Please find below the main tax measures of the 2021 Draft French Finance Bill released on 28 September 2020. French Parliamentary discussions on the Bill should begin on 12 October and are expected to be finalized by the end of December 2020 with a vote and enactment.
If enacted under the current wording, most of the provisions are expected to have an impact in 2021 or later depending on the provisions. However, the provision related to the Business tax (“CVAE”) may need to be taken into account in the consolidated financial statements for FY ended on December 31, 2020 since the expected decrease in rate (0.75% vs 1.5%) would trigger an adjustment of the deferred tax booked on CVAE (optional under IFRS while mandatory in US Gaap).
Corporate Income Tax
Revaluation of fixed assets – Neutralization of the tax consequences
Under French accounting rules, companies are allowed to freely revalue their fixed assets (only tangible and financial assets are eligible). Such practice allows to show a more accurate picture of the company’s patrimony and financial wealth. Resulting improvement of the French balance sheet should enable to increase borrowing capacity. However, capital gains that may arise from the revaluation of fixed assets are treated as an immediate taxable profit subject to corporate income tax [CIT].
In the context of the Covid-19 economic crisis, a temporary neutralization of the tax consequences of such revaluation is being proposed along those conditions:
- For depreciable assets, it would be possible to spread of the revaluation differences over a period of 5 or 15 years depending on the nature of the assets (i.e. resulting in tranches added-back to the taxable income over multiple years). Depreciation would be calculated using the revalued basis as from the fiscal year following that of the revaluation.
- Any disposal of the asset would trigger the immediate taxation of the fraction of the gain which has not yet been recaptured in the taxable income at the time of the sale.
- For non-depreciable assets, the proposed neutralization would consist in the deferral of the revaluation gains until the disposal of these assets. Write-downs would be calculated using the value before revaluation.
This favorable tax treatment would be subject to an election to be made by the company. In case of a loss-making company, it may be more interesting to immediately include any latent capital gains in the taxable income.
This tax treatment is available for the reevaluation realized in the FY ending on or after 31 December 2020 and until 31 December 2022.
Capital gain deriving from “sale and lease-back” transactions – spreading of the capital gain
With the contribution of Sarvi Keyhani.
Under a sale and lease-back transaction, a company that owns a real estate property can dispose of it (sale transaction) and continue to use it under a lease arrangement (lease-back with an option to re-purchase).
The main benefit of the operation is to allow the seller, who has become the lessee, to still use the same real estate property while improving immediately its cash flow position.
According to the provisions of the Draft Finance Bill for 2021, such sale and lease back arrangements would become tax neutral for the company disposing of its real estate property since the latter would be allowed to spread the capital gain realized over the period of the lease agreement. In other words, the company would deduct the rents accrued along the period over which it adds-back portions of the capital gain in its taxable income. The spreading of the capital gain would be optional and based on the lower of either the duration of the lease-back agreement or 15 years.
As a reminder, this measure was already applicable to arrangements entered into between 23 April 2009 and 31 December 2012, as part of provisions pushed by the French government after the 2008 financial crisis. Contrary to the former mechanism, the draft Finance Bill 2021 however provides that the new mechanism would be limited to real estate properties used for commercial, industrial, craftsmanship, liberal or agricultural activities. It seems therefore to exclude real estate properties held for pure investment purposes.
The benefit of this regime would also be applicable in the context of a sublease agreement signed with an affiliate – within the meaning of Article 39,12 of the French tax code – as long as such related company dedicates the relevant building to its own commercial, industrial, craftsmanship, liberal or agricultural activity.
Under the proposed draft, this measure would apply to disposals of real estate properties for which the sale or at least an enforceable promise to sell has been executed between 28 September 2020 and 31 December 2022.
These provisions will come to complete the existing preferential real estate transfer tax treatment applicable to sale and leasebacks (reduced registration duties under Article 1594 F quinquies H of the French Tax Code).
For further information, please contact Sarvi Keyhani.
R&D Tax credit
French tax law provides for a 30% R&D tax credit on qualifying research expenses up to €100M and a 5% credit above this limit if certain criteria are met.
To date, the expenses incurred on R&D works subcontracted to State funded service providers may be double counted for the calculation of the R&D tax credit. This mechanism would be abolished.
Moreover, the €2M increase in the €10M threshold for all subcontracted expenses granted to expenses related to R&D conducted by State funded providers would be abolished as well. As a result, R&D operations conducted by State service providers and accredited private providers would now be treated evenly.
This measure would apply to expenses incurred as from 1st January 2022.
The Bill would also repeal the possibility to file administrative ruling applications regarding the R&D tax credit to agencies in charge of supporting innovation. As of 1st January 2021, companies should only apply for an administrative ruling regarding the R&D tax credit with the French tax administration (FTA).
Local Taxes/Business Tax
Decrease of Contribution on the added value of enterprises (CVAE) and of the Territorial economic contribution (CET) capping rate in respect of the added value
Decrease of the Contribution rate on the added value of enterprises (CVAE)
The CVAE applies at a single rate of 1.5 % to the added value produced by the company. However, a digressive allowance is available depending on its amount of turnover. Thus, the effective tax rates depend of the company’ turnover.
The Draft 2021 Finance Bill would divide by 2 those effective tax rates (ETR).
These changes would apply for the computation of the CVAE due in 2021.
Such a decrease of the rate (0.75% vs 1.5%), even if only applicable on CVAE due in 2021 may impact the consolidated financial statements for FY ended on 31 December 2020 if enacted before December 2020. CVAE being considered as an income tax (optional under IFRS while mandatory in US Gaap) associated deferred tax may be adjusted as soon as change in tax rate is enacted.
Territorial Economic Contribution (CET tax) and cap mechanism
As a reminder, the CET consists in 2 different taxes: the real estate contribution for enterprises – CFE – and the Contribution on added value of enterprises – CVAE.
The “CET” is capped at 3% of the added value generated by an enterprise (cap mechanism).
According to 2021 Draft French Finance Bill the 3% cap rate would be lowered to 2% for the Territorial Economic Contribution due as from 2021.
Territorial economic contribution (CET) exemption for the creation/extension of an establishment
The creation and extension of an establishment – occurring as from 1st January 2021 – could be exempted from Territorial economic contribution “CET” , by Municipality decision for 3 years, from the year following its creation or from the second year following the year during which the extension was completed.
VAT Group regime
According to article 11 of the VAT Directive, France decided to implement the VAT group option provided to Member States.
Accordingly, entities established in France would be entitled to elect for setting up a VAT group if, while legally independent, those entities are closely bound to one another by financial, economic and organizational links. Companies included in the VAT group would then be treated as a single VAT taxable person.
The representative of the group elects for VAT grouping by filing a statement containing all the relevant information. The election will be binding for 3 years.
The representative of the VAT group should be responsible for ensuring compliance (such as filing the annual VAT return and the VAT payment) but all the members would remain jointly and severally liable for VAT debts.
The new regime would be applicable as from 1st January 2022 and the first French VAT groups could be created as from 1st January 2023 (i.e. with an election before 31 October 2022).
Clarification of VAT rules regarding composite offers
The Draft 2021 Finance Bill aims at implementing into French law the principles set out by the European Court of Justice regarding complex/unique services including several elements subject to different VAT regimes. The stated objective is to tackle optimization practices by operators providing composite offers to their clients.
According to the proposed measures, transactions including different (non-accessory) elements subject to different rates on a standalone basis would be subject to the highest applicable rate.
The Bill would also recognize the various services provided for travels by travel agencies or travel tour operators as a unique service delivery subject to its own regime.
Postponement of the implementation of the rules amending the e-commerce VAT regime
The Draft 2021 Finance Bill provides for the postponement of the entry into force of the VAT rules applicable to e-commerce to 1st July 2021 (instead of 1st January 2021).
As a reminder, those rules were adopted by the European Council upon the proposition of the European Commission by a decision dated July 20, 2020 (UE) 2020/1109.
The Draft 2021 Finance Bill would also exclude some specific delivery (such as second-hand goods, works of art, collectors’ items or antiques) subject to VAT on margin from the territoriality rules applicable to distance-sales of goods inside the EU and distance-sales of imported goods.
Finally, the Bill would limit the application of the specific scheme establishing a €10k turnover threshold below which intra-EU distance sales are considered as domestic transactions, to the taxpayers established in a single EU member State.
Extension of the reduced rate applicable to interest for late payment and default interest
Currently, a monthly 0.20% rate is applicable to interest for late payment and default interest according to the 2017 amended Finance Law which reduced this rate, from 0.40% to 0.20% until December 31, 2020.
Under its proposed draft, the 2021 Finance Bill would make permanent the current monthly 0.20% rate (i.e. 2.4% per year).
Securing the right to communicate login data to the FTA
The 2018 Anti-fraud law (n°2018-898, 23 October 2018) allowed, under certain specific circumstances, the French tax and customs administrations to access login data. Nevertheless, the provisions are not applicable as they stand. As a result, the 2021 Finance Bill provides for a prior authorization from a login data controller.