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social solidarity contribution (contribution sociale de solidarité des sociétés, so-called C3S) will be progressively repealed by 2017;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million) will be repealed by the end of 2016.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.