France: 1997 Finance Act/Amended 1996 Finance Act

Last Updated: 17 January 1997
This article is designed to summarize the main provisions of the 1997 Finance Act and the Amended 1996 Finance Act. Although few new structural measures have emerged, it is still worth taking a closer look at several articles of these texts.


Depreciation Of Private Vehicles: Increase In The Price Ceiling Used As The Basis For The Calculation Of The Deductible Amount Of Depreciation

Taking into consideration the increase in the cost of mid-range private vehicles, the 1997 Finance Act has raised the deductible price-ceiling from FRF 100,000 to FRF 120,000. The usual depreciable life remains 5 years.

Example: car acquired on December 1,1996 at a price of FRF 145,000.

- Depreciation allowance: FRF 145,000 * 20% * 30/360 = 2417
- Depreciation deductible for tax purposes: FRF 120,000 * 20% * 30/360 = 2 000

Provisions For Newspaper Publishing Companies (Article 39 Bis Of The CGI): Renewal And Adjustments To The Regime

The regime enabling newspaper publishers to apply special deductions (in the form of a direct deduction from profits or a provision) intended to help finance a portion of the cost of certain investments is renewed for a further five years (FY 1997 to FY 2001). It should be noted that the conditions to be satisfied by companies seeking to benefit from this regime have not changed. The provisions of Article 39 bis of the French Tax Code are thus still reserved exclusively for the benefit of companies running a daily or weekly newspaper or a monthly or bi-monthly journal primarily devoted to political news. Specific, cultural, technical or sports journals are not therefore concerned.

The key change to the regime provided for in Article 39 bis lies in the reduction in the cash flow advantage that companies have enjoyed until the present time by setting up a special provision, to the extent that the latter was not definitively allocated to the financing of fixed assets in the allotted time-period. Indeed, recoveries of the provisions concerned with respect to the unused portion thereof at the end of the five-year period are subject to a specific increase. The new mechanism consists in adding back to taxable income for the period during which the recovery is made an amount corresponding to the product of the provisions in dispute and the interest rate applied to late payments under Article 1227 of the French Tax Code (CGI), which is set at 0.75% per month, that is an annual rate of 9%.

In addition, the special regime is subject to the following changes:

  • an extension of the category of capital investments eligible for deductions. The special regime is thus extended to cover both acquisitions of land and acquisitions of controlling interests in printing companies, as well as to the creation of databases;
  • an increase in the ceiling on the special deductions. The increase concerns both the ceiling on deductions calculated as a ratio of income for the period, which has been raised from 60% to 80% and that relating to the cost of the investment which has gone up from 80% previously to 90% currently;
  • restoration to income of the deductions allocated to non-depreciable capital investments;
  • an increase in the taxable rate applied to recoveries of unused provisions.


Reduction Of The Corporate Income Tax Rate For Small And Medium Size Companies Strengthening Their Shareholders' Equity.

The 33 1/3% rate of corporate income tax is reduced to 19% for small- and medium-sized companies which strengthen their shareholders'equity.

This provision is reserved exclusively for the benefit of small- and medium-sized companies subject to corporate income tax under ordinary law which generate revenues of less than FRF 50,000,000 and are not the head of a group as referred to in Article 223 A of the French Tax Code during the first tax year in which a request to apply the reduced rate is submitted.
The company may benefit from the reduced rate for a series of three fiscal years (a positive fiscal year and the first two positive years that follow) on two conditions:

  • the corporate income which will benefit from this low rate must be incorporated to the company's capital before the end of the fiscal year that follows the realization of such an income.
  • the profit that may be subject to this rate is limited, for each of these year, to FRF 200.000.

It should be noted that the transfer of book income to shareholders'equity must take place during the tax year following that in which said income was realized.

In all cases, the 10% surcharge provided for in Article 235 ter ZA of the French Tax Code must be added to this 19% tax.

Deferred Taxation Regime Applicable To Inter-Account Transfers Of Securities.

According to the provisions of the amended Finance Act, the deferred taxation regime applicable to the "result" of inter-account transfers of securities has been extended in cases where the securities concerned are transferred:

  • to another company within the scope of a merger or a related operation placed under the specific tax regime provided by Article 210 b of the French Tax Code,
  • are sold within a consolidated tax group.

The result is passed on to the company receiving the contribution which is taxed thereon when the securities concerned are sold under conditions which do not qualify for a new deferral or extension period (AFA, Art.21).

We should stress that, as a general rule, the result of the intra-account transfer of portfolio securities, benefiting from the deferred taxation regime at the time of the transaction, must be taken into consideration in the period in which the securities are sold (Art. 219-I a ter).


Exemption from withholding tax
on intra-Community dividend distributions

Since the entry into force of EC Directive no. 90/435 of July 23,1990, European Community Member States are obliged:

  • to ensure that parent companies are exempt from taxation on dividends distributed by their subsidiaries established in another Member State in which they hold an interest of more than 25%,
  • to exempt the distribution of such dividends from any withholding tax.

Within this context, Article 20 of the amended Finance Act for 1996 creates the possibility for parent companies with their management seat in another EC Member State to benefit from a withholding tax exemption relating to dividends paid during the two-year period following the acquisition of at least 25% of the share capital of the company distributing the dividend, which is resident in France.

However, parent companies wishing to benefit from these arrangements will have to:

  • undertake to hold such interest for a period of at least two years;
  • and to appoint a VAT representative who shall be responsible for the payment of the withholding tax in the event of non-compliance with this obligation.


Duty On Contributions Of Assets.

The sale by a shareholder/partner of his shares in a company which has changed its tax regime between January 1, 1997 and December 31, 1998 with respect to corporate rights, still only remains liable to the fixed duty of FRF 500 that has been paid in direct result of this taxation regime change provided that the purchaser undertakes to hold the securities until the end of the fifth year following the change in tax regime. Such undertaking must be made in the instrument of sale itself. Failure to comply shall, of course, render the difference between the FRF 500 and the 8.60% duty (plus additional taxes) immediately due.


Inclusion Of Telecommunication Services Within The Scope Of Application Of Article 259 B Of The CGI.

The telecommunication services are henceforth classified as services governed by Article 259 B of the French Tax Code. This notably includes telephone and telex services, specialized connections, group telecommunications (teleconferencing, telephone meetings, etc), communications with mobile phones, inter-network communications and the operation of video-communication services via cable networks.

Such services will thus be taxable in France if:

  • the service provider and the user are both established in France;
  • the service provider is established in France and the user is not liable to VAT and is established in the European Union;
  • the service provider is established outside France and the user is subject to VAT in France;
  • the service provider is established outside France and the European Union and the user is not liable to VAT and is established in France.

Free Samples

Article 43 of the amended 1996 finance act provides for the non taxation of the free delivery of samples even if the value of each of them exceeds FRF 200.


Classification Of Rental Income Paid To A Company Belonging To The Same Group With Respect To The Loan Of Fixed Assets As Added Value

Companies subject to business tax benefit from a ceiling on the amount of their contributions according to the added value they have produced during the tax year.

With regard to the ceiling on business tax applicable to a company belonging to a group, the rent paid by the lessee to companies controlling it or which it controls may no longer be deducted from added value. In return, it should be highlighted that the depreciation allowances and provisions for property rented out are accepted as a deduction from the lessor's added value.


Gains Arising From The Exercise Of An Option.

The Social Security Financing Law has introduced substantial changes to the tax regime applicable to Stock Options. Prior to the introduction of this law, the gain arising from the exercise of the option (i.e. the difference between the value of the share on the date of exercise of the option and the price of the option) was exempt from social security contributions, with the exception of a certain portion of the discount exceeding 5% of the share price at the time the option was granted.

Pursuant to Article 11 of the Financing law, this gain shall be considered as an addition to salary and, as such, is subject to social security contributions:

  • the shares are not registered securities,
  • or they are sold prior to the expiration of a period of five years following the date of grant of the option.

Of course, these provisions will not have any consequences in the most common circumstances where the aforementioned conditions are satisfied. Their main objective is to harmonize the tax and social security regimes with respect to the gain received from the exercise of the option since failure to comply will mean that this gain will be treated as an addition to salary with regard to both personal income tax and social security contributions.

The content of this article is intended to provide a French guide to the subject matter. Specialist advice should be sought for your specific circumstances.

For additional information contact Claire Acard on +33.(1).55 61 10 10 or enter text search: "ARCHIBALD ANDERSEN Profile".

The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar.

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