE) system as in place in most European countries. The reform will fully apply to salaries, pensions and free-of-charge life annuity income; for other activity income and foreign income, a similar "contemporary installment" will apply. 7 CJEU, AFEP, 17 May 2017, C-365/16. 8 CJEU, March 8, 2017, Euro Park Service, aff. C-14/16. 9 Finance Law for 2017; art. 2. 4
2.2. Free shares schemes (i.e. restricted stock units or RSUs): partial cancellation of the advantages granted by the 2015 Macron Law In order to enhance the grant of RSUs, the 2015 Macron Law had provided for a more favorable social security and individual income tax regime for RSUs and relaxed the conditions to benefit from this regime, making it applicable where the vesting period is of at least one year and the whole vesting and holding period is of at least two years. The social security and income tax regime have been tightened by the Finance Law for 2017 for qualifying grants of free shares authorized by shareholders meetings held as from January 1, 2017, resulting in a partial cancellation of the advantages granted by the Macron Law 10 : - the specific employer social contribution applicable to the acquisition gain within one month from the vesting is increased from 20% to 30%; - the acquisition gain is still regarded as salary income and remains taxable upon the sale of the shares but the Finance Law introduced a less favorable treatment for that part of the acquisition gain exceeding EUR300 k. As a result: o the part of the acquisition gain not exceeding EUR300 k is subject to the same regime as the one applicable before the amendment i.e.: individual income tax (progressive rates) after application of rebates for holding period (50% for a holding period of between 2 and 8 years, 65% after 8 years of holding); social contributions (CSG/CRDS ) at a rate of 15.5% on the full acquisition gain. o the part of the acquisition gain exceeding EUR300 k is subject to: individual income tax (progressive rates) without any rebate for holding period; social contributions (CSG/CRDS ) at a rate of 8%. a specific employee social contribution at a rate of 10%. 2.3. Relaxation of the anti-abuse provision applicable in case of participation in foreign companies benefiting from a privileged tax regime (article 123 bis of the French Tax Code) Under French domestic law, where a French resident individual owns, directly or indirectly, at least 10% of the share capital of a foreign company benefiting from a privileged tax regime and which assets are mainly financial assets (cash, shares, receivables, etc ), such taxpayer is subject to individual income tax on 125% of the taxable income of the foreign company, irrespective of whether it is distributed or not. Where the foreign company is located in a so-called Non-Cooperative State or Territory 11 or in a state or territory that has not concluded with France a tax treaty including an administrative assistance provision, the taxable income is determined on a flat-rate basis. On March 1, 2017, the French Constitutional Council ruled that the corresponding provision was unconstitutional to the extent that: - it does not allow the taxpayer to prove that the interposition of a structure established outside the EU does not pursue tax fraud purposes, whereas this possibility is given to the taxpayer when the entity is established in an EU Member State, and that - it does not allow the taxpayer to challenge the flat value mechanism by bringing the proof of the amount of the real income of the foreign company 12. 10 Finance Law for 2017; art. 61. 11 The list of Non-Cooperative States and Territories is updated every year and currently includes Botswana, Brunei, Guatemala, the Marshall Islands, Nauru, Niue and Panama. 12 Const. Council, no. 2016-614, QPC, March 1, 2017. 5
2.4. Extension of the duration of the French impatriates regime Expatriates temporarily working in France and who become French tax residents as of the date of their arrival benefit from a temporary exemption on part of their income. This regime is applicable to employees who had not been domiciled in France during the five calendar years preceding the year of their arrival in France. Such employees may be exempt for up to six years on all benefits in kind and supplementary remuneration paid as a result of their expatriation to France (impatriation premium). They may also be exempt from income tax on one-half of their investment income and on one-half of their capital gains on shares of foreign companies. For impatriates who started working in France as from July 6, 2016, the exemption applies until the end of the eighth (previously the fifth) year following the assumption of duties 13. 3. New filing requirements 3.1. Public country-by-country reporting The country-by-country reporting requirement (CBCR) resulting from Action 13 of the OECD BEPS Action Plan has been introduced into French law in 2015. The next stage would be the public report, published online on a centralized database and freely accessible to the general public, to comply with the EU directive project published on April 12, 2016 (and amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches). However, there is uncertainty in this respect as the French Constitutional Council ruled that the French project of public country-by-country reporting was unconstitutional since it violates the constitutional entrepreneurial freedom, due to the divulgation of confidential data 14. The next question is whether a similar French law implementing the public CBCR as provided by the EU Directive could also be ruled unconstitutional. Under French law, it is a constitutional requirement to implement an EU directive, except if this implementation jeopardizes the "constitutional identity of France" which is a difficult concept to grasp. So it is possible that the Constitutional Council will accept tomorrow what it refuses today. 3.2. Extension of the scope of the simplified transfer pricing documentation requirement A simplified transfer pricing documentation must be filed on an annual basis within six months from the filing of the CIT return. This requirement was initially applicable to companies with a turnover of total assets exceeding EUR400m. This threshold has been lowered to EUR50m for declarations that have to be filed for fiscal years closed as from December 31, 2016 15. The number of companies in the scope of this requirement thus significantly increases. 3.3. Beneficial owner declaration To increase transparency, companies now have to communicate information on their beneficial owner to the Trade and Companies Register 16. 13 Finance Law for 2017; art. 71. 14 Law n 2016-1691, Dec. 9, 2016, art.137, Sapin II, and Const. Council, no. n 2016-741 DC, Dec. 8, 2016. 15 Sapin II law, art. 138 (V). 16 Sapin II law, art. 139. 6
4. Treaties developments There have not been many bilateral treaties developments over the last year, as detailed hereunder. The signature process of the OECD multilateral convention following the BEPS project will start in June 2017 in Paris. 4.1. Colombia The double tax treaty between France and Colombia, signed in June 25, 2015, was ratified by France on October 7, 2016. Since the ratification process has not started yet in Columbia, the treaty provisions will likely not be applicable before 2018 (at the earliest). Such provisions, which are favorable for companies, notably include a more precise definition of the permanent establishment criteria and attractive withholding tax rates (e.g. 10% for royalties in lieu of the 33% rate provided by Colombian law). This treaty includes several anti-abuse clauses and as such foreshadows the post BEPS French double tax treaty model. 4.2. Portugal An amendment to the France-Portugal tax treaty has been signed on August 25, 2016 and ratified by both countries in March, 2017. These amendments especially aim at bringing this tax treaty in line with the OECD requirements of the in the field of exchange of information and anti treaty-abuse rules. 4.3. Republic of Singapore The provisions of the new France-Singapore tax treaty signed on January 15, 2015 are applicable, on the French side, since January 1, 2017. On the Singaporean side, they will apply as from January 1, 2018 except for certain provisions including those related to exchange of information, which would apply as from January 1, 2017. The new treaty especially provides for a decrease of the withholding tax on dividends from 10% to 5% under certain conditions. No withholding tax applies on interest on loans between companies and royalties are not subject to any withholding tax except when they relate to authors rights. 5. Future developments Emmanuel Macron, new President of the French Republic, has appointed its government on May 17, 2017. In the coming months, the measures announced in his campaign plan may be implemented, depending notably on the outcome of the legislative elections in June. The most significant tax measures promoted by Emmanuel Macron are described hereunder on the basis of details provided in his campaign plan. 5.1. Corporate income tax E. Macron intends to introduce a gradual decrease of the CIT rate to reach 25% in 2022. Moreover, a specific reduced rate would be created for small businesses. 5.2. Decrease of levies Employer social security contributions would be decreased and in turn the Tax Incentive for Competitiveness and Employment (Cre dit d'impo t pour la Compe titivite et l'emploi, CICE), which is a tax credit amounting to 7% of individual gross wages lower than 2.5 times the minimum wage, would be repealed. 7
5.3. Individual passive income: introduction of a flat tax Under current rules, capital gains, interests, dividends and assimilated income are included in the taxpayer's global taxable income, thus submitted to progressive rates up to 45% plus various social contributions amounting to 15.5%. To encourage investment, a unique flat tax of 30% would be introduced, while keeping the possibility to opt for the progressive scale. 5.4. Social contributions An increase of 1.7% of the Contribution Sociale Généralisée (CSG) is planned. The current rate of the CSG, which consists in a withholding tax on most revenues, is 7.5% for wages and 8.2% for investment income and capital gains. This increase should however not apply to low retirement pensions and unemployment benefits, but income from capital would be in the scope of this measure. E. Macron wishes to reintroduce the exemption from social contributions on overtime which had been introduced in 2007 but removed during François Hollande s mandate. This measure would include a deduction of EUR 0.50 by hour on employer s contributions for more than 20-employees companies, and a full exemption of social contributions paid by employees on overtime (both social security contributions and CSG-CRDS). 5.5. Wealth tax Individuals with net assets in excess of EUR1.3m are subject to French wealth tax (Impo t de Solidarite sur la Fortune or ISF). Currently the tax base does not include professional assets or works of art in order to encourage economy and the art sector. E. Macron intends to convert the ISF into a wealth tax on real estate and thus exclude from the tax base all non-real estate assets that would be considered as investments in favor of the development of the economy. The current EUR1.3m threshold and progressive scale would remain applicable. 8