On 24 September 2018, the French government presented the Finance Bill for 2019. You will find below its main tax measures.
Reform of the French tax consolidation system and capital gains rules for equity share transfers (Art. 12)
Several changes would be made to the tax consolidation system for fiscal years beginning as of 1 January 2019. These changes, which are meant to guarantee the compatibility of those rules with the European Union (EU) law, are as follows:
- Subsidies and debt write-offs granted between companies of an consolidated group would no longer be neutralised;
- Any benefit granted between companies member of a consolidated group that results from the delivery of goods (other than fixed assets) or from the performance of services, for a price lower than their actual value but at least equal to their cost price, would not be taken into account to determine the net profits of a group’s member companies and would not constitute distributed income;
- The taxable portion of costs and expenses (PCE) relating to capital gains on intra-group significant equity share transfers would no longer be neutralised; in exchange, its rate would be set at 5% (instead of 12%). This change, which would apply to fiscal years beginning as of 1 January 2019, would affect all companies subject to corporate income tax, not only those that belong to a group formed for tax-consolidation purposes;
- The 1% PCE on dividends would apply to dividends paid between companies of a group that are not eligible for the parent-subsidiary rules. This rule would put an end to the full neutralisation of such dividends which is still in force. under tax consolidation rules;
- It would also apply to dividends paid by a European subsidiary held under the same conditions as a subsidiary which is a member of a consolidated group, even if the parent company is not a member of a consolidated group (provided, however, that the parent company was unable to form an tax consilidation group with other subsidiaries established in France).
Interest limitation rule (Art.13)
The Anti Tax Avoidance Directive (EU Directive 2016/1164, ATAD) includes an article (Art. 4) that sets forth rules for limiting the deduction of exceeding borrowing costs. France has decided to implement such rules into its law as early as in 2019.
The proposed mechanism would provide, in particular, that:
- Any deduction of exceeding borrowing costs would be capped at 30% of restated profits, as defined by the bill (close to the EBITDA) or to EUR 3 million if such amount is greater, with a carry forward of exceeding borrowing costs that are not deductible for a given year and, for five years, the unused deduction capacity (in other words, the unused portion of the 30% cap);
- Consequently, the mechanisms to combat thin capitalisation and limit the deductibility of interest related to the acquisition of certain equity shares would be repealed. However, in the case of thin capitalisation, the ceiling set as a percentage of restated profits defined by the act would be lowered to 10%;
- If the 30% cap of restated profits defined by the act is exceeded, a safeguard clause would make it possible to deduct the exceeding borrowing costs that exceed the cap (without, however, resulting in a total deduction) for companies that are members of a consolidated group and can show that their equity/asset ratio is higher than the equity/asset ratio of the consolidated group they belong to;
- The same interest limitation rules would apply at the level of an tax consolidated group taken as a whole.
Taxation of earnings on patent sales or licenses (Art. 14)
To take into account the recommendations of the Organisation for Economic Cooperation and Development on the taxation of intangible assets, the tax rules for earnings on sales or licenses of patents and other exhaustively listed intangible assets would be amended for fiscal years beginning as of 1 January 2019:
- The 15% rate would be the same for all companies, whether or not they are subject to corporate income tax, and would apply to income net of R&D expenses;
- The “nexus” rule would apply: the application of the reduced rate would depend on the proportion of total R&D expenses incurred by the holder of the intangible asset and by an unrelated entity in the total expenditure for R&D or to acquire the asset;
- The rules would become optional.
New documentation requirements would be established on the model of transfer pricing documentation.
Temporary increase of the “5th CIT instalment” (large companies) (Art. 15)
For fiscal years beginning between 1 January 2019 and 31 December 2019, the share of the estimated amount of corporate income tax (CIT) used to calculate large companies’ 5th instalment, would be increased to:
- 95% (instead of 80%) for companies the turnover of which exceeds EUR 250 million and is less than EUR 1 billion;
- 98% (instead of 90%) for companies the turnover of which exceeds EUR 1 billion and is less than EUR 5 billion. Until now, this rate applied only to companies the turnover of which exceeds EUR 5 billion.
Partial implementation into French law of the directive on e-commerce VAT rules (Art. 21)
The special scheme rules provided for by Directive 2017/2455 of 5 December 2017 for small businesses, including start-ups, would be implemented into domestic law. Electronic services, provided by companies the turnover of which is less below 10,000 euros for the provision of such services, would be taxable at the place of the provider’s establishment. Most of the provisions of this directive, which extensively revises the rules for distance sales of goods, as well as the rules for declaration and payment of the VAT on services in the EU, are supposed to come into force on 1 January 2021.
Implementation into French law of the directive on the voucher rules (Art. 22)
The provisions of Directive 8741/16 of 27 June 2016 on the treatment of vouchers would be implemented into domestic law. The new rules distinguish:
- “Single-purpose” vouchers, which follow the tax rules for the goods or services to which they give access; and
- So-called “multi-purpose” vouchers, which are not taxable as such, but as a total or partial component of the consideration for the goods or services the vouchers were delivered to obtain.
Insertion of an anti-abuse clause with respect to corporate income tax (Art. 48)
Based on Article 6 of the ATAD directive, a clause to combat corporate income tax abuse would be inserted into the French tax Code, for fiscal years beginning as of 1 January 2019, providing that “For the purposes of calculating the corporate tax liability, a Member State shall ignore 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 advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances”.
Exit tax (Art. 51)
The exit tax rules regarding individuals would be maintained, but with two important changes for departures occuring as of 1 January 2019:
- The exit tax would no longer apply except for two years: a taxpayer would therefore be granted tax relief or a refund if it held its shares for at least two years after departure;
- The payment deferment (without a payment guarantee) would apply to taxpayers going elsewhere in the EU or to a country that has concluded a mutual assistance treaty regarding tax collection with France.
Directive on tax dispute resolution mechanisms in the European Union (Art. 54)
Directive 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the EU would be implemented into domestic law. The institution of a mutual agreement procedure is provided for and, when discussions between tax authorities are unsuccessful, an advisory commission would be set up to solve the dispute between the member states involved. The French provision implementing the directive would apply to all requests to initiate a procedure filed with the tax authorities on or after 1 July 2019 that concern disputes related to income or capital received during a fiscal year beginning on or after 1 January 2018.