Below we provide a summary of the current major rules governing the French corporate income tax (CIT) as applied to financial instruments.
NB: Certain rules applicable to medium and small businesses are not covered hereafter.
1. CIT rates
The CIT rates are on the path to be reduced significantly in the coming years.
In 2018 the rate is 33.33 percent, except for the taxable profit up to €500,000 where the rate is 28 percent.
In 2019, the rate will be 31 percent, except for the taxable profit up to €500,000 where the rate will be 28 percent.
In 2020, there will be a unique rate of 28 percent, decreasing to 26.5 percent in 2021 and to 25 percent from 2022.
NB: Businesses with a turnover exceeding €1 billion were liable to one or two exceptional contributions, based on the CIT liability, for the financial year closed from December 31, 2017 to December 30, 2018.
NB: Businesses with a CIT liability exceeding €763,000 are liable to a so-called "social contribution" equal to 3.3 percent of their CIT liability (minus €763,000).
2. Tax losses
- Carry back
The carry back of any tax loss is limited in its scope, as it may not exceed €1 million, and may be imputed only against any profit of the immediately preceding financial year. The resulting claim against the French Treasury may be used to pay any future CIT liability within five years, and any unused portion will be redeemed at the end of the five year period (or used to pay other taxes).
- Carry forward
Any tax loss may be carried forward indefinitely. However, for any financial year, the imputable tax loss is limited to €1 million plus 50 percent of the taxable profit of such year exceeding €1 million.
Under specific circumstances (change of business, etc. ...), the taxpayer may lose the right to carry forward its tax losses.
3. Taxation of Dividends
French and foreign sourced dividends are, in principle, fully liable to CIT. Any tax credit (resulting from a withholding tax) attached to foreign sourced dividend is imputable against the CIT liability, subject to the imputation of certain costs against the taxable dividends.
Dividends may be effectively 95 percent exempt or 99 percent exempt, if certain conditions are met:
- The 95 percent exemption is available when, inter alia, the taxpayer holds an equity participation in the distributing entity equal to at least five percent of the share capital of the latter, for a minimum period of two years;
- The 99 percent exemption is available when the above conditions are met and the dividends are distributed within a French tax grouping, or by EU entities which would have been eligible to the French tax grouping if there were French incorporated, i.e., inter alia, if they are 95 percent or more held by the French parent.
NB: No exemption is available when the equity investment is acquired under certain transactions, e.g. stock loans and repos, or where the taxpayer owns only the "usufruct" (right to dividends) of such investment. Specific rules apply when the equity investment is transferred to a French law governed trust.
NB: No exemption is available when the taxpayer owns the equity investment through a tax transparent vehicle.
NB: No exemption is, in principle, available when the equity investment is held in an entity established in a so called "none cooperative jurisdiction."
NB: No exemption is available when the dividends are deductible for the distributing entity.
NB: No exemption is available when certain specific anti-abuse rules are applicable, i.e. the structure is deemed to lack substance.
NB: If the exemption is available, any tax credit attached to the relevant dividends is not imputable (e.g. foreign dividends liable to withholding tax in the source country).
NB: None voting shares are entitled to the exemption.
NB: The exemption is generally not available in respect of dividends distributed by REITs.
4. Taxation of capital gains on equity securities
The capital gains are generally fully liable to CIT (and the capital losses are fully tax deductible).
However, the capital gains realized in respect of the sale of certain eligible equity investments are 88 percent exempt when they are held for a minimum period of two years. When the eligible equity investment is held in a listed real estate entity, the capital gains are taxed at the specific CIT rate of 19 percent (investments in non-listed real estate entities do not benefit from any exemption or reduced CIT rate).
The eligible equity investments include, inter alia, those investments which are entitled to the dividends exemption (see 3 above), to the extent the investment represents at least five percent of the voting rights in the underlying entity, and those which are treated, for accounting purposes, as "participating securities" i.e., in essence, securities the holding of which is deemed to the useful for the business of the taxpayer (through the control of the underlying entity or through the influence exercized in such entity).
The exemption is also available for the equity investments acquired through certain public tender offers by the initiator of the tender offer.
NB: For the purposes of the computation of the holding period, the taxpayer has to apply, generally, the FIFO rule (first in, first out).
NB: Any capital loss on the sale of an eligible equity investment (held for 2 years or more) is not tax deductible. When the eligible investment is held in a listed real estate entity, any loss, after 2 years of holding, is imputable against the capital gains taxable at the specific 19 percent CIT rate.
NB: The capital gains on certain exchanges of securities (e.g. conversion, public tender offers, etc...) are taxable only upon any subsequent sale of the securities received in exchange.
NB: The capital losses realized on the sale of an eligible equity investment, before the end of the 2-year-holding period, is not deductible if the purchaser is a related entity.
NB: Treasury shares never qualify for the exemption.
NB: The transfer of equity securities under certain transactions (e.g. stock loan, repo, collateral, etc...) is not a taxable event under certain conditions.
NB: Certain financial institutions and insurance businesses are subject to specific rules in respect of the securities, which include certain mark-to-market taxation.
NB: Any gain or loss on the buy-back of the equity securities by the issuer is deemed to be a capital gain or loss and treated as above.
NB: Any capital gain or loss on the sale of equity securities within a French tax grouping is neutralized.
NB: Specific rules apply to investments held in capital venture funds.
NB: The exemption is not available when the investment is held, inter alia, in an entity invested mostly in non-eligible securities or managing such securities.
NB: The exemption is not available, in principle, in respect of investments held in entities established in none cooperative jurisdiction.
5. Taxation of debt securities (holders)
Any interest on the debt securities is fully liable to CIT on an accrued basis. Any capital gain/loss on the sale of the debt securities is fully taxable/tax deductible for CIT purposes.
NB: Specific rules apply to the taxation of the remuneration on the deep discount debt securities (i.e. those where the non-regular coupons or redemption premium exceeds 10 percent of the issue price).
NB: The capital gains on certain exchanges of securities (e.g. convertible bonds) are taxable only upon any subsequent sale of the securities received in exchange.
NB: Any tax credit attached to foreign sourced interest is imputable against the CIT liability, subject to the imputation of certain costs against the taxable coupon.
NB: The transfer of debt securities under certain transactions (e.g. stock loan, repo, collateral, etc.) is not a taxable event under certain conditions.
NB: The remuneration on the undated deeply subordinated instruments is generally tax deductible.
NB: Any capital gain or loss on the sale of debt securities within a French tax grouping is neutralised.
6. Taxation of debt securities (issuers)
The general principle is the full deductibility of interest assuming the usual conditions are met: arm's length rate, use of the borrowed money for corporate purposes, etc.
However there are a number of exceptions which limit the deductibility of the interest.
A general limit, is the so called "rabot" rule, whereby 25 percent of the "net financial expenses" (NFE) of the taxpayer are not tax deductible. The NFE are defined as any excess of the interest paid by the taxpayer over the interest received by it. The rabot quicks in when the NFE exceed €3 million.
NB: Specific rules apply for the rabot applied within a French tax grouping.
NB: The administration had taken the view that the amounts paid and received under interest rate swaps should be within the rabot rule, but a recent lower court decision ruled that only interest paid/received for actual money borrowed/lent should be taken into account.
A second limitation applies when the holder of the debt is a direct shareholder of the issuer without being an affiliate; the interest is deductible only if the share capital is fully paid up, and the interest rate does not exceed an average rate computed by reference to certain rates charged by financial institutions (e.g., currently, approx. 1.5 percent).
A third limitation applies when, the holder of the debt is an affiliate of the issuer and is, typically, located outside of France; the interest is not deductible if the holder is not liable to a tax charge which is equal to at least 25 percent of the CIT charge which would have been applicable under similar circumstances.
NB: The relevant foreign tax charge does not take into account the deductible expenses at the level of the holder; accordingly, in essence, the interest is deductible if the corporate tax rate applicable to the holder is not below 25 percent of the then current CIT rate (e.g., currently, around 8.33 percent given that the CIT rate 33.33%; see section 1 above).
Specific rules apply when the holder of the debt is, inter alia, a tax transparent vehicle.
The fourth limitation is a thin capitalisation one, where the interest paid to the affiliates is not deductible if one of these conditions is not met:
- The affiliate debt/equity ratio of the issuer does not exceed 1.5.
- The interest due to affiliates does not exceed 25 percent of the issuer's EBITDA.
- The interest due to affiliates does not exceed the interest due from affiliates.
If the thin cap limitation is applicable, the deductible interest is the highest amount obtained by using the above criteria (no limitation applies if the amount thus computed does not exceed €150 000).
NB: The thin cap also applies to debt vis-à-vis third parties guaranteed by affiliates.
NB: Specific thin cap rules apply to French tax groupings.
NB: No thin cap limitation applies if the consolidated debt/equity ratio of the group controlling the issuer is higher than the one of the issuer.
NB: No thin cap limitation applies to treasury pools, or to financings similar to a client financing.
A fifth limitation may apply when the issuer borrows to acquire an equity investment which benefits from the 88 percent exemption in respect of capital gains (see section 4 above). However, the issuer may achieve deductibility if it can prove that:
- the decisions in respect of the above investment are taken by it or by certain affiliates located in France (or located within EU plus Iceland, Norway and Lichtenstein), and
- when the underlying entity is controlled or is influenced, such control or influence is exercised by it or by certain affiliates.
If the limitation is applicable, the none deductibility would last until the closing of the 8th financial year following the acquisition of the investment, and the non-deductible amount would be equal to the aggregate interest multiplied by the ratio debt/purchase price of the target entity.
Special deductibility limitations may apply when the interest is paid to holders located in tax privileged jurisdictions or established in none cooperative jurisdictions.
NB: Under the ATAD Directive, which has to be implemented into the French legislation, the deduction of interest may be limited, in the future, to 30 percent of the EBITDA of the issuer.
7. Taxation of derivative instruments
The derivative instruments are subject to the normal CIT rules, with the below specific exceptions.
Certain derivative instruments are subject to a mark-to-market valuation at the end of each financial year of the taxpayer, any unrealised gain and loss being, in principle, fully taxable / tax deductible.
When two positions are deemed to be "symmetrical", (i.e. straddle) any mark-to-market loss on one position is not deductible until the gain on the other position is taxed.
Also the mark-to-market gain on a given position, at the end of a given financial year, is not taxed immediately if the only purpose of the position is to hedge the risk of a transaction to be implemented during one of the two following financial years (in which case the taxation would take place upon the implementation of the underlying transaction).
Also the mark-to-market gain on a currency derivative, which is hedging a future transaction, will be taxed over the same period as the underlying hedged transaction.
NB: Specific rules apply to the derivative business of certain financial institutions.
8. Financial transaction tax and stamp duties
Beside the CIT rules summarized above, the purchase of certain equity securities may result in a tax cost:
- the purchase of listed shares issued by French issuers, with a market capitalization of over €1 billion, is liable to the French financial transactions tax (FTT) at the current rate of 30 bp applied to the acquisition cost; numerous exemptions apply (market making, intra group transactions, intraday trades, temporary transfers, etc. ...)
- if the listed shares are not effectively subject to the FTT, their purchase may be liable to the stamp duties at the current rate of 10 bp, although no duties would be due if the purchase is not documented by a written agreement (interpreted broadly);
- non-listed shares may be liable to stamp duties.
9. Taxation of non-French corporate tax residents
The below summarized rules apply when the relevant non-resident has no French permanent establishment; if there is any French permanent establishment, the rules under sections 1 to 7 above would generally apply.
9.1 Holders of debt securities issued by French issuers
With certain very limited exceptions (e.g. when the holder established in a none cooperative jurisdiction), the French interest source is not subject to any French withholding tax (a withholding tax may apply if the interest is deemed to be a distribution of profits).
Any capital gain on the sale of the debt securities would not be liable to any French tax.
9.2 Holders of equity securities issued by French issuers
The French sourced dividends are generally liable to a 30 percent withholding tax (28 percent from 2020) which is generally reduced to 15 percent, for portfolio investments, under the international tax treaties signed by France; the withholding tax may be lower or eliminated when the holder has a significant investment in the issuer.
There would be no French withholding tax on dividends distributed by French subsidiaries to EU parents (subject to certain anti-abuse rules).
NB: Specific rules apply to dividends distributed to certain non-French UCITS (where a 0 percent withholding tax may be available) and certain non-French none for profit organizations (where a 15 percent withholding tax may be available).
NB: Specific rules apply for distribution by French REITs.
Any capital gains on sale of equity investments are not taxable in France unless the investment represents more than 25 percent of the profits of the issuer; even in that case, most international tax treaties signed by France protect the non-residents from any taxation in France.
NB: Specific rules apply to investments in French real estate entities and funds.
9.3 Derivative instruments executed with French counterparties
There is no French withholding tax on any payments made by the French counterparties to non-French tax resident counterparties, and on any profit on any assignment of the derivative by the non-French tax resident counterparties.
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