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France looks to tax measures for deficit reduction

France looks to tax measures for deficit reduction

France revealed its latest attempts to allay investor fears over the country's high debt and deficit levels on Wednesday, with tax measures dominating.

Tax changes account for the majority of the EUR11 billion ($16 billion) austerity package, with reform of the application of capital gains tax and the reining in of various tax breaks among the headline changes.

"The tax measures amount to EUR10 billion, against the overall austerity budget of EUR11 billion," said Nicolas Jacquot of Taxand France.

French government has decided that enough is enough and that the nation's debt levels need to be brought under control. Fears of a downgrading of the country's triple A credit rating have also reinforced this.

Prime Minister Francois Fillon said: "Our country cannot live beyond its means forever. We have passed the threshold of tolerance on debt."

The latest reforms will have a profound impact on businesses.

"Businesses are among the taxpayers which will contribute the most to the austerity budget, especially with two measures - loss carry forward and capital gains on disposal of shares - which amount to EUR1.8 billion," said Jacquot.

The impact on businesses is expected to continue with further provisions set to be installed.

"Many will fear that other measures targeting businesses will be adopted during the course of the Parliament debate," said Jacquot. "There is, for instance, a significant debate on the deductibility of interests. We can expect that this is not the end of the story for businesses."

Capital gains tax
In 2007, the participation exemption previously applicable only to dividends was extended to capital gains on participation shares. Under the exemption, 95% of the gains derived from the disposal of qualifying shares were exempt from tax. The remaining 5% was deemed to correspond to the expenses incurred with respect to the participation, and is taxable at the normal rate of 34.43%.

"With the changes announced, only 90% of the gains will be exempt from tax, and the remaining 10% will be taxed in the normal manner," said Jacquot. "The participation exemption regime is highly criticised in France, because of its supposed cost. But government wants to maintain the principle of exemption as it is a common regime within the EU. Hence this proposal, which appears to be a compromise."

Franco-German harmonisation
The measures already announced this Wednesday were also intended to promote harmonisation of the French and German corporate tax systems, something which French President Nicolas Sarkozy and German Chancellor Angela Merkel have been pushing for.

"The measure on loss carry forward is 'copied and pasted' from the German regime - though some German rules are put aside, for instance as regards the transfer of shares - and presented by the French government as a promotion of harmonisation of French and German corporate tax systems," said Jacquot.

But despite using German blueprints for some aspects of new legislation, France has ignored other German provisions.

"What the French government forgets is that Germany lowered the corporate tax rate, [whereas] France has now one of the highest in the EU at 34.43% plus the local business tax, and [Germany also] has specific competitive tax regimes - on goodwill for instance," added Jacquot.

Tax breaks repealed
On top of tax increases for wealthy individuals - prompted by pleas from the CEOs of 16 French companies including L'Oreal, Societe Generale, Total and Air France, for government to take more taxes from them, much as Warren Buffett recently urged the US government to do - and an increase in the tax on cigarettes and alcohol, tax breaks given to companies incurring a loss have been limited.

"In France, losses may be carried forward indefinitely and corporate taxpayers have the option to carry losses back against undistributed profits realised upon the three preceding financial years," said Jacquot. "With the changes announced on Wednesday, the loss carry-back period will be only one year and the loss carry-forward will be limited to EUR1 million of net income in a given year without restriction and any remaining loss will only be set off against up to 60% of the net income exceeding this limit."

"This is the end of one of the main tax advantages of the French tax system, but it is not a return to the law applicable to 2004 when carry-forward was restricted to five years," he added.

More to follow...

Nicolas Jacquot, Taxand France

First published on the ITR, 26 August 2011

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