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French Finance Bill 2013 Increases Corporate Tax Burden
This Bill has been voted by the French Parliament and has come into force since 30 December 2012. The changes in this Bill will have a huge impact on corporate income taxation.
Although not discussed in this article, changes are also enacted in respect of the taxation of individuals, to tax investment income (eg capital gains, interest and dividends) at the same rates as salary income, ie, investment income will be included in the regular income tax brackets, up to a maximum tax rate of 49%. Taxand France summarises the key issues affecting corporate income taxation.
New Interest Barrier Rules
Interest rate limitations and thin-capitalisation rules already limit the deduction of interest accrued on related-party debt or third party debt guaranteed by related parties. In addition, another anti-abuse rule restricts interest deductibility on shares acquisitions when the debtor cannot demonstrate that the decisions relating to the acquired shares are effectively made in France and that the control or influence over the acquired company is exercised in France.
The Finance Bill for 2013 implements a new cap on the Corporate Income Tax ("CIT") deduction of interest expense. The limitation would not be applicable to companies with a net interest expense below EUR3 million. However, companies exceeding this threshold would be subject to a limitation on their full interest expense, capping the deductibility at 85% of the interest for financial years closed as of 31 December 2012, and 75% of the interest for financial years closed as of 31 December 2014. The term "interest" will be construed as net interest expense deductible for tax purposes and will include intercompany rental payments exceeding amortisation of the rented asset.
A consolidated tax group would be viewed as a single entity, such that debt issued within that tax group would not be subject to the new limitations on interest deductibility. Thus the limitations apply only to debt payable to an entity outside of the tax group.
Finally, concessions and infrastructure companies may be exempt from these rules provided the assets financed meet specific requirements.
Increased Taxation of Long Term Capital Gains Realised By Companies
French companies are 90% exempt from CIT on long-term capital gains on shares disposals. The 10% taxable portion is calculated on net capital gains, ie after offsetting long-term capital losses against long-term capital gains.
Under the Finance Bill for 2013, the portion of taxable gain would be increased to 12% (effective tax rate 4.1% based on the gross capital gain), with no opportunity to offset long-term capital losses against long-term capital gains.
Tax Losses Carried Forward
New rules were recently introduced limiting tax loss carry-forwards. As from the financial year close on 30 December 2011, losses could still be carried forward indefinitely but within the limit of EUR1M plus 60% of the portion of profit exceeding EUR1M. The remaining tax losses could be carried forward with no time limitation.
Under the Finance Bill for 2013, the 60% portion of profit is reduced to 50%.
Exit Tax on the Transfer of Companies Abroad
In order to conform with the ECJ case law, the Finance Bill replaced the immediate taxation with a 5 year roll-over of the CIT computed on unrealised capital gains on the transferred assets and on deferred (ie realised but with a deferred taxation regime) capital gains on the transfer of a head-office and related assets from France to another EU/EEA Member State. This applies to any transfer made during a financial year ended on or after 31 December 2012.
The tax on the capital gains would become immediately due if the company is wound-up, or if the assets are subsequently transferred into a non-EU/EEA state or alienated.
It is crucial for companies to assess and anticipate the impact of these new rules, particularly when contemplating transactions which may generate financial expenses or international transfers. In addition, it should be noted that these rules have come into force at the same time as the new extended 'search and seize' powers of the French tax authorities, granted by the Amended Finance Act for 2012. Pursuant to this Act, companies must now be able to present their accounts in an electronic format and the French tax authorities may seize data stored on a server abroad, as long as such data is accessible from the location being searched.