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 Nicolas André, Alexios Theologitis and Thomas Le Frêche

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.



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).


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social solidarity contribution (contribution sociale de solidarité des sociétés, so-called C3S) will be progressively repealed by 2017;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of 10.7 percent on the corporation income tax liability of companies with a turnover in excess of €250 million) will be repealed by the end of 2016.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.


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.


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.


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.


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.


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.


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.


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.


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).


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. 


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.

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Nicolas André
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