New provisions modifying French corporate tax law and registration duties on shares/stocks transfers have been enacted at the end of 2011.
I – Corporate and individual tax
1. Temporary new contribution
The fourth Amended 2011 Finance Act provides that companies with an annual turnover exceeding 250 million euros are subject to a new contribution of 5% on the gross amount of their corporate income tax computed at the rate of 33 1/3%. This new contribution is not deductible from the company’s tax result. It increases the effective corporate tax rate up to 36.1%. To date, the contribution should only concern tax years closed from December 31st, 2011 to December 30th, 2013.
2. New limitation on interest deduction
A new measure is introduced to prevent the interest deduction on loans financing the acquisition of a shareholding by a French company when it cannot be demonstrated that it actually makes decisions relating to the acquired participations and exercises an actual control or influence over the acquired company (i.e. the acquired participation is actually managed outside of France). In such a case, the disallowed interest expense must be computed as follows: Interest expense of the tax year x (Acquisition price of the qualifying shareholdings / Average amount of the debt of the acquiring company for the tax year). This limitation is applicable from the tax year in which the French company cannot demonstrate that it exercises the actual control on the acquired participation until the end of the eighth year following the year of the participation acquisition. However, the fourth Amended 2011 Finance Act provides that this new limitation will not apply where:
a. The total fair market value of the participations owned by the French acquiring company does not exceed 1 million euros;
b. The participation acquisition has not been financed by debt; or
c. The debt-to-equity ratio of the group is equal to or higher than the debt-to-equity ratio of the acquiring company.
3. Withholding tax rate on dividends paid to non-resident
From January 1st, 2012, the flat rate which applies to dividends paid to non-resident is increased from 25% to 30% (dividends paid to EU resident individuals from 19% to 21% and to non-cooperative countries and territories from 50% to 55%: fourth amended 2011 Finance Act).
II – Registration duties on transfer of stocks and shares
The 2012 Finance Act introduces adjustments to the tax regime initially provided by the French Tax Code for transfers of stocks and shares performed as from January 1st, 2012. Among these new measures, the following should be highlighted:
a. transfers of stocks (of listed or non-listed companies, but regarding stocks of listed-companies, only if the transfer is made by an act) are now subject to the following decreasing tax rates depending on the sale price:
- 3% for the part lower than 200,000 euros, - 0.5% for the part between 200,000 euros and 500,000,000 euros, - 0.25% for the part exceeding 500,000,000 euros. Transfer of shares remains subject to a 3% fixed rate + a tax allowance of up to 23,000 euros.
b. Four tax exemptions are introduced by the Finance Act regarding transfer of shares and stocks (subject to the above tax scale) depending on the context of the transfer operation, such as:
- Acquisition of shares/stocks performed by a company under a share buyback or a share capital increase; - Acquisition of the shares/stocks of a company put into a backup procedure or receivership; - Acquisition of shares/stocks while the assigning company and the company which acquires the share/stocks are members of the same tax group; - Operations subject to article 210B of the French Tax Code (e.g. partial asset transfer).
c. When the transfer of stocks of a French company is made by an act concluded outside of France, registration duties as mentioned in a. will apply. A tax credit is granted for any registration duties effectively paid in the State of registration or the State of residence of each parties (provided this payment is inherent to a compulsory formality of registration provided by the legislation of this State).
III – Value Added Tax
Pursuant to the Fourth Amended 2011 Finance Act, the reduced VAT rate applying on goods or services that are not of first necessity (currently 5.5%) is raised to 7% from January 1st, 2012.
Stéphane Austry, Partner - CMS Bureau Francis Lefebvre