On 20 December 2018, the French Parliament approved the Finance Bill for 2019.
Except for the constitutionality review by the Conseil constitutionnel (French Constitutional Council), this Bill is final and expected to be published by 31 December 2018.
Separate from the Finance Bill for 2019, the French Prime Minister Edouard Philippe announced – during a press interview on 17 December 2018 – that a tax on digital activity would apply in France as from 1 January 2019. This new tax, which might impact major digital actors, is NOT included in the Finance Bill for 2019 and should only be discussed before the French Parliament in early 2019.
This Alert summarizes the main corporate tax provisions relating to companies in the Finance Bill.
Interest deduction limitation rules
In an effort to comply with the European Union (EU) Anti-Tax Avoidance Directive (ATAD),1 the Finance Bill provides for the following major changes to the current French interest deductibility limitation rules:
- New general limitation: net interest expenses will be deductible from the taxable income of a company only to the extent that they do not exceed the higher of the two following thresholds: (i) €3 million or (ii) 30% of the adjusted taxable income of the company (i.e., corresponding to the taxable income before the offset of tax losses and without taking into consideration net financial expenses and – to some extent – depreciation, provisions and capital gains/losses), altogether referred to as the “regular threshold.”
- Debt-to-equity ratio: should the company be thinly capitalized and exceed a specific 1.5:1 debt-to-equity ratio (i.e., similar to the current debt-to-equity thin-cap ratio), a portion of the net interest expense, determined by application of the following ratio to the net interest expense, will be subject to the regular threshold:
- Average amount of indebtedness towards unrelated parties + [1.5 x equity] (numerator)
- Average amount of indebtedness (denominator)
The remaining portion of the net interest expense will be tax deductible only within the limit of the higher of the two following thresholds: (i) €1 million or (ii) 10% of the abovementioned adjusted taxable income (strengthened threshold). The portion of net interest expense that will be subject to the strengthened threshold will correspond to the difference between: (i) the total amount of net interest expense and (ii) the amount of net interest expense subject to the regular threshold in accordance with the abovementioned computation. According to a specific safe harbor provision, despite the fact that a company is thinly capitalized, it will not be subject to the strengthened threshold if the debt-to-equity ratio of the company is not higher, by more than two percentage points, than the debt-to-equity ratio of the consolidated group to which it belongs (i.e., application of the regular threshold to the total amount of net interest expense).
- Safe harbor provision: 75% of the net financial expense exceeding the regular threshold will still be tax deductible provided that the equity-to-asset ratio of the company is at least equal to, or is not lower, by more than two percentage points than the equity-to-asset ratio of the consolidated group to which it belongs. Note that this safe harbor rule does not apply in case of thin capitalization.
- Interest expense carryforwards: interest expenses that are excluded from the deductible expenses of a given fiscal year (FY) can be carried forward indefinitely (subject to the abovementioned limitations). However, the portion of net interest expense that could not be deducted by application of the strengthened threshold in the case of thin capitalization, can only benefit from the carryforward up to one-third of its amount.
- Deduction capacity carryforwards: when, for a given FY, a company does not fully utilize its deduction capacity (i.e., the amount of net interest expense is lower than the abovementioned thresholds), the unused portion of deduction capacity (i.e., amounting to the positive difference between the applicable thresholds and the net interest expenses) can be carried forward for the five following FYs. However, this deduction capacity carryforward cannot be used to deduct non-deductible interest expenses that have been carried forward. Also, if the company is thinly capitalized, the exceeding portion of the deduction capacity for the said FY cannot be carried forward.
- Reorganizations: interest expense carryforwards as well as deduction capacity carryforwards could be transferred in the case of reorganizations (e.g., mergers) if the tax ruling provided by Article 209 II of the French Tax Code (FTC) is obtained.
- Tax consolidation: the abovementioned new limitation rules will also apply at the level of French tax consolidated groups, subject to certain conditions.
- Repeal of certain current limitation rules: the 25% general reduction, the so-called Amendement Carrez (i.e., applicable upon the purchase of a new shareholding) and the three current thin-cap ratios (i.e., debt-to-equity ratio, adjusted earnings threshold and interest income threshold) are repealed.
These adjustments of the French interest deductibility limitation rules apply to FYs open as from 1 January 2019.
Adjustment of the favorable tax regime applicable to patent-related income
Currently, French corporations benefit from a reduced 15% tax rate that applies to:
- Income derived from the licensing of patents and patentable rights.
- Capital gains realized on patents and patentable rights held for at least two years, unless the disposal takes place between related companies.
The Finance Bill modifies this favorable tax regime in an effort to make it compatible with the so-called nexus approach of BEPS2 Action 5, thereby conditioning its application to the actual performance by the claiming taxpayer of research and development (R&D) activities in France.
Per the Finance Bill for 2019, the favorable rate will be reduced to 10% and will apply, on an election basis only, to the net income derived from the licensing of qualifying patents, after deduction of R&D expenses, and after the application of a ratio comparing: (i) the R&D expenses incurred for the creation, or the development of the qualifying patent, either by the claiming taxpayer or by non-related parties to (ii) the total R&D expenses incurred for the creation, the development, or the acquisition of the qualifying patent. Note that this election can be performed on an asset-by-asset basis or on a group of asset basis. This election will also be available at the level of French tax consolidated groups, subject to certain requirements.
Also, should certain conditions be met, a safe harbor provision would allow election of a replacement ratio.
The same tax treatment could apply, still on an election basis, to the net income derived from the sub-licensing of qualifying patents, and to the net gains derived from the transfer, to non-related parties, of qualifying patents, provided that the latter have not been acquired less than two years before.
The favorable regime will no longer cover patentable rights (except for small and medium-sized companies under certain circumstances), but exclusively patents. Yet, it will be extended notably to copyright protected software.
This modified regime will apply to FYs open on or after 1 January 2019 (except for certain specific provisions), irrespective of the date of creation or acquisition of the qualifying patent.
Anti-hybrid provision for royalties
For FYs beginning on or after 1 January 2019, royalties paid for the licensing of intellectual property (IP) rights by a French entity to a related entity that is not a resident of an EU or European Economic Area (EEA) Member State will no longer be fully tax deductible for French Corporate Income Tax (CIT) purposes if the beneficiary entity is not subject to tax on the royalty income at an effective rate of at least 25%.
The portion of the royalty paid that should be added-back to the taxable income of the French paying entity will be determined by applying the following ratio to the total amount of the royalty payment:
i. The difference between 25% and the effective tax rate applicable to the royalties at the level of the beneficiary of the payment; (numerator)
ii. 25% (denominator)
As a consequence, should the royalties be subject to a 12.5% effective tax rate at the level of the beneficiary entity, the deduction of 50% of the royalty payment will be denied in France at the level of the paying entity.
This limitation will only apply if the tax regime applicable to the royalties at the level of the beneficiary entity is considered as harmful by the OECD.3
Also, in the case of sub-licensing, the effective tax rate will be assessed at the level of the ultimate licensor.
Adjustment of the tax consolidation regime
The Finance Bill amends the current French tax consolidation regime as follows:
- Waivers of debts and subsidies between members of a tax consolidated group: these transactions which are currently neutralized at the tax consolidated group level will no longer benefit from such neutralization.
- Capital gains on share transfers: the current neutralization at the tax consolidated group level of the taxable portion of capital gains on share transfers eligible to the participation exemption regime is repealed.
- Dividends not subject to the parent-subsidiary regime: such dividends will be tax exempt up to 99% of their amount in the following cases:
- The distribution is performed within a French tax consolidated group (i.e., these distributions are currently fully neutralized at the tax consolidated group level)
- The dividend is distributed to a French company, by a company that is a resident for tax purposes in the EU or EEA (provided that the EEA country has concluded a treaty with France which includes a mutual assistance provision) and that could be part of a French tax consolidated group for more than one FY if it were subject to CIT in France. In the latter case, the 99% exemption applies irrespective of whether the French beneficiary is tax consolidated or not. Yet, if it is not tax consolidated, this must not result from the mere absence of option for the French tax consolidation regime while that option was technically possible.
- At cost-transactions: the Finance Bill legalizes the ability to perform sales and provide services at cost within the same tax consolidated group.
- Brexit consequences: in order to soften the major consequences that the Brexit will have on French tax consolidated groups, the Finance Bill provides for various mechanisms, such as:
- The possibility to transfer shares/substitute a nonresident parent company (in the case of a horizontal consolidation) in order to prevent the termination of the French tax consolidation.
- Postpone some of the consequences triggered by the Brexit to the closing of the FY.
- Merger of the parent company: the merger of the parent company of a French tax consolidated group into another company belonging to the same tax group will no longer trigger the termination of the said tax group provided that certain conditions are met.
- Conversion from one type of tax consolidation to another: it will be possible – under certain conditions – to substitute a vertical tax consolidated group to a horizontal tax consolidated group, and vice versa, without triggering the termination of the tax consolidation.
Also, in the absence of tax consolidation, the non-deductible share of expenses applicable to certain dividends that benefit from the parent-subsidiary regime will be reduced from 5% to 1%. This decrease will apply to dividends received by French companies, that are not members of a French tax consolidated group, from foreign companies that are resident for tax purposes in the EU or in the EEA (provided that the EEA country has concluded a treaty with France which includes a mutual assistance provision) and that could be part of a French tax consolidated group if they were subject to CIT in France. However, this reduced non-deductible share of expenses will only apply if the non-tax consolidation of the French beneficiary companies does not result from the mere absence of option for the French tax consolidation regime while that option was technically possible.
These adjustments of the French tax consolidation regime will apply to FYs open as from 1 January 2019 except for provisions detailed in paragraphs 5 to 7 that will apply to FYs closed as from 31 December 2018.
Implementation of the general anti-abuse provision from the EU ATAD4
For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD.
Consequently, regarding the assessment of the CIT liability, no account will be taken of an arrangement or a series of arrangements which, having been put into place for the main purpose, or one of the main purposes, of obtaining a tax benefit that is contrary to the object or purpose of the applicable legal provisions, are not genuine considering all relevant facts and circumstances.
- The 80% penalty applicable under the current French GAAR regime provided by Article L 64 of the Tax Procedure Code (i.e., exclusive purpose test) will not apply to this new anti-abuse provision. However, an 80% penalty could still apply if the French Tax Authorities (FTA) demonstrate that the taxpayer committed fraudulent acts.
- A tax ruling with implicit consent from the FTA (after six months) will be available to the taxpayers for transactions performed as from 1 January 2019.
- Article 145, 6-k of the FTC (i.e., specific anti-abuse provision dedicated to the French dividend participation exemption regime will be repealed) to prevent the duplication of rules.
- This new anti-abuse provision will not apply to certain reorganizations (e.g., mergers) in order not to duplicate with Article 210-0 A, III of the FTC.
New anti-abuse provision for all other taxes than CIT
A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into.
This new anti-abuse rule providing for a main tax purpose test will be applicable to transactions performed as from 1 January 2020 and subject to a tax reassessment notice issued as from 1 January 2021.
Despite the introduction of this new anti-abuse provision for all other taxes than CIT and the new ATAD derived anti-abuse provision for CIT, the current French GAAR (i.e., exclusive purpose test) is not repealed. As a consequence, the FTA will have the choice between using either the current French GAAR or – depending on the tax involved – one of the two new anti-abuse provisions to reassess a taxpayer.
Although the referral to the abuse of law Committee will be available under this new anti-abuse provision, the 80% penalty applicable under the current French GAAR regime (i.e., exclusive purpose test) will not apply. However, the FTA might apply an 80% penalty if demonstrating that the taxpayer committed fraudulent acts.
Increase of the last CIT installment to be paid by large companies
The last CIT installment5 due by large companies is based on a percentage of the estimated profits for the current FY (instead of the previous FY). For FYs open as from 1 January 2019, this last installment will be due on the basis of higher rates:
- 95% (instead of 80% currently) for companies with revenue over €250 million, but less than or equal to €1 billion
- 98% (instead of 90% currently) for companies with revenue over €1 billion, but less than or equal to €5 billion
The 98% rate currently applicable to companies with revenue over €5 billion remains unchanged.
Withholding tax (WHT) on domestic dividend distribution
As from 1 July 2019, the following will be deemed to be a distributed income subject to the French domestic WHT applicable on dividends: any payments of any kind, up to the portion that corresponds to a distribution of income arising from a shareholding (or an assimilated income referred to in articles 108 to 117 bis); performed, by any means, by a French resident, directly or indirectly to a nonresident, provided that the following conditions are met:
a. The payment is performed in the course of a temporary transfer of the shares/rights of the French resident or any other transaction that gives rise to a right or an obligation to resale/return these shares/rights or any rights on this shareholding.
b. The transaction is performed within less than a 45-day period, during which the right to the payment arises.
Such WHT is paid by the French paying resident upon the payment of the deemed distribution.
The beneficiary of the payment can get reimbursed of the WHT imposed provided that he can demonstrate that the payment corresponds to a transaction, the main object and effect of which are neither to avoid the application of a WHT nor to obtain a tax benefit.
Information as regards this payment will have to be filed by the French paying resident by 31 January of the year following the payment.
Elimination of double taxation
The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
As a result, an out-of-court settlement will be available for both companies and natural persons consisting in discussions between the French and the foreign tax authorities involved. Failure for the tax authorities to reach an agreement within two years (or three years depending on the situation) will lead to the setting up of an advisory committee that will issue an arbitral decision.
This mechanism will be available as from 1 July 2019 as regards double taxation (i) derived from income received as from 1 January 2018 for natural persons; and (ii) for FYs open on or after 1 January 2018 for companies.
Repeal of the burden of proof’s reversal resulting from an abuse of law Committee decision in favor of the FTA
When a French taxpayer is reassessed on the ground of the current French GAAR, abuse of law procedure (i.e., article L.64 of the French Tax Procedure Code), the latter can choose to bring the matter in front of the abuse of law Committee. Currently when the abuse of law Committee issues a decision in favor of the FTA, the burden of proof shifts from the FTA to the taxpayer (i.e., the FTA no longer has to demonstrate that the taxpayer committed an abuse of law, but instead, it is on the taxpayer to demonstrate that he did not commit an abuse of law).
For reassessment notices issued as from 1 January 2019, this shifting of the burden of proof will be repealed except in the case of serious irregularities in the taxpayer’s bookkeeping.
Tax neutrality of share-for-share transactions benefiting from the favorable CIT regime
For FYs closed as from 31 December 2018, shares received by the contributor in exchange for his contribution in a share-for-share transaction benefiting from the French favorable CIT regime (i.e., Article 210 B of the FTC) will be deemed to have been held by the latter as from the date the contributor acquired the contributed shares.
Provision withdrawn from the initial Draft Finance Bill
Please note that the improvement of the capital gain participation exemption regime initially announced in the first draft of the Finance Bill for 2019, and commented as such in the EY Global Tax Alert issued on 25 September 2018,6 has not been maintained in the final version of the Finance Bill for 2019.
1. Article 4 of the EU Directive 2016/1164 dated 12 July 2016.
2. Base erosion and profit shifting.
3. Organisation for Economic Co-operation and Development.
4. EU Directive 2016/1164 dated 12 July 2016.
5. The last installment is equal to the difference between: (i) various rates – depending on the revenue of the companies – applied to the forecasted profits for the current FY and (ii) and the total amount of the first three installments already paid.
6. See EY Global Tax Alert, French Government releases draft Finance Bill for 2019, dated 25 September 2018.
EYG no. 012550-18Gbl
On 21 December 2018, the United Kingdom (UK) Government published draft legislation as part of a Government amendment to the Finance Bill 2018-2019, introducing targeted relief for goodwill and certain other assets (Relevant Assets) from 1 April 2019 in certain circumstances. Changes were anticipated following a consultation on the corporate intangible fixed assets (IFA) regime in February 2018 and an announcement in the Budget on 29 October 2018. A summary of responses to the consultation, published on 7 November 2018, included a draft proposal to introduce a targeted relief for goodwill. The draft legislation published on 21 December includes some notable changes to what was originally put forward in the draft proposal.
The draft legislation repeals section 816A CTA 2009 – which denied relief for Relevant Assets acquired from 8 July 2015 – and introduces targeted relief for the acquisition or creation of such assets in certain circumstances on or after 1 April 2019. The relief will only be available for acquisitions where such assets are acquired on or after 1 April 2019 as part of a business acquisition that includes the acquisition of qualifying intellectual property (IP) for use on a continuing basis in the course of business. The maximum rate of relief that will be available in each accounting period is 6.5% of the cost of the asset, which is higher than the usual fixed rate relief that can be claimed of 4% and could be higher or lower than the accounting charge.
Anti-avoidance provisions may apply to fully restrict the relief in certain circumstances, and a partial restriction may also apply depending on the expenditure on qualifying IP compared to Relevant Assets.
This is a welcome change to the IFA regime making the UK more competitive at a time when many groups are looking at the location of their IP.
Goodwill and certain other assets (Relevant Assets)
The draft legislation provides for relief for the cost of Relevant Assets acquired on or after 1 April 2019 in certain circumstances.
The Government stated at the time of the Budget that relief would only be reintroduced for goodwill arising on a business acquisition and would not be extended to customer-related intangibles. However, in a positive development, a Relevant Asset is defined to include goodwill, intangible fixed assets that consist of customer information and customer relationships, unregistered trademarks or other signs used in the course of a business, or any licenses or other rights in respect of these items.
Rate of relief
Where on or after 1 April 2019 the company creates, or acquires as part of the acquisition of a business, a Relevant Asset, the company will be treated as having made an irrevocable election to write down the cost of the asset for tax purposes at a fixed rate of 6.5% of the cost of the asset per annum.
However, the amount of relief may be partially restricted if the expenditure on qualifying IP times a multiplier of 6 is less than the expenditure on Relevant Assets as part of the acquisition. To determine whether a restriction applies, the following ratio is calculated:
Expenditure on qualifying IP assets x 6
Expenditure on Relevant Assets
Where the ratio is less than one, the relief available for Relevant Assets is restricted by applying this fraction to the relief that would otherwise be available.
The draft legislation provides flexibility for the Treasury to amend both the fixed rate percentage and the multiple of expenditure on qualifying IP assets used to calculate the ratio of relief available for Relevant Assets at a later date, if required. Where the assets are acquired other than as part of the acquisition of a business or where the acquisition of a business does not include expenditure on qualifying IP assets for use on a continuing basis in the course of a business, no relief will be available.
Provisions to re-introduce rules to prevent tax motivated incorporations are also included in the draft legislation, and will apply where the transferor is an individual who is related to the acquiring company at the time of the acquisition, or a firm which includes as a member, an individual who is related to the acquiring company. In such circumstances there are different rules that apply to determine whether a restriction applies. These rules are not considered further as part of this Alert.
Qualifying IP assets
Qualifying IP includes patents; registered designs; copyrights or design rights; or a license, or other right, in respect of the above that are intangible fixed assets in relation to the company, are not a pre-2002 asset and are not an excluded asset for the purposes of the IFA regime.
However, registered trademarks are notably excluded from the definition of qualifying IP assets, as is know-how not protected by one of the rights listed above. Trademarks were included in the scope of qualifying IP in the proposal at the time of the budget announcements but their omission now might have been determined necessary to fund the increase in the multiplier compared to that proposed at the time of the budget.
Pre-FA 2019 assets
Prior to 1 April 2019, relief for Relevant Assets created or acquired from 8 July 2015 was denied under s816A CTA2009. As that provision is repealed from 1 April 2019, new provisions are introduced to deny relief for so called pre-FA 2019 assets with detailed rules on what is treated as a pre-FA 2019 asset (including rules on intra-group transfers and where the value of the asset was derived in whole or in part from another asset).
In general, the pre-FA 2019 asset rules require that an asset (or assets from which value derives) was a chargeable intangible asset between 29 October 2018 and 31 March 2019, and therefore could impact arrangements where assets have been “offshored” between these dates and brought back into the UK.
Assets created or acquired before 8 July 2015 and within the intangible fixed asset regime will in general not be impacted by these rules and full relief should continue to be available for those assets subject to considering the precise details of their creation or acquisition and the detailed rules.
It is intended that the new rules will have effect in relation to accounting periods beginning on or after 1 April 2019. If a company’s accounting period straddles this date, it will be treated as ending an accounting period on 31 March 2019 and beginning a new one on 1 April 2019.
The draft legislation will be included as an amendment to Finance Bill 2018-19 during the report stage which is expected to take place in early 2019.
The Government is aware that many groups are looking at the location for their intangible assets and supply chain more generally, following other recent changes to the international tax landscape, such as the BEPS1 project and US tax reform. The purpose of these changes is to make the UK a more attractive location for activities with a high proportion of qualifying IP, such as patents, copyright etc.
Groups may want to carefully consider these changes in light of other recent international developments and assess whether their current supply chain is optimized.
1. Base Erosion and Profit Shifting.
EYG no. 012580-18Gbl
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