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Significant recent changes in tax law: France

  • France
  • Tax planning and consultancy - Briefings

31-05-2014

Exceptional 50% Tax on high remuneration

On 30 April 2014, the French tax authorities (“FTA”) released their draft regulations on the exceptional tax on high income (taxe exceptionnelle de solidarité sur les hautes rémunérations) included in the 2014 Finance Bill.

The new temporary tax was introduced by the Finance Bill for 2014. The tax is due by companies paying high gross remuneration to their employees in 2013 and 2014 exceeding EUR 1 million.

This temporary tax must be paid by companies at a rate of 50% on the portion of the remuneration which exceeds EUR 1 million paid in 2013 and 2014 to their employees.

The remuneration and benefits covered by the 50% tax include all types of income (eg wages, salaries, equivalent income, stock options, free shares and all benefits in kind or in cash, attendance fees, pensions).

This 50% tax is capped each year at 5% of the turnover of the eligible company (eg a company with a EUR 5 million turnover pays remuneration of EUR 1.8 million, the sum EUR 800,000 that exceeds EUR 1 million is subject to the new tax: EUR 800,000 x 50% = EUR 400,000 but the final 50% tax is capped at 5% of the turnover of the company ie EUR 250,000).

The 50% tax is calculated company by company and is deductible from the corporate income tax paid by the company but not deductible from the additional temporary surtax of 10.7%.

Limitation on the deductibility of interest on loans obtained from (French or foreign) related parties

In May 2014, the French tax authorities (“FTA”) issued the awaited draft comments on the new scheme regarding the limitation on the deductibility of interest on loans received from (French or foreign) related parties provided for by Article 212 I-b of the French Tax Code (“FTC”).

This new measure resulting from the Finance Act for 2014 applies to interest booked during tax years ending on or after 25 September 2013 and limits the deductibility of interest paid by a French company to related entities when such interest payments are not subject to a certain level of tax at the level of the lending company.

Although the comments issued by the FTA do not resolve all issues relating to the application of this new limitation, they provide some welcome clarifications regarding its application.

Any interest paid by a French entity on a loan granted by an affiliated French or non resident company is non deductible for French corporate income tax purposes if the borrower is unable to demonstrate upon request of the FTA that the interest is subject to tax at the level of the recipient company at a rate equal to at least 25% of the tax that would have been due under the standard French rules.

If the lender is not “domiciled or established” in France, the taxation of interest it receives must be equal to at least 25% of the corporate tax liability that would have been due in France had the company been domiciled or established in France.

Despite the fact that this mechanism is initially dedicated to challenge aggressive planning structures (“anti hybrid rules”), it applies in practice to any interest paid in consideration for any receivable whatever the nature of the receivable or the financial instrument implemented at the level of the lending company.

The main clarifications made by the FTA are as follows:

  • The FTA has clarified that the comparison of the tax rates is to be made by reference to the French standard corporate income tax rate (ie 33.1/3%), increased by additional contributions (ie between 34.43% and 38%, depending on the size of the lender). As a result, interest received by a foreign entity should be subject to a minimum taxation ranging from 8.33% (standard CIT rate) to 9.5% (in case of application of additional CIT surtaxes to the standard CIT rate, ie  38% x 25%) so that the interest be deductible at the level of the French borrower.
  • The fact that the lending company would pay nil taxes or would be in a loss making position is not relevant to trigger the non deductibility of the interest at the level of the paying company (ie the tax regime applicable to the lending company on the interest received is taken into account and not the effective taxes paid by the lending company).
  • Upon request of the FTA, French taxpayers must provide documentation supporting that the foreign CIT theoretically owed by the lender on interest paid to it and deducted in France is at least equal to the CIT Reference Rate. The FTA further indicates that:

 -      Proof of the minimum taxation may be evidenced by any means;

-      The French debtor which has deducted the interest paid out to the non resident lender must evidence that:

(i) The CIT rate to which the interest paid is subject to, equal to or higher than the CIT Reference Rate; and

(ii) The interest paid is recorded in the profit and loss account of the non resident lender enterprise.

 

This process will complement the other rules of limitation already applicable in France which may restrict the interest deductibility, ie:

-           Thin capitalization rules (FTC art. 212 and art. 39,1-3)

-           Anti ‘debt push down’ rules (FTC art. 209, 1X, named “Carrez rule”)

-           Interest capping rules (FTC art. 212 bis).

Tax regularisation in France of undeclared funds held abroad (French offshore voluntary disclosure program)

The French tax authorities (“FTA”) have completed a new voluntary disclosure program for undeclared foreign assets.

The recent reinforcement of the investigative and penal powers of the FTA, as well as the development of a Double Tax Treaty network in France in matters of exchange of tax information, mean that any French taxpayers owning undeclared funds abroad should consider the opportunity to engage in a tax regularisation procedure with the French authorities.

2014 could be one of the last chances to repatriate these undeclared foreign funds in a way that would avoid French taxpayers experiencing confiscation and potential prosecution processes.

A new regularisation unit allows taxpayers to reveal their foreign funds to the French Tax Authorities and benefit from a secure set of rules.

This regularisation procedure is no longer anonymous as was the case in the past. To date, around 23,000 cases have been filed with accounts containing an average of EUR 900,000.

The taxpayers should voluntarily disclose all their undeclared foreign assets and the corresponding income and/or gains.

As a general rule, the unreported income and assets are fully taxed based on the rectified tax returns as from 2006 as regards income tax, and 2007 as regards wealth tax, inheritance and gift tax.

The taxpayers entering into such a regularisation process have a limited opportunity to pay interest for late payment (at 4.8% per year) and specific penalties in addition to the initial unpaid taxes.

This will allow French taxpayers wishing to reveal their undeclared foreign funds to:

  • avoid prosecution, and
  • reduce the amount of penalties which would otherwise be imposed under common law by up to 40%.

A distinction is made between “passive frauds” (these are frauds that concern mainly taxpayers having inherited foreign funds) subject to reduced penalties and fines and “active frauds” subject to more onerous regularization terms. As a general rule, the penalty is reduced from 40% to 15% in the first case and to 30% in the second case.

The regularisation procedure allows for the unrestricted use of initially undeclared funds after payment of reduced penalties and fines.

We have developed a specific expertise in dealing with such regularisation processes and have assisted numerous clients matters regards this over the last few months.

For more information contact

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