The Finance Bill for 2013 (December 30th, 2012, n° 2012-1509) and the 3rd Amending Finance Bill for 2012 (December 30 th, 2012 n° 2012-1510) have been approved by the French Parliament with Court, with significant reserves from the French Supreme Court.
This Tax Alert summarizes the main relevant budget measures for corporations and individuals, including multinational corporations with operations in France.
I. CORPORATE TAXATION
TAX CREDIT FOR COMPETITIVENESS AND EMPLOYMENT
A new tax credit (CICE) calculated on wages paid to employees earning less than 2.5 times the French minimum wage (€17,112 per year) has been introduced to improve business competitiveness.
The rate of the CICE is 4% for 2013 and 6% from 2014 onward. It is determined on a calendar year basis.
The tax credit can be set off against the corporate income tax liability due by the taxpayer in respect the fiscal year during which the wages have been paid. Excess tax credit can be carried forward for a maximum of three years. Unused credit after this three year period may be refunded. SMEs may benefit from immediate refunds.
PARTICIPATION EXEMPTION ON CAPITAL GAINS
Capital gains realized on participation shares held for more than two years are exempt, apart from a share of the costs and charges that remains subject to corporate income tax at 33.1/3%. This taxable share has been raised by 20%, from 10% to 12% (ETR of 4%, additional contributions excluded) and is now calculated on the gross amount of gains, notwithstanding any capital losses (in the past, the taxable portion used to be determined after deduction of capital losses).
For tax-consolidated groups, these new rules apply to intra-group transactions that were neutralized under the previous rules, i.e. reintegration shall be made on 12% of the gross capital gains where neutralization was made on 10% of the net capital gains. This will penalize companies exiting tax-consolidated groups.
The new regime applies to fiscal years ended as from December 31st, 2012.
RELOCATION OF REGISTERED OFFICES WITHIN THE EU
When a French company relocates its headquarters outside France, unrealized capital gains are immediately taxed.
For relocations within the EU, taxation may be avoided if the headquarters' assets remain in France in a permanent establishment. Any transfer of these assets outside France triggers capital gains taxation, which used to be paid immediately under the previously applicable rules. In order to comply with the latest ECJ decisions (EUJ, September 6th, 2012, n° C-38/10, EC v. Portuguese Republic & EUJ, September 28 th, 2012, n° 371/10, National Grid Indus BV), an option to divide payment over five years is introduced for asset transfers within the EU.
This option is therefore not available for assets transferred outside the EU.
NEW FINANCIAL EXPENSES DEDUCTION LIMITATION
Under the former regime, net interest expenses - after thin capitalization and anti-avoidance limitations - were fully tax deductible. As from January 1st, 2012, only 85% of the net financial expenses are deductible. This limitation will be further lowered to 75% as from January 1st, 2014. Interest in excess cannot be carried forward (permanent disallowance).
Financial expenses include interest expenses (whether paid to related entities or banks) and the financial portion of lease payments (the portion of the lease payments corresponding to depreciations booked by the owner shall be excluded). The purpose of the financing is not relevant.
A safe harbor rule applies to SMEs having financial expenses of less than €3m.
For tax-consolidated groups, these rules apply to the net financial expenses of the group, thus cancelling any intra-group interest expense/income. The €3m limit shall be determined on a group basis, after having aggregated all of the net financial expenses of the entities who are members of the tax-consolidated group. As a result, a company having less that €3m of net financial expenses can be caught by the new rules if the net financial expenses of the group exceed €3m.
CORPORATE INCOME TAX INSTALLMENTS
The regime of corporate income tax installments applicable to large companies is modified to accelerate the effective payments of tax due in the year. By the end of each fiscal year, corporate income tax installments should represent:
- 75% of the final corporate income tax when total sales exceed €250m;
- 85% of the final corporate income tax when total sales exceed €1b;
- 95% of the final corporate income tax when total sales exceed €5b.
TAX LOSSES CARRIED FORWARD
Carried-forward tax losses of up to €1m could previously be deducted from future taxable income, as well as 60% of the income exceeding €1m. This limitation is reduced to 50% of the income in excess of €1m. However, debt waivers in favor of companies in difficulty may result in this limitation being increased.
Excess tax losses can still be carried forward indefinitely and no "change in ownership / control" rules exist.
For tax-consolidated groups, the consolidated taxable profits can be offset against consolidated tax losses within these limits. The same limits apply to a subsidiary's carried-forward tax losses of years prior to the tax consolidation that can be deducted from the subsidiary's own taxable profits only.
These new limits apply to fiscal years ended as from December 31st, 2012.
R&D TAX CREDIT
New expenses can be taken into account when determining the R&D tax credit. For small and medium-sized companies, it is be possible to include some innovation expenditures when calculating the R&D tax credit, including those related to prototypes. These expenses can be taken into account within the limit of €400,000 per year and are eligible for a 20% tax credit.
VAT BILLING RULES TRANSPOSITION
EU billing rules as provided by Directive 2010/45/EU are effective in France as from January 1st, 2013. The basic rule is that the Member State where the supply of goods or services takes place sets the invoicing rules. Two exceptions are made for intra-community supplies of goods or services, subject to the reverse charge and supplies of goods or services which are taxable outside the EU. In these cases, the invoicing rules of the Member State where the supplier is established shall apply.
Additionally, equal treatment between paper and electronic invoices is established in order to promote the uptake of e-invoicing.
Finally, invoices have to accurately reflect the actual supplies of goods or services, thus requiring that the authenticity of the origin, the integrity of the content and the legibility of invoices are ensured from the time of issue until the end of the period of storage of the invoice. In addition to EDI, it is now permitted to use business controls to create a reliable audit trail between the invoice and the supply of goods or services so as to meet such requirements.
CHANGES IN VAT RATES
The VAT rates of 7% and 19.6% are increased to 10% and 20% respectively. However, the reduced VAT rate of 5.5% is lowered to 5%. The new rates apply as from January 1st, 2014.
Taxpayers with a VAT deduction ratio below 90% are subject to the payroll tax. Under the former regime, wages were taxed at 4.25% for the portion below €7,604, and 8.5% for the portion exceeding €7,605 per year.
The Social Security Finance Act has widened the payroll tax base, which is now identical to the CSG tax base, and introduced an additional tax bracket of 20% for wages over €150,000 per year.
The new rules significantly impact both the financial and soccer sectors given that financial entities and soccer clubs are not 100% subject to VAT while wages in these sectors are historically high.
II. INDIVIDUAL TAXATION
MARGINAL TAX RATE OF 45%
A new marginal income tax rate of 45% on income exceeding €150,000 per year is in effect. This measure applies to income received as from January 1 st, 2012. The exceptional surtax of 3% and 4% is maintained.
75% TAX ON VERY HIGH INCOME
The exceptional surtax of 18% on business income exceeding €1m (leading to taxation at 75%) was held to be unconstitutional by the French Supreme Court. The Government seems intent on introducing a similar tax in 2013, although the path left open by the Supreme Court appears to be very narrow (the marginal rate resulting from the surtax should not exceed 70%).
TAXATION OF FINANCIAL INCOME AT 45%
The tax rate of financial income is aligned with the rates of the other income taxes. Dividends and interest are now subject to standard progressive income tax rates (up to 45%) and to the exceptional surtax rates for high income of 3% and 4%.
Upon receipt, tax installments of 21% (dividends) and 24% (interests) respectively are withheld. Any remaining tax liability will be paid the year following receipt (together with the other income). Dividends still benefit from a 40% rebate. Taking into consideration the overall social contributions of 15.5%, the marginal rate on dividends is in the range of 40.2% and 58.2% for interest income (surtax for high income excluded).
The new regime shall apply to 2013 income. The retroactive application of the new rules to individuals having received income in 2012 (and who opted for the fixed levy at source) was struck down as unconstitutional by the French Supreme Court.
CARRIED INTEREST INCOME AT 45%
Carried interest income shall be taxed pursuant to the capital gain tax rules.
CAPITAL GAINS AT 45%
In 2011, capital gains realized on disposal of securities were subject to a flat rate of 19% (social contributions of 15.5% excluded).
This rate is increased to 24% for gains realized in 2012.
In 2013, the tax rate of capital gains is aligned with the rates of the other income taxes. Gains realized as from January 1st, 2013 are subject to standard progressive income tax rates (up to 45%) and the special surtax rates of 3% and 4%. An allowance based on the duration of ownership may reduce taxation: 20% for shares held for 2 years, 30% after 4 years and 40% after 6 years. The holding period shall start to run as from the acquisition of the shares.
The 19% flat rate is still applicable to "entrepreneurs", under reinvestment conditions.
STOCK OPTIONS AND RSU AT 45%
For RSU and stock options granted on or after September 28th, 2012, gains realized upon exercise of stock options or vesting of RSU shall be taxed as wages at the progressive income tax rate (up to 45%) and subject to the surtax of 3% and 4%. Tax payment shall be deferred until the disposal of the shares.
Social contributions shall be due at a rate of 8%, plus the 10% specific employee contribution.
CAPITAL CONTRIBUTIONS AND SUBSEQUENT SHARE TRANSFER
This operation allowed capital gains realized on share contributions to a holding company to benefit from a suspension of taxation while the contributed shares were sold by the holding company to retrieve cash.
This suspension of taxation has been replaced by a tax deferral i.e. the tax liability is set but its payment is deferred until either the contributed shares or the holding company shares are disposed of. Reinvestment of the capital gains may maintain the tax deferral under certain conditions.
Wealth tax was increased to return to the rates that were applicable in 2011 (from 0.5% to 1.5%), where taxable assets exceed €1.3m. A limitation has been introduced so as to limit the overall taxes paid to 75% of total income. However, the Constitutional Council struck down the inclusion of unrealized gains in total income.
III. TAX AUDIT RULES
The presentation of computerized accounting records during tax audits is now mandatory. Printed records will no longer be accepted. Failure to comply may lead to a penalty of 5% of the declared or reassessed gross revenue. In addition, such behavior would be considered as obstructing a tax audit, which allows the French Tax Authorities to impose unilateral tax adjustments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.