The 2021 Draft French Finance Bill released on 28 September 2020 introduces VAT Grouping provisions as well as a modification of the scope of the cost sharing exemption provided for by Article 261 B of the French Tax Code.
A single taxable person:
Article 45 of the 2021 Draft French Finance Bill envisages the transposition in France of Article 11 of the VAT Directive, according to which each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organizational links.
Modalities and conditions of the French VAT group:
The setting-up of a VAT Group will be available to entities established in France, without distinction according to their field of activity. The VAT Group regime will be structured as follows:
- VAT grouping will be optional,
- The VAT Group will be subject to a prior statement to the French tax authorities,
- Once elected, the VAT Group will be in place for a minimal 3-year period,
- The members of the VAT Group must be established in France and must be closely bound to one another by financial, economic and organisational links,
- The list of members forming the VAT Group will be freely chosen by the representative member at the time of election, with the agreement of these members,
- Once chosen, the perimeter of the group is fixed for 3 years. Thus, any new entry or exit of a member will be possible only at the end of the 3-year period (variations to the group as a result of a sale or purchase within the corporate group should be allowed),
- The representative of the VAT Group should be responsible for compliance obligations (such as filing the VAT return and the VAT payment) but all the members would remain jointly and severally liable for VAT debts. The representative member will also be in charge of claiming VAT credit refunds on behalf of the VAT Group,
- The VAT group will have its own VAT number,
- Once integrated, each member of the VAT Group will become, for VAT purposes, a “separate business unit” of the VAT Group,
- A taxable person may be a member of only one VAT Group. A VAT Group may not be a member of another VAT Group,
- Before the end of the 3-year period, a member will have to leave the VAT group as from the first day of the month following the month during which it no longer meets the VAT grouping conditions,
- Any entry / exit of a member will be assimilated for VAT purposes to a transfer of a totality of assets (so-called “TOGC”) benefiting from a VAT relief regime (Article 257 bis of the French Tax Code),
- Concerning input VAT recovery, each member will be considered as a separate business unit and the attribution method will apply in priority (Article 271 of the French Tax Code). The provisions of the corresponding articles of the French Tax Code, notably regarding the VAT pro-rata, should be amended by a decree of the French Supreme Court,
- The input VAT credit recorded by a member in respect of a period prior to the entry into force of the option for the VAT Group will remain acquired by this member (i.e. no possibility to carry over the input VAT credit of a member on the VAT return of the VAT Group),
- The input VAT credit recorded on the VAT return of the VAT Group during the application of the optional regime will be definitively acquired by the VAT Group,
- The option to apply VAT on financial services, if chosen, would have to be exercised by each member individually,
- The option for the payment of output VAT on supplies of services on an accrual basis could be exercised by the VAT Group or by each member individually.
The new regime would be applicable as from 1st January 2022 and the first French VAT groups could be created and operating as from 1st January 2023 (i.e. with an election before 31 October 2022).
The implementation of the French VAT group regime will be accompanied by amendments to some Articles of the French tax procedures book, with the objective to adapt the current French Tax authorities audit methods to take into account the introduction of VAT Grouping.
Consequences of the VAT grouping regime on the French salary tax:
The reform should also have an impact on the French salary tax. Indeed, VAT grouping regime may lead to an increase of the French salary tax to be paid by employers who are members of a VAT Group and who provide services to group members that would have been VATable in the absence of a VAT group. Actually, the flows within the VAT group may in principle be considered as outside the scope of VAT for the purposes of the calculation of the French salary tax ratio.
Modification of the scope of the cost sharing exemption:
Finally, the scope of the cost sharing exemption (Article 261 B of the French Tax Code) will be modified as from 1st January 2023. As from this date, the cost sharing exemption will only be applicable to transactions carried out in the field of health and education, as well as services supplied by non-profit organizations.