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Four Budget Act to Benefit Public Finances
The 2011 tax reforms in France were designed to increase public finances, resources and prevent tax optimisation. These reforms have since been modified in the Finance Bill for 2012. Taxand France provides a summary of the new provisions and how they will affect multinationals with operations in France.
- Tightening of rules relating to the carry-forward and carry-back of tax losses
Carry-forward of tax losses
The offsetting rules of tax losses realised by companies which are liable to corporate income tax can be offset against the taxable income of following tax periods without time limit.
As from the tax period ended 21 September 2011, the tax losses that can be carried forward continue to be carried forward without time limit, but the amount that can be offset against the taxable income of the following tax period is limited to EUR1 million plus 60 per cent of that taxable income over EUR1 million.
Carry-back of tax losses
As from the tax period ended 21 September 2011, tax losses realised by companies which are liable to corporate income tax can only be offset against the taxable income realised in the immediately preceding tax year (instead of the three preceding tax years as previously permitted). Furthermore, the amount of the tax losses which can be carried back is limited to the lower of EUR1 million and the net taxable income realised the immediately preceding tax year (there was no limitation in amount previously).
- Increase in the tax rate for management costs relating to the gain on sale of shareholding securities
The gain realised by companies liable to corporate income tax on sale of shareholding securities which have been held for at least two years is tax-exempt. However, 5% of the gain, deemed to represent management costs (costs incurred to manage the shareholding), is subject to corporate income tax. From the tax period beginning 1 January 2011 and onwards, the taxable management costs are increased to 10% of the gain. Management costs have the same meaning as in article 4-2 of the EU parent-subsidiary directive 90/435/EEC.
- Exceptional corporate income tax contribution of 5%
For the fiscal years ending 31 December 2011 until 30 December 2013, companies with a turnover of more than EUR 250 million are required to make an exceptional corporate tax contribution of 5% to the Government. This also applies to tax consolidated groups where the aggregate turnover of the companies belonging to the group is higher than EUR 250 million.
The new contribution amounts to 5% of the corporate income tax due, determined before the offsetting of any tax credit or corporate income tax reduction. Taking into account the 3.3% social contribution due on corporate income tax exceeding EUR 763,000, it results in an increase of the actual corporate income tax rate to 36.1%.
The 5% contribution will be payable at the same time as the payment of the final corporate tax liability.
- Tax deductibility of financial expenses linked to the acquisition of shareholding securities
Effective from 1 January 2012, financial expenses derived from the acquisition of shareholding securities will no longer be deductible for tax purposes if the acquiring company cannot produce evidence demonstrating that decisions concerning the said shareholding securities are actually taken by itself or by a French company controlling it or by a French company controlled by it. This concerns the financial years covering a period of 12 months following the acquisition and, for shareholding securities held before 1 January 2012, the first financial year which commences in the year 2012.
This new provision is aimed at denying a tax deduction for financial expenses linked to the acquisition of shareholding securities when decisions concerning these shareholding securities are actually exercised outside of France. The financial expenses will not be deductible for a period of 8 years following the acquisition of the shareholding securities.
These new provisions will not apply when:
- the total amount of shareholding securities is lower than EUR1million
- the acquisitions were not financed by indebtedness
- the indebtedness ratio of the group to which the enterprise belongs is higher than its own indebtedness ratio
- New reduced VAT rate
The standard VAT rate in France is 19.6%. Besides this standard rate, there are reduced rates (5.5%, 2.1%). A new reduced VAT rate of 7% has been created to amend the scope of the current reduced rate of 5.5%. Most of the goods and services currently taxed at 5.5% will now be taxed at 7%. The 5.5% rate is maintained for some goods and services such as food products for human and equipment and services for disabled and the infirm
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The French tax reforms implemented by the Budget Acts aim at improving the public finances and prevent the tax optimisation. It would be prudent for multinationals carrying out activities in France to scrutinise to what extent they may be affected by the new provisions.