What’s Up in France? – Everything new is Expensive

As in past years, 2013 is in France a year very interesting one concerning tax actuality. Indeed, the 2013 Finance Act and 2012 Amended Finance Act have brought a lot of news most of it not particularly positive for tax payers. Some of this changes concerned corporate tax while others concerned income tax and, consequently, company managers. We propose you a brief summary of some of these taxes changes.
 
Tax loss carry-forwards
 
Until December 31, 2012, tax-loss carry-forwards may be offset with no limitation up to €1 million and for up to 60% of profits exceeding this threshold (i.e. a minimum taxation of 40% on profits exceeding €1 million). Further the 2013 Finance Act, the 60% limit is now reduced to 50%.
 
Restriction of the deductibility of interest
 
Under the Finance Act for 2013 and in addition to the preexistent constraints (thin-cap rules or anti-abuses measures), 15% of the net interest expenses will not be tax deductible. In addition, this rate will be increased to 25% concerning the fiscal year beginning on January 1st, 2014. Net interest expenses could be defined as the difference between interest expenses paid and interest income. However, this rule will not apply if the net interest expenses are lower than € 3 million.
 
Increase of Capital Gain Taxation on Qualifying Participations Realised By French Taxpayers
 
Until December 31, 2012, capital gains realised from the sale by a company of a qualifying participation were exempt from corporate tax with the exception of a 10% add-back lump portion, based on the net amount of capital gain, i.e. after deduction of capital losses. This 10% lump portion is now of 12% and based on the gross amount of capital gains.
 
Transfer of Headquarters or Permanent Establishment into a European Member State
 
In order to make French Law compliant with European Court of Justice case law, the transfer of headquarters or permanent establishment from France to an European Member state triggers the immediate taxation of profit or unrealised capital gain unless that the assets continue to be held by a French permanent establishment. As from November 14th 2012, the payment of the corporate tax by the company can be spread over five years, by five instalments of 20% of the total amount due.
 
Extension of the Exceptional Contribution on Corporate Tax
 
Companies whose turnover exceeds € 250 million are currently subject to an exceptional contribution on corporate tax equal to 5%. This contribution was initially supposed to be suppressed at the end of the year 2013. However, this exceptional contribution was extended by the 2013 Finance act until December 2015.  One can therefore question on the exceptional nature of this exceptional contribution in an exceptional period.
 
In addition to these tax law modifications concerning companies, the French legislator did not forget to strengthen French legislation with regard to income tax. Here are some examples directly applicable to company managers.
 
Removal of the Flat Rate Tax on Dividends and Interests
 
Dividends and interest paid to a French tax resident were subject to a flat tax rate (upon option for dividends) of 21% for dividends and 24% for interest.
 
Dividends and interests are now subject to income tax by application of the progressive scale, with a new marginal rate of 45%. Moreover, a withholding tax remains to be applicable to dividends, at the rate of 21%, and interest, at the rate of 24%, but is now considered as an instalment of individual income tax. However, the 40% allowance applicable to certain dividends was not suppressed by the legislator.
 
Modification of Shareholding Capital Gain Taxation
 
The capital gain from the sale by a French tax resident, as from January 1st, 2013, of shares is now subject to individual income tax by application of the progressive scale, instead of a flat tax rate of 24% for 2012 (19% for 2011).
 
However, the amount of the capital gain is reduced by a progressive allowance depending on the holding period of the shares. This allowance is equal to:
 
·         20% if the holding period is more than 2 years and less than 4 years;
·         30% if the holding period is more than 4 years and less than 6 years;
·         40% if the holding period is over than 6 years.
 
As a result of pressure from “young entrepreneurs”, the legislator has introduced a favourable tax regime under conditions. The capital gain derived from the sale of shares held in an operating company controlled by the seller and its relatives may be taxed at the flat rate of 19% under option, if the following conditions are met:
 
·         The seller must have exercised eligible executive functions or must have been employed in that company over the preceding 5 years.
·         The operating company must have an industrial, commercial, agricultural or liberal activity since at least 10 years or since its creation.
·         The shares of the seller must have been held continuously during the 5 years before the sale. They must have represented, continuously during at least 2 years during the last 10 years preceding the sale, at least 10% of the voting rights or of the rights in the social benefits. The shares have to represent at least 2% of these rights on the date of the sale.
 
This flat rate applicable to young entrepreneurs could be modified in the next months.
 
Moreover, the taxation of the capital gain derived from the sale of shares of companies submitted to corporate tax may, under conditions, be reported. The capital gain must be reinvested in the capital of companies submitted to corporate tax. Since 2013, the reinvestment must be done in the 24 months following the sale (36 months before 2013) and only 50% of the capital gain must be reinvested (80% before 2013).
 
It should be recalled that these taxes are accompanied by social contributions at a rate of 15.5%.
 
Consequently, 2013 is not in France a year particularly attractive to the investment both in corporate or individual terms, each of them having knew a tax increase.
 
Jérôme Barré heads the Tax department at Franklin.  After working as a legal and tax expert with the legal and finance division of the AXA Group, he served five years as general counsel and tax director of Rothschild & Cie Banque . In 1997, he set up and developed the “Asset Planning and Family Business” department at Pricewaterhouse Coopers (Landwell & Partners).  In 2002, he became a partner at Arthur Andersen International, then at Ernst & Young, law firm, again serving as chair of the “Asset Planning and Family Business” department.  He has been a partner at Franklin since May 2006.
 
Drawing on his experience in the banking and insurance sectors, as well as in buyouts and takeover bids, Jérôme Barré has developed a very pragmatic general knowledge of legal and tax issues.
Furthermore, he has extensive experience assisting clients in the course of tax litigations and tax investigations.
 
Jérôme Barré teaches a course on “International Corporate Tax Management” at the University of Paris IX-Dauphine and on “Individual Tax Law” at the University of Paris V-Malakoff.  He is also a frequent lecturer on his areas of practice in conferences and presentations, and the author of numerous articles published in the specialised press.  He is the president of the jury for the Asset Manager of the Year award sponsored by INVESCO and Gestion de Fortune magazine.  Jérôme Barré is also a member of the HEC Entrepreneur jury.  He contacted via at e-mail at jbarre@franklin-paris.comand phone at +33 (0) 1 45 02 79 00