Article 12: Reform of the tax consolidation regime, parent-subsidiary regime, participation-exemption under the long-term regime
Article 12 of the Finance Act draft amends certain important tax regimes applicable to corporations such as the tax consolidation regime, the parent-subsidiary regime and the taxable portion of gains eligible to participation-exemption under the long term regime, in order to bring French domestic law into conformity with European Union law.
For the determination of the group’s overall taxable income, the Finance Act draft provides the end of the neutralization of subsidies, waivers of debts and taxable portion of capital gains on sale of substantial shareholdings eligible to participation-exemption under the long-term regime.
In order to compensate the end of the neutralization, the taxable portion of capital gains on sale of substantial shareholdings would be reduced from 12% to 5%. This 5% rate reduction would apply to all companies, including those which are not tax-consolidated.
The dividend distributions made within the tax-consolidated group that do not qualify for the parent-subsidiary regime (such as distributions between sister companies, where the beneficiary holds less than 5% of the distributor’s share capital) would no longer be neutralized but would be deducted up to 99% of their amount. The main idea is to unify the regime of all distributions within a tax-consolidated group.
The Act provides also to extend the taxation of a reduced 1% portion to distributions received by a company member of a group, which receives distributions from subsidiaries established in another EU country, which, if established in France, would qualify to be members of the tax-consolidated group.
Finally, the application of the taxation of a reduced 1% portion of the dividend (instead of 5%) would apply to dividends received by companies that are not members of a tax-consolidated group from companies subject to a tax equivalent to French corporate tax in Member State of the European Union or in another State party to the Agreement on the European Economic Area which has concluded an administrative assistance agreement with France to prevent tax evasion and avoidance which, if established in France, would have met the conditions required for being members of a tax-consolidated group.
Article 13: Reform of the interest deductibility limitation rules
As a result of the adoption of the European directive “ATAD” of July 12, 2016, the French tax law of the limitation of deductibility of interest would be amended.
The “25% non-deductibility rebate” which limits the deductibility of the financial expenses to 75% of their amount would be replaced by the ATAD rule, which limits the financial expenses deduction to 30% of EBIDTA (earnings before interest, depreciation, provisions and gains or losses subject to reduced tax) or €3 million, per fiscal year (possibly prorated if FY is less than 12 months). The new regime provides for an exhaustive list of net financial expenses which fall within the scope of this limitation ruling. A catch-up deduction of 75% is available when the equity/assets ratio of the company is higher than the ratio calculated at the consolidated group level.
By way of exception, when the average amount of related party debt exceed 1.5 times the net equity of the company, the deductibility of net financial expenses would be capped at 10% of EBITDA or €1 million.
Non-deductible financial expenses may be deducted, within the limits, in the next 5 financial years.
The thin-capitalization rules (art.212, II of the FTC) and the Amendment Carrez limiting the financial expenses deduction incurred for the acquisition of substantial shareholdings where the decisions are not taken by companies located in the EU or the EEA (art 209, IX) would be repealed.
The Finance Act would maintain the general rule of limitation of the deductible interest rate and the anti-hybrid mismatch rules (art 212,I of the FTC).
Article 14: Reform of the patent tax regime
The OECD and the European Union have adopted the "nexus" approach, which consists in proportioning the tax benefits derived from the exploitation and transfer of a patent (or a similar intangible asset) to research and development (R&D) expenses realised in the national territory.
This approach consists in determining the portion of eligible profits with an eligibility ratio ("nexus" ratio) which has to be proportionate to the R&D expenses incurred in the territory.
The French patent box regime was considered as a potentially “harmful practice” so it has to be bring into line with the principles of the OECD.
Thus, the income eligible for the reduced rate of 15% will be determined with the "nexus" approach: tax advantage will be proportionate to the amount of R&D expenditure incurred in France.
The "nexus" ratio would be obtained as follows:
|Nexus Ratio =||R&D expenses incurred by the asset holder in France
or incurred by unrelated companies wherever located
increased by 30%
Total R&D expenses + acquisition costs
In addition, the Finance Act draft would amend the scope of the 15% rate:
- Patentable inventions would be excluded ;
- Original software protected by copyright would be included.
In tax-consolidated groups, a global calculation would be made at the level of the parent company and anti-abuse measures would be applicable in case of patent acquisition prior joining the group.
The new patent box regime would apply on taxpayer’s option for the reduced tax rate, made per asset, per product or per product family.
Article 15: Last corporate income tax instalment payment
The last corporate income tax instalment of the largest companies would be exceptionally increased.
The fifth instalment payment for the 2019 financial year would be increased to:
- 95% (instead of 80%) for companies with a turnover between €250M and €1 billion;
- 98% (instead of 90%) for companies with a turnover between €1 billion and €5 billion.
The 98% quota provided for companies with a turnover of more than €5 billion would remain unchanged.
Article 16: Dutreil Agreement: Adaptation of the partial exemption from transfer duties
Several changes have been announced:First, the partial exemption from transfer duties would no longer be fully challenged in the event of a transfer or donation within the core group of shareholders responsible for ensuring the company's sustainability during the collective commitment phase.
The exemption would only be challenged for the securities transferred or given by an heir or beneficiaries to another shareholder of the collective commitment.
In addition, the transfer of securities, which are still under a lock-up commitment, to a holding company would be extended. This transfer would be permitted even if the beneficiaries of the exemption do not hold entirely the holding company and if its assets do not consist solely of the securities transferred.
Lastly, the annual administrative reporting requirement would be repealed.
Article 17: The reversible option for Corporate tax
Companies and groups, which fall within the scope of the partnership regime (personal income tax), may opt for the corporate tax regime.
Article 17 of the Finance Act draft provides that the company’s choice to move from personal income tax taxation to corporate tax taxation would no longer be irreversible. If this tax election proves to be penalizing, the company could waive its option.
The right to waive the option for corporate tax would be time limited (5 years).
Article 48: General anti-abuse clause
The so-called "general anti-abuse" clause of the ATAD directive is transposed into French law by Article 48 of the Finance Act Project for 2019.
This application of this clause would require the fulfilment of two cumulative conditions:
- the arrangement, or series of arrangements, has 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, and
- the arrangement, or series of arrangements, is not regarded as genuine. The arrangement, or series of arrangements, shall be considered as non-genuine insofar as not based on sound commercial justification consistent with the underlying economic reality.
Article 50: Reform of the “Exit tax”
A new tax law system would replace the current Exit Tax Law system.
The new tax system would focus on unrealised gains on securities and similar transferable securities held by French tax resident who have sold their securities less than two years after the transfer of the tax residence outside France.
The provision of guarantees to ensure the recovery of the Treasury's claim would only remain required for taxpayers transferring their tax residence to a State or territory that has not concluded an administrative assistance agreement with France.