The French parliament adopted the 2020 finance bill on 19 December 2019 but it is still subject to review by the constitutional court. In fact, certain provisions of the bill could be challenged by some members of parliament who could allege that they violate constitutional principles. The court is expected to rule before the end of 2019.
This article summarizes the key provisions of the bill (except for VAT).
Corporate income tax
Rate reduction trajectory
Companies with minimum annual turnover of EUR 250 million
At the end of 2018, the government decided to suspend an initiative that would have reduced the corporate income tax rate for companies with a minimum turnover of EUR 250 million (to be assessed at the tax group level, if applicable) to finance “yellow jacket” measures (i.e. measures to address the concerns of protesters wearing yellow vests/jackets as a means of group identification). As a result, the standard tax rate for 2019 remained at 33.33%, with a 28% rate applying to the first EUR 500,000 of taxable income, in accordance with the 2018 finance act.
Under the new law, the corporate income tax rate reduction trajectory would continue in 2020, with the rate dropping to 31% (the 28% rate applicable to the first EUR 500,000 would remain unchanged). Thereafter, a corporation’s entire taxable income would be taxed at a 27.5% rate in 2021 and 25% in 2022.
Companies with annual turnover lower than EUR 250 million (small and medium-sized enterprises (SMEs))
The rate reduction trajectory would be less steep for SMEs as their rate already was reduced to 31% for 2019, with the 28% rate applying to the first EUR 500,000 of taxable income, as provided in the 2018 finance act. The finance law reduces SMEs’ corporate income tax rates to 28% in 2020, 26.5% in 2021 and 25% in 2022.
Withholding tax rates
Following the change in the trajectory of the corporate income tax rate reduction, the withholding tax rate on certain income received by nonresidents (in particular, capital gains on substantial participations or on real estate), which generally is aligned with the corporate income tax rate, also would be adjusted. The new rates are as follows: 31% for 2019 (except for withholding tax on dividends, which would remain at 30%), 28% for 2020 and 26.5% for 2021, regardless of the company’s annual turnover.
Adjustments to withholding taxes applicable to nonresident companies
Nonresident companies in tax loss positions
The Court of Justice of the European Union (CJEU) ruled in 2018 that the different withholding tax treatment under French domestic law between loss-making nonresident companies and loss-making French companies violates the free movement of capital in the Treaty on the Functioning of the European Union. The tax rules applicable to loss-making nonresident companies are modified for fiscal years ending on 1 January 2020 or later. These companies could benefit from a temporary reimbursement of the withholding taxes provided for in articles 119 bis, 182 A bis, 182 B, 244 bis, 244 bis A and 244 bis B of the French tax code (FTC). The amounts reimbursed correspond to the amount of tax that the companies would subsequently repay if they become profitable again.
The following conditions must be fulfilled to benefit from the temporary reimbursement of withholding taxes:
- Regarding the dividend withholding tax provided for in article 119 bis of the FTC, the recipient must be a legal entity that is located either:
- In an EU or European Economic Area (EEA) country that has concluded a treaty on administrative assistance and a mutual assistance agreement with France; or
- In a non-EU or non-EEA country if the entity does not have a sufficient participation in the distributing company to allow it to have an effective role in the distributing company’s management or control
- Regarding the other withholdings (articles 182 A bis, 182 B, 244 bis, 244 bis A and 244 bis B of the FTC), the recipient must be a legal entity based in an EU or EEA country; and
- In all cases, the recipient must be in a tax loss position
Extension of withholding tax exemption for dividends paid by companies in mandatory liquidation
The withholding tax exemption applicable to dividend distributions made by companies in mandatory liquidation provided for in article 119 quinquies of the FTC would be extended to other income and profits received and realized by these companies (if they are located in an EU or EEA country that has concluded a treaty on administrative assistance and a mutual assistance agreement with France) and subject to the withholding taxes addressed in articles 182 A bis, 182 B, 244 bis, 244 bis A and 244 bis B of the FTC.
This withholding tax exemption also applies to the dividend withholding tax (article 119 bis of the FTC) but it would apply only to entities in mandatory liquidation located:
- In an EU or EEA country that has concluded a treaty on administrative assistance and a mutual assistance agreement with France; or
- In a non-EU or non-EEA state (that has concluded a treaty on administrative assistance and a mutual assistance agreement with France) provided the entity does not have a sufficient participation in the distributing company to allow it to have an effective role in the distributing company’s management or control
Recalculation of branch tax for distributions arising from foreign-source profit
The after-tax income of French branches of nonresident companies is deemed to be distributed to the nonresident and is subject to a 30% branch tax. The branch tax could be recalculated if the nonresident company (located in an EU or EEA country) demonstrates that the distributions that are subject to withholding tax under article 115 quinquies of the FTC arose from foreign-source profits. This rule would be consistent with a recent decision of the Supreme Administrative Court (decision CE, 10 July 2019, n°412581) in which the court concluded that the French branch tax violated EU law and, specifically the freedom of establishment principle in the EU treaty.
Mergers between sister companies
A 2019 law (n° 2019-744) extended the simplified merger regime to mergers between sister companies, thus eliminating the need for a share exchange. This modification was made without the necessary changes to the applicable tax regime. As a result, such mergers could no longer benefit from tax-free treatment.
To ensure that mergers between sister companies remain tax-free, the 2020 finance bill modifies article 210-0 A I,3 of the FTC as follows:
- It lists the conditions that must be fulfilled for capital gains and capital losses realized in a merger to receive long-term treatment without shares having to be exchanged
- It provides methods that can be used to determine the holding period of shares when they are held for less than two years after the merger (which is necessary to apply the parent-subsidiary regime under domestic law); and
- It modifies article 112 of the FTC to align the tax regime applicable to distributions allocated to retained earnings (i.e. the consideration used in a merger without a share exchange) with the merger bonus tax regime.
These measures apply retroactively as from 21 July 2019.
The 2020 finance bill implements the ATAD 2 (2017/952 EU Anti-Tax Avoidance Directive) into domestic law. The ATAD 2, which aims to prevent multinational companies from using “hybrid” arrangements to limit the taxation of their profits, also applies to hybrid mismatches with non-EU countries, thereby extending the scope of the anti-hybrid provisions of the ATAD 1 (2016/1164 EU Anti-Tax Avoidance Directive). The directive also aims to ensure a harmonized and coordinated approach in the EU to the implementation of action 2 of the OECD BEPS project (neutralizing the effects of hybrid mismatch arrangements).
The finance bill introduces rules (article 205 B, 205 C and 205 D of the FTC) that address the following types of arrangements:
- Situations that give rise to a deduction without inclusion of:
- A payment under a financial instrument
- A payment to/by a hybrid entity
- A payment to an entity with one or more permanent establishments (PEs)
- A payment to a PE; or
- A deemed payment between a head office and a PE, or between two or more PEs
- Situations that give rise to a double deduction; and
- Specific situations involving:
- An imported hybrid
- A payment to a PE that is disregarded in its jurisdiction
- A hybrid transfer
- A reverse hybrid; or
- A double deduction by a payer that is a dual tax resident
The ATAD 2 rules apply only to hybrid mismatches that arise between the taxpayer and its associated enterprises (i.e. generally, entities in which the taxpayer holds a 50% direct or indirect interest (or 25% interest in some cases)) or between associated enterprises. An exception applies to structured arrangements involving a taxpayer, in which case the presence of associated enterprises is not required.
Hybrid mismatches result from the difference in the treatment of financial instruments, entities or payment attribution rules between two countries. Such differences may result in either a deduction in one country without corresponding taxation in the other, a deduction in both countries or no taxation in either country. The bill provides several ways to neutralize hybrid arrangements: either France can disallow the deduction of a payment that is not taxed or that is deducted in the other country, or France can tax income resulting from a payment that is deducted or not taxed in the other country. Another solution is for France to tax payments made by a French entity to a PE located in another country if the PE (and thus its income) is disregarded there.
However, the bill provides exceptions to the anti-hybrid rules and notably in cases where:
- The hybrid transfer is made by a professional financial trader; or
- The double deduction affects a payment that is also subject to a double inclusion; or
- The imported hybrid is fully corrected by another country
Together with the implementation of these rules, article 212 I, b) of the FTC, which limits the deduction of interest expense to the extent the related party recipient is subject to less than a minimum interest tax rate on the payment, will be abolished as it conflicts with ATAD 2.
These measures apply as from 1 January 2020; the measures regarding reverse hybrids will be effective as from 1 January 2022.
According to the French exit tax rules (article 221, 2 of the FTC), unrealized capital gains from the transfer of a main office or establishment from France to an EU/EEA country that has concluded a mutual assistance agreement in relation to recovery with France are spread over five years. Any tax due on the unrealized gains must be paid within two months following the transfer, either in full or in five equal annual installments.
To comply with article 5 of the ATAD 1, the exit tax, spread over five years, also applies to the transfer of individual assets, whether or not a main office or an establishment is transferred to the EU/EEA country. The new rule applies as from 1 January 2020.
Interest expense deduction limitation
The 2019 finance law introduced new interest expense deduction limitation rules to implement the ATAD 1 into domestic law, significantly revising French rules in this area.
Pursuant to the ATAD 1 rules, net borrowing costs are deductible only up to the greater of:
- 30% of the taxpayer’s EBITDA (i.e. earnings subject to standard corporate income tax before interest, tax, depreciation and amortization); or
- EUR 3 million
The 2019 law also introduced several other new rules, including:
- A safeguard clause allowing an additional 75% deduction by a consolidated group (beyond the amount allowed under the thresholds discussed above)
- Lower thresholds (10% of EBITDA or EUR 1 million) for companies that are thinly capitalized; and
- Specific rules for tax consolidated groups
The 2020 finance bill clarifies how EBITDA should be calculated. The earnings to be taken into account are those before reduction by tax losses carried forward and before application of the interest expense deduction limitation. For tax consolidated groups, only the amortization and depreciation that have not been neutralized as a consequence of the tax consolidated group regime should be taken into consideration
The bill also provides a special rule for “autonomous” companies, i.e. companies that are not part of a consolidated group (as defined in 2° of VI of article 212 bis of the FTC) and that do not have a PE outside of France or an associated company (as defined in paragraph (4) of article 2 of the ATAD 1). Those companies will be able to deduct 75% of excess borrowing costs deemed nondeductible under the general limitation rule (30% of the EBITDA / EUR 3 million thresholds).
The new interest expense deduction limitation rules apply to fiscal years ending on 31 December 2019 or later.
Transfer of losses in a restructuring
Loss carryforward from the target or the transferor may be transferred in a tax–free merger only if the acquiring company receives approval from the budget minister or the tax authorities after meeting certain requirements.
In some cases, the approval may be waived, allowing the target’s tax losses, finance costs and unused deduction capacity to be fully transferred, as long as:
- Their combined amount does not exceed EUR 200,000
- The target company has not transferred its business or establishment or ceased operating; and
- The transaction qualifies for the preferential, tax-free regime
Approval waivers are not applicable to demergers or partial transfers of business assets.
Patent box regime
Both the OECD and the EU have adopted a “nexus” approach for the application of patent box regimes, which consists of allocating the tax benefits derived from the exploitation of a patent or similar intangible asset to research and development (R&D) expenses realized in the country where the expenses are incurred.
The 2019 finance act ensured that French tax rules were in line with the OECD and EU initiatives. Under the current French nexus regime, income and capital gains arising from patents (acquired or created) are taxed at a reduced corporate tax rate of 10%.
The 2020 finance bill amends the nexus regime in two ways:
- When qualifying assets are held by partnerships (“sociétés de personnes”) (i.e. entities that are not subject to corporate income tax), a 10% tax rate applies to the share of income owed to corporate partners or to individual partners performing their professional activities within the entity; and
- Net income subject to the 10% tax may be offset by operating losses from the same fiscal year
This measure applies to fiscal years ending on 31 December 2019 or later
Changes to tax credits and tax reductions
R&D tax credit
French tax law provides for a 30% R&D tax credit on qualifying research expenses up to EUR 100 million and a 5% credit above this limit if certain criteria are met. Eligible expenses generally include R&D staff expenses, general and administrative (G&A) expenses and depreciation allowances for assets used for R&D activities in France. Current law allows an estimate of G&A expenses equal to 50% of all R&D staff expenses and 75% of the depreciation allowance for assets used in R&D activities in France. As from 1 January 2020, the 50% estimate for R&D staff expenses would be reduced to 43%, while the 75% estimate for the depreciation allowance would remain unchanged.
Companies are required to file an appendix to the R&D tax credit return describing the nature of the R&D performed. This requirement does not apply to companies with less than EUR 100 million in qualifying research expenses. Companies that spend between EUR 10 million and EUR 100 million on research will have to file an appendix to the R&D tax credit return (primarily providing details regarding doctoral students who are recruited or whose doctorate is financed with those expenses).
Expenses allocated to public or accredited providers will be limited to expenses incurred in research that those providers conduct directly. A company will not be allowed to include R&D expenses incurred in R&D subcontracted to non-accredited private providers in the base of its R&D tax credit. Only expenses related to R&D conducted by public providers may be double counted.
Tax reduction for corporate philanthropy
Companies that make charitable donations qualify for a 60% corporate income tax reduction, limited to EUR 10,000 or 5‰ of the company’s turnover per fiscal year, whichever is greater. For payments made during a fiscal year ending on 31 December 2020 or later, the limit would be increased to EUR 20,000. Companies that make donations exceeding EUR 2 million would qualify for a 60% income tax reduction for the portion of contributions totaling EUR 2 million or less and a 40% reduction for donations exceeding this amount. However, the 60% reduction still would apply if donations are made to certain non-profit organizations (e.g. organizations that provide for basic needs, free meals, housing or other care to persons in need) regardless of the amount. Taxpayers would be able to carry forward surplus donations for the five years following the year of the donation, subject to the same limitations (EUR 20,000 or 5‰ of turnover, whichever is greater), and would benefit from the same tax rates (60% or 40%, as applicable).
The 2020 finance bill also provides that “skill-based” patronage, i.e. employee use, should be taken into account when calculating the tax reduction, up to the amount of the employee’s wages, including social charges, but limited to three times the threshold provided for in article 241-3 of the social security code (EUR 40 524 for 2019).
Individual income tax
Nonresident withholding tax
The 2019 finance law reformed the taxation of nonresidents by amending the withholding tax applicable to wages, pensions and life annuities paid to nonresidents (article 182 A of the FTC). The new law increases the minimum tax rate applicable to the French-source income of nonresidents (article 197 A of the FTC) and removes the partly discharging nature of this withholding tax (article 197 B of the FTC).
The entry into force of these new rules is delayed until 1 January 2021 (instead of 1 January 2020, as planned in the 2019 finance law). The nonresident withholding tax provided for in article 182 A will be abolished as from 1 January 2023 and will be replaced by the general law withholding tax (prélévement à la source or PAS).
Under the new rules, the application of a specific withholding tax to nonresidents for gains derived from French employee stock ownership plans (article 182 A ter of the FTC) would be still applicable. However, as from 1 January 2023, those gains will be subject to the general withholding tax (PAS) base and rate.
Taxation of corporate executives
According to the domestic tax residence rules, the following individuals are considered resident in France:
- Persons whose household or principal place of residence is in France
- Persons who carry out their primary professional activity in France
- Persons whose core economic interests are in France; and
- Public officials who perform their functions in a country where their income is not subject to tax
Under the new rules in the finance bill, executives of large French corporations with annual turnover exceeding EUR 250 million would be deemed to perform their principal professional activities in France, subjecting these executives to French income tax (see second bullet above). This establishes a link, for domestic law purposes, between those functions and the executives’ French tax residence. Therefore, the new provision adds precision to the domestic law criteria for French tax residence that tax treaties are likely to supersede. In fact, French tax treaties are extensive enough to cover French individual income tax, including wealth tax on real estate assets in some cases. However, considering the small number of French tax treaties addressing inheritance and gift taxes, the domestic law criteria are more likely applicable.
If the corporation is a member of a group of controlled companies, the EUR 250 million annual turnover threshold must be determined at the group level in the meaning of article L 233-16 of the French commerce code.
The finance bill explains that corporate “executives” include the chairman of the board of directors when he/she assumes the direction of the company, the chief executive, managing directors, the president and members of the management board, as well as other managers or executives with similar functions.
This new tax residency rule applies to personal income, real estate wealth, as well as inheritance and gift taxes. It applies as from 1 January 2019 for individual income tax, and as from 1 January 2020 for real estate wealth tax, inheritance and gift taxes.
Tax audits and litigation
Use of open social media data for tax audits
The French tax authorities (FTA) currently use innovative “data mining” techniques to detect tax fraud and target taxpayers for audit. These techniques are limited to data reported to the FTA/French indirect taxes and customs administration and do not extend to open data, including data on social media.
The 2020 finance bill creates a three-year pilot program that allows the FTA/French indirect taxes and customs administration to exploit data made public on online platforms (such as social media platforms). Although such data is published freely by online platforms users, its exploitation implies that the processing of personal data, which should be strictly regulated, should come with certain guarantees and be limited to the most serious infringement cases listed in the law (e.g. search for unreported activities and fraudulent tax domiciliation). The law provides that the data collected should be adequate, relevant and limited to what is strictly necessary, and its use should be proportionate to the intended purpose.
When there is evidence of the most serious infringement as listed in the law, the data collected will be shared with the relevant department of the FTA or French indirect taxes and customs administration. “Sensitive” data collected (within the meaning of I of article 6 of law n° 78-17 of 6 January 1978) or any other data not directly linked to the most serious infringement will have to be destroyed no later than five days after its collection. However, the data collected could be retained for up to one year if it is strictly required to uncover tax offenses relating to the most serious infringements, or until the end of criminal, tax or customs proceedings for which it is being used. Any other data will have to be destroyed no later than 30 days after its collection. The outsourcing of data handling and storage is prohibited.
The French supreme administrative court will detail the measure’s implementation rules in a decree that will be reviewed by the national information and liberties commission.
Content provided by TAJ, member of Deloitte Touche Tohmatsu Limited.