France: French Tax Update: Draft Finance Bill For 2016, New France/Germany Double Tax Treaty, And ECJ Steria Decision

Last Updated: 9 October 2015
Article by Siamak Mostafavi, Nicolas André, Alexios Theologitis, Thomas Le Frêche and Martin Bünning

Most Popular Article in France, October 2015

This French Tax Update will focus on (i) the main provisions of the draft Finance Bill for 2016 (Projet de loi de finance pour 2016) issued by the French Government on September 30, 2015 and to be discussed before the French Parliament between October and December ("Draft Finance Bill for 2016"), (ii) the amendment signed in March 2015 in respect of the France/Germany double tax treaty, and (iii) the decision issued in early September by the European Court of Justice ("ECJ") in the Steria case.

DRAFT FINANCE BILL FOR 2016 

PERSONAL INCOME TAX TO BE WITHHELD AS FROM 2018  

Personal income tax is currently directly declared and paid by individual taxpayers themselves. The Draft Finance Bill for 2016 proposes to switch to a withholding system as from January 1, 2018. Although the main features of the personal income tax system (e.g. progressive scale, basket rules, etc.) should not be modified by such switch, the specifics of the reform will be discussed during 2016, inter alia in order to determine the scope of the withholding (essentially salaries and similar income) and the treatment of the transition year (the current system entails an interval as the personal income tax declared and paid in a given year is based on the income of the previous year).

REDUCTION OF THE GLOBAL CORPORATION INCOME TAXES BURDEN

The Draft Finance Bill for 2016 contains the following announcements:

  • the corporation income tax (impôt sur les sociétés) standard rate will be decreased from 33,33 percent to 28 percent by 2020;
  • the corporate social solidarity contribution (contribution sociale de solidarité des sociétés, so-called C3S) will be progressively repealed by 2017;
  • the temporary surcharge on corporation income tax (contribution exceptionnelle sur l'impôt sur les sociétés, currently imposed at the rate of 10.7 percent on the corporation income tax liability of companies with a turnover in excess of €250 million) will be repealed by the end of 2016.
     

Several amendments to the current filing system are proposed by the Draft Finance Bill for 2016, in order to have all transfer pricing documentations filed electronically.

ANTI-AVOIDANCE MEASURES

The Draft Finance Bill for 2016 proposes several measures to combat tax avoidance and tax evasion, in particular in the field of VAT.

The Draft Finance Bill for 2016 will be discussed before the French Parliament between October and December and most likely adopted before year-end. It will be complemented by the amended finance bill for 2015 (Loi de finances rectificative pour 2015), which is likely to contain further technical provisions.

NEW FRANCE/GERMANY DOUBLE TAX TREATY

On March 31, 2015, the Ministers of Finance of France and Germany signed an amendment ("Amendment") to the double tax treaty entered into between France and Germany on July 21, 1959 ("FR/GER Treaty"), as amended on June 9, 1969; September 28, 1989; and December 20, 2001.

The most salient provisions of the Amendment are discussed hereinafter.

SCOPE AND DEFINITIONS

The Amendment (i) restricts the scope of the FR/GER Treaty to persons who are residents of France and/or Germany, and (ii) extends the definition of "resident" provided under Article 2 of the FR/GER in order to include both countries and their political subdivisions or local authorities.

A new paragraph is furthermore inserted by the Amendment to the supplementary protocol to the FR/GER Treaty so that pension funds that are not subject to tax or, in the case of Germany, that benefit from a special treatment of premiums paid may benefit from treaty relief where 50 percent of their beneficiaries, members, or participants are individuals who are residents of France and/or Germany. It is, however, unclear how it can be proved that the beneficiaries etc. in fact are resident in the state of the pension fund.

CAPITAL GAINS 

The Amendment introduces a new Article 7 to the FR/GER Treaty on capital gains, essentially along the lines of Article 13 of the OECD Model.

New Article 7 of the FR/GER Treaty provides that capital gains derived from the transfer of shares of a company or any other entity whose assets consist of more than 50 percent of their value (directly or indirectly through one or several companies or other entities) of real estate assets ("Real Estate Company") are taxable in the country where the relevant real estate assets are located (it being noted that real estate assets used for the purposes of a business are excluded from such definition, which constitutes a deviation from the OECD Model and the German negotiation principles—Verhandlungsgrundlage)).

From a French standpoint, a 33.33 percent withholding will consequently be applicable on the capital gains derived from the transfer of shares in a French Real Estate Company by a German resident. Under current domestic law, Germany would tax the capital gain only when the Real Estate Company either has a German principal place of management or its statutory seat is in Germany, i.e., a capital gain derived by a French resident from the disposal of shares in a Real Estate Company that neither has a principal place of management in Germany nor a German statutory seat would still not be taxed in Germany. In the case of the sale of shares in a Real Estate Company having either a German principal place of management or a German statutory seat, a French corporate seller would benefit from a 95 percent exemption from German corporate income tax provided it does not qualify as a financial undertaking that realizes a short-term capital gain. The taxable portion of the capital gain would be subject to 15.825 percent corporate income tax (including solidarity surtax). An individual could claim a 40 percent tax exemption for the capital gain.

Interestingly, the FR/GER Treaty in the context of Real Estate Companies only refers to shares in stock corporations and similar shares (Aktien und vergleichbare Anteile). It could be argued that this wording excludes shares in limited liability companies (Geschäftsanteile) especially since the wording deviates from the German negotiation principles.

Pursuant to a redrafted blanket clause, capital gains other than those derived from the transfer of shares of a Real Estate Company remain taxable only in the country of residence of the transferor.

Furthermore, new Article 7 of the FR/GER Treaty provides that both France and Germany reserve their right to tax capital gains derived by a resident individual of the other country where the individual was a former resident during at least five years, thereby effectively allowing the application of exit taxes for individuals. In practice, the country looking to apply an exit tax is allowed to tax any capital appreciation accrued during the period of time during which the individual was a resident of such country in respect of shares held in a resident company of such same country. In turn, the other country (i.e., the new residence country) has to take into account the exit tax so imposed by the former residence country in order to determine the tax liability of the relevant individual in respect of the capital gains derived from the transfer of the relevant shares.

DIVIDEND DISTRIBUTIONS BY REAL ESTATE INVESTMENT VEHICLES

The Amendment introduces a new paragraph 10 to Article 9 of the FR/GER Treaty dealing with dividend distributions made by real estate investment vehicles (French REIT-like entities (Société d'Investissements Immobiliers Cotées, "SIIC") and real estate funds (Organisme de Placement Collectif Immobilier, "OPCI") for France, and G-REIT for Germany).

Under this new paragraph, using a similar wording to that included, for example, in the double tax treaty entered into between France and the United Kingdom in 2008, the benefit of the withholding tax limitations will be denied to dividends paid out of income or gains derived from real estate assets where (i) the distributing real estate investment vehicle (a) distributes most of such income or gains annually and (b) benefits from a tax exemption in respect of such income or gains, and (ii) the beneficial owner of those dividends holds, directly or indirectly, 10 percent or more of the capital of the distributing real estate investment vehicle.

From a French tax standpoint, a 30 percent withholding tax rate will consequently be applicable to dividends paid by a French SIIC or OPCI to a German beneficial owner. In the reverse situation, a G-REIT would have to withhold 26.375 percent (25 percent plus solidarity surtax thereon) from any distribution.

METHODS FOR ELIMINATION OF DOUBLE TAXATION

On the French side, the Amendment introduces several modifications:

  • the method for elimination of double taxation as provided under Article 20-2 of the FR/GER Treaty is restricted to income that is not exempt from corporation tax by virtue of French tax law;
  • the list of income covered by the credit method is amended under Article 20-2 (a)(aa) of the FR/GER Treaty;
  • the Amendment maintains the credit method allowing French residents to claim foreign tax credit on the amount of German withholding tax actually paid but limited to the French tax due on such income; however, the scope thereof is amended and will inter alia include capital gains derived from real estate assets and certain dividends; and
  • a subject-to-tax condition will be included under Article 20-2 (a)(bb) in respect of the exemption method.

On the German side, the Amendment maintains the exemption method with progression as provided under Article 20-1 of the FR/GER Treaty, but it introduces a specific provision allowing Germany, in respect of business profits and upon notification to France, to switch to the credit method.

NON DISCRIMINATION

The Amendment adds a new sentence to Article 21 of the FR/GER Treaty to provide that a resident and a nonresident will not be deemed to be in the same circumstances, irrespective of the nationality definition.

The Amendment further adds a new paragraph to this same Article 21 of the FR/GER Treaty in order to bring the tax treatment of contributions made by an individual to a pension scheme in line with Commentary 38 on Article 18 of the OECD Model.

EXCHANGE OF INFORMATION AND MUTUAL AGREEMENT PROCEDURE

Article 23 of the FR/GER Treaty is modified by the Amendment in order to bring the exchange of information and assistance in the collection of taxes provisions in line with the OECD Model.

The Amendment also merges Articles 25 and 25(a) of the FR/GER Treaty into a new Article 25 in order to comply with the OECD standards. Under this new Article, a case may be submitted to arbitration where the competent authorities of both France and Germany have failed to reach an agreement over a treaty dispute within three years (a two-year period applies under the current FR/GER Treaty).

ENTRY INTO FORCE

As is usually the case, France and Germany must notify each other of the completion of their ratification procedures, and the Amendment will enter into force on the first day following the date on which the latter notification is received.

The ratification by the French parliament and the German parliament is expected for the last quarter of 2015. Subject to reciprocal notifications prior to December 31, 2015, the provisions contained in the Amendment should thus enter into force as from January 1, 2016.

It should in any event be noted that representatives of the French tax authorities have since announced, during a tax professionals conference, that the Amendment should be regarded as a step toward a more global renegotiation of the FR/GER Treaty to take place in the coming years. 

ECJ DECISION IN THE STERIA CASE

In a recent judgment dated September 2, 2015 (C-386/14), rendered following a request for a preliminary ruling by the Appeal Court of Versailles (CAA Versailles, July 29, 2014, n° 12VE03691, Sté Groupe Stéria), the European Court of Justice ("ECJ") found that the taxation of a 5 percent add-back on dividends received from EU subsidiaries was in certain cases not compliant with the freedom of establishment principle.

This judgment follows a claim introduced before the French tax authorities by Groupe Steria SCA, a French company owning at least 95 percent of subsidiaries established both in France and in other EU Member States. However, contrary to dividends received from its French subsidiaries—dividends fully exempt from corporate income tax because of their belonging to a tax group—dividends received from EU subsidiaries are subject to a taxation of a 5 percent add-back.

The ECJ had to decide whether the differentiated tax treatment applied to dividends received from French subsidiaries and dividends received from subsidiaries established in other EU Members States did or did not comply with the freedom of establishment principle. The ECJ ruled that excluding dividends paid by subsidiaries established in other EU Member States from the benefit of a full exemption is liable to make it less attractive for companies to exercise their freedom of establishment, as it would deter them from setting up subsidiaries in other Member States.

Moreover, the ECJ ruled that this difference in treatment cannot be justified, neither by the need to safeguard the balanced allocation of the power to impose taxes between the Member States nor by the need to safeguard the cohesion of the tax system.

Taxpayers should assess the opportunity to file a claim with the French tax authorities in order to request a tax refund relating to the 5 percent add-back on dividends received from subsidiaries established in other EU Member States and that could have been members of a tax group had they been established in France. A claim filed before December 31, 2015 would allow recovery of the relevant corporate income tax paid since 2013 (in respect of FY 2012).

It will be interesting to closely monitor the measures that will be taken by the French legislator in order to end this restriction on the freedom of establishment. An abolition of the neutralization of the 5 percent add-back of the proportion of costs and expenses within a tax-integrated group might have adverse tax consequences for French tax groups.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nicolas André
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.