The French Government has released today the Finance Bill for 2013. This bill represents a considerable effort to reduce the French deficit, since the current French government has pledged to reduce the annual additional deficit from currently 4.5% to 3% of GDP in 2013 to meet the Maastricht Treaty targets.
According to first press releases, the 2013 budget reduces public spending by €10bn and increases taxes by €20bn (€10bn for individuals and €10bn for corporations).
This bill will be discussed by both chambers of the French parliament and the final version, which will be signed into law in the last days of 2012, might differ from the bill.
The main measures of the bill are discussed below:
I – Corporations
- 85% to 75% cap on interest deduction. Interest is allowed as an ordinary and necessary business expense deduction when contracted for the needs and in the interest of the corporation. Several provisions of the French Tax Code (FTC) govern interest deductions such as notably the limitation on interest paid out to shareholders or to related entities up to certain market rates (FTC Article 39-1-3°), the thin capitalization rules (FTC Article 212), and the duty to show a controlling authority in an acquired foreign company for the deduction of the financial acquisition expenses (FTC Article 209 IX). The bill provides that the net interest (other than those already in the scope of the above limitations) on loans paid by corporations will now only be deductible by up to 85% of its amount for years closed on December 31, 2012, and only up to 75% of its amount for years opened from 2014 on. However, interest payments below €3m per annum are deductible. Consolidated tax groups would also keep the benefit of a complete deduction of their interest payments within the group.
- Reduction of the benefit of the capital gain tax exemption on portfolio investments. Capital gains on portfolio investments are generally exempted from taxation throughout Europe. In France, only a 10% fraction of the net capital gains on portfolio investments (a lump sum for costs and expenses) is taxed at the corporate tax rate, if those investments are disposed of after a two year holding period. The bill tightens this 90% exemption, since the taxable basis for the computation of the 10% lump sum for costs and expenses is now the gross amount of the capital gain for years closed on December 31, 2012.
- Accelerating the corporate tax prepayments of large corporations. The corporate tax is paid in quarterly prepayments. For large corporations with a turnover of at least €500m, the last (fourth) prepayment is computed on an estimation of the current profits when they have significantly increased from the previous ones. The bill sets the estimated corporate tax used in the computation of the fourth prepayment (above the three already paid prepayments) at 75% (previously 66.2/3%) of the current estimated profits for corporations with a turnover between €250m to €1bn, at 85% (previously 80%) for corporations with a turnover between €1bn and €5bn, and at 95% (previously 90%) for corporations with a turnover over €5bn. This will be applicable for tax years starting on January 1st, 2013.
- Harsher rules regarding the carry-forward of corporate losses. Generally, residual corporate losses can be carried-forward on future tax years to offset future taxable corporate profits without limit in time (FTC Article 209-1). However, such losses can only offset taxable corporate income on the next tax years up to an amount of €1m, and up to 60% of the profits above €1m. According to the bill, only 50% of the profits above €1m can be offset by those losses, applicable to years closed on December 31, 2012. This will trigger additional tax revenues for the French state and extend in time the carry-forward of losses.
II – Individuals/Partnerships
- Investment income and capital gains on shares are integrated in the progressive tax rate of the income tax. Investment income (e.g., dividends, interests) and capital gains currently enjoy special flat tax rates, which range from 19% to 24% (to which 15.5% additional social contributions have to be added). With the bill, investment income and capital gains on shares derived in 2012 will be subject to the progressive tax rate of the income tax for individuals and partnerships.
- Capital gains on stock options plans, on free shares and on carried interest, are integrated in the progressive tax rate of the income tax. The preferential taxation for the capital gains realized at the exercise of the option of either a stock option plan or a granting of free shares is no longer applicable, as those gains are now in the progressive tax rate of the income tax, for gains derived in 2012. Gains on repurchase of carried interest are qualified as salary and no longer as capital gain.
- Real estate capital gains: exceptional 20% rebate on dispositions in 2013. Capital gains on immovable property (with the exception of constructible real estate) are taxed at a 19% flat rate (effective rate of 34.5% with the additional social contributions). Several rebates are permitted on those capital gains, most notably a rebate that increases in time depending on the holding period of the immovable property resulting in an exemption after a 30 years holding period. The bill introduces a new 20% tax rebate on the capital gains realized in 2013 from the disposition of immovable property. The government intends with this measure to increase the liquidity of the real estate market. The new rebate is not applicable to the additional social contributions. For the capital gains on the disposition of constructible real estate, those gains will lose the rebate for the holding period from 2013 on, and will be taxed at the progressive tax rate of the income tax from 2015 on.
- New top tax bracket at 45% for the income tax progression. Before the finance bill, the highest tax bracket on the progressive tax rate for the income tax was at 41% for income above €70,830 per tax share. The bill introduces an additional top tax bracket at 45% for taxable income over €150,000 per tax share. The other tax brackets are kept unchanged and therefore not adjusted for inflation, with the exception of the first two gross income brackets (low income end). These progressive tax rates will be applicable on income of 2012.
- Exceptional 75% tax. The gross income of individuals/partnerships exceeding €1m per person per tax household is subject to an exceptional 75% tax for 2012 and 2013. Taking into account the highest tax bracket on the income tax progression of this bill (45%), the exceptional contribution on high revenues (4%), and the additional social contributions (8% on the revenues from activities), this exceptional tax will result in a 18% tax increase. This tax would apply on professional income, including gains on stock options and carried interest.
- Reducing to €10k the tax credits cap. Taxpayers are allowed to offset their income tax liability with certain tax credits up to a certain cap. For income earned in 2012, tax credits are limited to €18,000 and 6% of the taxable income (FTC Article 200-0 A). Some of the most used tax credits and covered by that cap are the tax credit for the interests paid on the acquisition of the principal abode, investments in rental real estate, investments in venture capital funds. The bill reduces the tax credit cap against the income tax down to €10k per year for income earned in 2013. Grandfathering rules will apply. This cap is not applicable to tax credits granted for investments in French overseas departments and territories.
- Wealth tax rates increase. Taxpayers are currently subject to the wealth tax for a net estate superior to €1.3m. The tax rates range from 0.25% to 0.5%. The bill sets a new floor of €1.31m and five new tax rates ranging from 0.5% to 1.5% (net wealth over €10m), but with a capping mechanism that ensures that tax households will not be spending more than 75% of their income paying taxes (including the wealth tax).