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Bills provide a series of tax measures affecting companies and individuals to redress public finances.
On 30 December 2012, the French Parliament approved the Finance Bill for 2013, which contains important tax measures for both companies and individuals. The main provision of the bill is the taxation of capital gains realized by individuals upon the sale of shares as normal income at the standard income tax rates.
Measures Applicable to Companies
Limitation on the Deductibility of Financial Expenses
For the fiscal year ended as of 31 December 2012, companies liable for corporation tax may only deduct up to 85% of their financial expenses from their taxable income. For the fiscal years starting from 1 January 2014, companies may only deduct up to 75% of their net financial expenses.
Only companies with net financial expenses exceeding €3 million are affected by this measure. This amount is a triggering threshold and not a deductible.
"Net financial expenses" is the total amount of financial expenses being remunerated from the amounts left in the possession of or put at the disposal of the company deducted from the total amount of financial expenses compensating the amounts left or made available to the company.
The expenses and revenue mentioned above include, notably, rent payments relating to (i) leasing operations, (ii) leasing transactions with a purchase option, and (iii) leases of real estate entered into between related companies within the meaning of the provisions of article 39-12 of the French General Tax Code (GTC). It is necessary to deduct from these rent payments the depreciation made by the lessor, including the financial depreciation recorded by the leasing companies and those leasing property with a purchase option, as well as the expenses and the ancillary benefits invoiced to the lessee.
The ceiling deduction limitation of 85%—or 75%, beginning in 2014—of net financial expenses is applicable after the possible add-back of the following:
Nondeductible financial expenses pursuant to the provisions of article 212 of the GTC. This only relates to interest from loans granted by companies belonging to the same group as the borrowing company.
Financial expenses related to borrowings linked to the acquisition of participating interests that are not deductible from the taxable income of the purchaser, only when the purchaser can demonstrate that it (or a company incorporated in France and belonging to the same economic group) actually makes the decisions relating to these shares and that it exercises a control or influence over the target company.
These measures are also applicable to companies that are members of consolidated tax groups but only applies to the net financial expenses related to transactions undertaken with companies that are not members of the tax group.
The €3 million threshold is assessed by taking into account the total amount of net financial expenses of the tax group.
Taxation of Capital Gains on Participating Interests
Before the passing of the Finance Act 2013, capital gains made as a result of the sale of participating interests were exempt from corporation tax, except for a lump sum amount equal to 10% of the net capital gains made during the fiscal year. Now, however, the taxable amount is equal to 12% of gross capital gains, excluding capital losses made during the same fiscal year. These capital losses are disregarded only to determine the taxable income in case of a net capital gain. Therefore the effective corporate rate of taxation of gross capital gains on participating interests equals 4.13% (i.e., 12% x 34.43%, which is the standard corporate tax rate).
The capital gains provisions are applicable to determine the taxation rates for the fiscal year ended as of 31 December 2012.
Note that the taxation of dividends received by a parent company remains unchanged. These dividends are only taxable up to 5% of their amount—an effective corporate rate equal to 1.72% (i.e., 5% x 34.43%).
Capping of Tax Losses
Carried-forward tax losses of a company can be offset against the taxable profit of a given fiscal year within a limit of €1 million increased by 50% (instead of 60% previously) of such profit exceeding this threshold. The balance of the unused tax losses may be carried forward indefinitely to subsequent fiscal years and is subject to the same capping mechanism. The losses of the whole of a consolidated group may be carried forward in the same conditions.
Note that the threshold of €1 million may be increased by the amount of the debt write-offs granted to a company making losses if it is subject to conciliation, protection, reorganization proceedings, or liquidation.
This measure imposing a ceiling of losses is applicable to carried-forward tax losses recorded for the fiscal year ended as of 31 December 2012.
Taxation of Profits Arising from the Capitalization of Impaired Receivables
A company that purchases a receivable from a third party, which is not affiliated to the debtor or the purchasers of the receivables, for a value less than its nominal value, and which is then capitalized following an increase of the debtor company's share capital, books a taxable profit equal to the difference between the purchase value of the receivable and the actual value of the subscribed shares, not their book value.
For example, a company could purchase a receivable from a third party with a nominal value of €15 million for a price equal to €100,000, which is then capitalized by the debtor company. The company that acquires the receivable receives 150,000 shares of the debtor company for a nominal value of €100. The actual value of the shares issued following the capitalization of the receivable equals to €150,000. The company that acquires the capitalized receivable will therefore realize a taxable profit equal to €50,000 (i.e., €150,000 – €100,000), not €14.9 million (i.e., €15 million – €0.1 million).
This scheme is only applicable to companies that are liable to corporate tax and receive participating interests upon the capitalization of the acquired receivable.
These provisions are applicable for the fiscal year ended as of 31 December 2012.
Extension of Exceptional 5% Corporate Tax Surcharge
Companies with a turnover of more than €250 million are subject to an exceptional surcharge equal to 5% of the amount of the corporation tax determined (i) after allocating reductions and tax credits of any nature whatsoever and (ii) at a standard rate (33.33%) or according to a reduced rate (19% or 15%).
A parent company of a tax group is liable for the payment of this exceptional 5% corporate tax surcharge if the accumulated turnover of the member companies of the tax group exceeds the €250 million threshold.
This exceptional corporate tax surcharge, initially payable for the fiscal years ended between 31 December 2011 and 30 December 2013 (i.e., fiscal years ended 2011 and 2012 for companies closing their fiscal years with the calendar year) has been extended to 30 December 2015. It will therefore apply to the fiscal years ending 31 December 2013 and 31 December 2014 for companies that close their fiscal years with the calendar year.
The marginal corporation tax rate remains equal to 36.10% for fiscal years 2013 and 2014.
Final Installment Payment of Corporation Tax
The final installment payment of corporation tax by companies with a turnover greater than €250 million is henceforth calculated with reference to the estimated profit for the current fiscal year, not with respect to that of the previous fiscal year.
This final installment payment of corporation tax will be calculated according to the company's turnover as follows:
Amount of advance payment
Turnover greater than €5 billion
Difference between 95% of the estimated corporation tax for the current fiscal year and the interim payments
Turnover between €1 billion and €5 billion
Difference between 85% of the estimated corporation tax for the current fiscal year and the interim payments
Turnover between €250 million and €1 billion
Difference between 75% of the estimated corporation tax for the current fiscal year and the interim payments
This provision is applicable to fiscal years opened as of 1 January 2013.
Adjustment of Research Tax Credit
The research tax credit regime extends to innovation expenditures by European small and medium-sized enterprises (SMEs) at an early stage of research and development relating to the design of prototypes for new products or test installations for new products.
Expenditures eligible for this innovation tax credit are capped at €400,000 per year, and the tax credit rate is 20%.
Previously, increased research tax credit rates of 40% for the first year and 35% the for the second year were granted, under certain conditions, to companies that had not benefitted from a tax credit for the previous five years and that did not have a relationship of dependency, as defined in article 39-12 of the GTC, with another company that had benefitted during the same period. These increased rates have been abolished.
Accordingly, for these first two years, the rates of the research tax credit are equal to the standard rate, i.e., 30%.
These provisions are applicable to tax credits calculated according to expenditures incurred as of 1 January 2013.
Tax on Salaries
As of 1 January 2013, the base of the payroll tax is brought into line with that of the social welfare charge (contribution sociale généralisée) (CSG). Practically speaking, the amounts allocated to employees pursuant to employee savings plans (e.g., profit sharing and incentive schemes) will notably be subject to payroll tax.
The scale is also amended as follows:
Annual individual remuneration
Amount not exceeding €7,604
Amount between €7,604 and €15,185
Amount between €15,185 and €150,000
Amount greater than €150,000
Tax Credit for Encouraging Competitiveness
As of 1 January 2013, companies can benefit from a competitiveness tax credit for remunerations that are subject to social security contributions paid to employees during the calendar year and that do not exceed 2 1/2 times the French minimum wage (salaire minimum interprofessionnel de croissance) (SMIC).
The tax credit rate is fixed at 4% for remunerations paid in 2013 and at 6% for those paid as of 1 January 2014.
This tax credit is deducted from the corporation tax payable by companies during the year in which the remunerations used for the calculation are paid. This tax credit may be transferred to the parent company of a tax group.
The part of the tax credit that has not been set off against the corporation tax confers a right to a receivable from the French tax authorities that may be used for the payment of corporate tax due during the three calendar years following the year of the finding. The unused tax credit at the expiration of this three-year period will be reimbursed.
However, the following may obtain the immediate reimbursement of the unused tax credit: SMEs, as defined by the European Commission; start-up businesses; new innovative businesses; and companies subject to protection, reorganization proceedings, or liquidation.
Moreover, a prefinancing mechanism should be set up as of 2013 in order to immediately improve the cash flow position of the SMEs and the intermediate-size enterprises (entreprises de taille intermédiaire) (ETIs) that request the tax credit. According to this mechanism, banking institutions will offer to their customers an advance equal to the amount of their tax receivable. In order to ensure that all companies can take advantage of this, an endorsement or guarantee from the public investment bank (Banque Patrimoine & Immobilier) (BPI) is needed to facilitate the obtaining of this prefinancing.
Transfer of Registered Office Abroad
In the case of a transfer of a registered office or establishment to another member state of the European Union, accompanied by the transfer of assets, the unrealized capital gains on the transferred fixed assets, as well as the capital gains carried over or subject to a tax deferral, are taxed according to the usual rules either immediately or over a period of five years.
Also subject to taxation, either immediately or over a period of five years, are the capital gains made in the transfer of a registered office or establishment to a state that is part of the European Economic Area by having signed with France either (i) a convention on administrative assistance to combat tax evasion and avoidance or (ii) a convention of mutual assistance for the recovery of claims similar in scope to that provided for by the Council of the European Union Directive 2010/24/EU of 16 March 2010.
Within two months following the transfer of its registered office or establishment, the company concerned should pay either (i) the corporation tax in its entirety or, at its express request, (ii) 1/5 of the corporation tax, with the balance being paid in equal installments no later than the anniversary date of the first payment over the following four years. The balance of the amounts payable could, however, be paid at any time, in a single payment, before the expiration of this period.
The balance of the corporation tax is immediately payable in cases of a sale of assets or transfer of these assets to another state other than those mentioned above, the liquidation of the company, or noncompliance with the payment schedules.
Measures Applicable to Individuals
Capital Gains Tax on Securities
Capital gains realized by French individuals upon the sale of company shares and securities since 1 January 2013 are subject to income tax at progressive rates after the application of a rebate for the holding period.
However, the capital gains made by the "entrepreneurs" remain taxed at a flat rate of 19%, to which it is necessary to add the social security contributions, which are currently at 15.5%—resulting in a global tax rate of 34.5%.
The following taxation arrangements remain unchanged:
Capital gains from the sale of shares acquired as a result of the exercise of the warrants for business creator shares (Bons de Souscription de Parts de Créateurs d'Entreprises) (BSPCE). These gains remain taxable at a flat rate of 19% (34.5% including social security contributions).
Gains made by the withdrawal or redemption of shares held in a Share Savings Plan (Plan d'Épargne en Actions) (PEA) before the expiration of the plan's fifth year of operation. These gains remain taxable at a flat rate of 22.5% (37.5% including social security contributions) in case of withdrawal or redemption before two years or at a rate of 19% (34.5% including social security contributions) in case of withdrawal or redemption after two years but before five years.
Capital gains made in 2012 by individuals other than those mentioned above are taxed at a flat rate of 24% instead of 19% (39.5% including social security contributions).
Furthermore, the exemption of capital gains in cases of reinvestments of a part of the sale price in the subscription in the capital of SMEs is simplified and the regime for SME managers who retire is extended until 2017.
GENERAL TAXATION REGIME IN FORCE SINCE 1 JANUARY 2013
The general taxation regime is applicable to all individuals except for "entrepreneurs", BSPCE beneficiaries, and PEA holders.
According to this regime, capital gains made on the sale of company shares or securities are subject to income tax at progressive rates, which should be increased by social security contributions, after application of a rebate depending on the holding period of the sold shares. This rebate is equal to the following:
20% when the sold shares have been held for at least two years but less than four years
30% when the sold shares have been held for at least four years but less than six years
40% when the sold shares have been held for at least six years
The holding period begins on the date of subscription or purchase of the sold securities, including those that were purchased before 1 January 2013.
Note that no rebate should be taken into account to determine the basis for calculation of social security contributions.
TAXATION OF "ENTREPRENEURS"
Capital gains made by individuals that satisfy the following conditions remain taxable at a flat rate of 19% (34.5% including social security contributions):
The company whose securities are sold must carry out an industrial, commercial, craft, agricultural, or professional activity, excluding (i) guaranteed income-generating activities due to regulated purchase of production rates, (ii) financial activities, and (iii) fixed and movable property management activities. This condition is assessed in a continuous manner for the 10 years preceding the sale or, if the company has been incorporated for less than 10 years, since its incorporation.
The seller—directly or through a third party or through a spouse, ascendants and descendants, or brothers and sisters—must have held the sold shares continuously for at least five years.
The securities held by the seller—directly or through a third party or through a spouse, ascendants and descendants, or brothers and sisters—must have been represented continuously for at least two years during the 10 years preceding the transfer of at least 10% of the voting or financial rights of the company whose securities have been transferred.
At the transfer date, the securities held by the seller—directly or through a third party or through a spouse, ascendants and descendants, or brothers and sisters—must represent at least 2% of the voting or financial rights of the company whose securities have been transferred.
During the five years preceding the transfer, the seller must have continuously held an eligible management position (e.g., president or chief executive officer) or a salaried position within the company whose securities have been transferred.
EXEMPTION OF CAPITAL GAINS WHEN REINVESTING PART OF THE SALE PROCEEDS IN THE SUBSCRIPTION IN THE CAPITAL OF SMES
The system of deferral of taxation, and then exemption of capital gains, is now applicable when reinvesting 50% of the capital gains (instead of 80% previously) within 24 months of the transfer (instead of 36 months previously).
The sale proceeds may be reinvested in several operating companies, as well as in the subscription of units in venture capital mutual investment funds complying with the investment quota of 50%, as provided for in article L 214-28 of the French Monetary and Financial Code, or in shares of capital venture firms complying with the investment quota of 50%, as provided for in article 1er -1-1° -al. 3 of the law of 85-695 dated 11 July 1985.
Only the proportion of capital gains actually reinvested can benefit from a deferral of taxation and then an exemption.
RETIRING SENIOR EXECUTIVES
The tax exemption scheme for retiring senior executives is extended until 31 December 2017.
Subject to the provisions of tax treaties, capital gains made by nonresidents holding more than 25% of the profit rights of a French entity, or having held more than 25% of such profit rights at any moment during the five years preceding the sale of the shares of that French entity, are now taxed at a rate of 45% instead of 19% previously.
Taxation of Dividends and Interest
Until 31 December 2012, dividends and interest received by French individuals were either subject to income tax at progressive rates or subject to a flat withholding tax rate of 21% for dividends and 24% for interest (i.e., a global rate of 36.5% and 39.5%, respectively, including the social security contributions). Dividends were, however, taxed at 40% after a rebate.
Since 1 January 2013, dividends and interest are subject to income tax at progressive rates subject to deduction of the CSG deductible at a rate of 5.1% and, for dividends only, a rebate of 40%. Dividends and interest are also subject to social security contributions at a current rate of 15.5%.
Dividends and interest are further subject to a withholding tax at the source, which respectively equals to 21% and 24% nondefinitive and which will be deducted from the income tax payable for these dividends.
Finally, note that the revenue from fixed-income investments for which the debtor is established in France and that are paid outside of France in a Non-Cooperative State or Territory (NCST) are now subject to a withholding tax of 75% (instead of 50% previously) except if the debtor proves that the principal purpose and effect of the operations corresponding to this revenue were not to allow the location of this revenue in a NCST.
Stock Options and Restricted Units Shares
The tax treatment of the gains on options or the gains from acquisition is different from the tax treatment of capital gains realized upon the sale of the shares.
In case of allotment of stocks options, the gains on options are equal to the difference between the value of the share on the date of exercise of the option and its exercise price.
In case of allotment of free shares, the gains from acquisition of the free shares are equal to the value of the share on the date of its definitive allotment.
The capital gains realized upon the sale of the shares is equal to either (i) the difference between the sale price of the shares and their value on the date of exercise of the options (stock options) or (ii) the difference between the sale price of the shares and their value on the date of its definitive allotment (free shares).
TAX REGIME FOR CAPITAL GAINS ON DISPOSAL
Capital gains realized in 2012 upon the sale of shares acquired or received through an eligible stock option plan or restricted stock units plan are taxed at a flat rate of 24% (39.5% including social security contributions). Those realized as of 1 January 2013 are subject to income tax at progressive rates after the application of a possible rebate depending on the holding period.
TAX REGIME FOR CAPITAL GAINS ON OPTIONS AND CAPITAL GAINS FROM ACQUISITION
The tax regime for capital gains on options and capital gains from acquisition remains unchanged if the options or free shares were granted before 28 September 2012.
For options and shares granted for free as of 28 September 2012, the regime is brought into line with the standard regime for wages and salaries. Gains from stock options or gains from acquisition (free shares) are subject to income tax at progressive rates in the category of wages and salaries.
Gains on stock options are taxable in the year of the disposal of the shares, not the year of the exercise of the options. The same applies to gains from acquisition (free shares), subject to compliance with the vesting period provided for by the French Commercial Code (shares effectively allotted at least two years after the allotment date). If this is not the case, the gains from acquisition are taxed in the year of the effective allotment of the shares.
SOCIAL SECURITY REGIME
The social security regime for gains on options and gains from acquisition remains unchanged if the options or free shares have been allotted before 28 September 2012.
For the options and shares granted for free as from 28 September 2012, gains on options or acquisition are now exempt from social security contributions provided that the companies notify the Unions de Recouvrement des Cotisations de Sécurité Sociale et d'Allocations Familiales (URSSAF) of the identity of their employees or corporate officers receiving stock options and free shares, as well as the number and value of shares allotted to each of them.
The rate of the salary contribution remains equal to 10%.
Contribution of Securities Followed by Their Transfer by the Beneficiary Company
Capital gains made since 14 November 2012 by individuals who contribute shares to a company that they control are deferred upon transfer for valuable consideration, repurchase redemption, or cancellation of the shares received in consideration of the contribution.
The taxation of such capital gains cannot be deferred further when the shares that have been contributed to the beneficiary are transferred for valuable consideration by the beneficiary company, redeemed, reimbursed, or cancelled within a period of three years as of the date of contribution.
Nevertheless, in case of a sale by the beneficiary company of the shares contributed within a period of three years as of the date of contribution, the taxation of capital gains could be deferred further, provided that the beneficiary that sold the shares reinvests at least 50% of the proceeds of their disposal within a period of two years as of the date of transfer in one of the following:
The financing of a commercial, industrial, craft, professional, agricultural, or financial activity, excluding the management of fixed and movable property
The acquisition of a part of the capital of a company exercising one of the activities listed above, provided that this acquisition allows the beneficiary company to control this company
The subscription in cash to the initial capital or capital increase of one or several European SMEs
In case of a gift of shares issued by the beneficiary company followed by a sale of the shares, the donee may be liable for the income tax assessed on the capital gain realized by the donor upon the contribution of its shares. The taxation of capital gains cannot be deferred further when the contributor moves their tax residence outside France.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the following Morgan Lewis lawyer:
. According to article 39-12 of the GTC, a relationship of dependency exists between two companies (i) when one holds, directly or through an intermediary, the majority of the share capital of the other or carries out, in fact, the decision-making power or (ii) when both of them are placed under the control of the same third-party company.
. SMEs are companies that employ fewer than 250 employees and for which the turnover does not exceed €50 million or its total assets do not exceed €43 million.
. Provisions of article 244 bis B of the GTC.
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