L:\reper113\144006265.doc
FOREIGN LAWYERS’ FORUM
FRENCH ANNUAL REPORT
November 2004 – November 2005
Michel Turon
Line-Alexa Glotin
&
Matthieu Chapin
UETTWILLER, GRELON, GOUT, CANAT & ASSOCIES (UGGC)
47, rue de Monceau
75008 Paris (France)
Tel: 33.1.56.69.70.00 – Fax: 33.1.56.69.70.71
e-mail: m.turon@uggcavocats.com - la.glotin@uggcavocats.com - m.chapin@uggcavocats.com
-2-
SUMMARY
-3-
I. TAX RATES
Pages

CORPORATE TAX
6-10
- Minimum tax (“IFA”)
- Corporate tax:
 Standard rate
 Reduced rate

BRANCH TAX
11-12

WITHHOLDING TAX
13-14
- Dividends
- Interest

VAT

REGISTRATION DUTIES
15-16
17-20
- Goodwill and leasehold rights
- Real estate
- Shares

PERSONAL INCOME TAX
-
21-24
Tax residents of France
Tax residents of other jurisdictions

TAXATION OF CAPITAL GAINS ON SECURITIES

WEALTH TAX

INHERITANCE AND GIFT TAX
25-27
28-30
31-34
-4-
II. DISTRIBUTIONS
35-37
III. INTEREST
38-39
IV. FOREIGN-CONTROLLED CORPORATIONS
40-41
V. RULINGS
42-43
VI. THIN CAPITALIZATION RULES
44-46
VII. CASE LAW
47-48
VIII. TAX TREATIES
49-50
-5-
I. TAX RATES
-6-
CORPORATE TAX
- Minimum tax (“IFA”)
- Corporate tax: standard rate and reduced rate
-7-
MINIMUM TAX1
From January 1, 2005
ANNUAL SALES
MINIMUM TAX
(EUROS)
EXCEEDING
NOT EXCEEDING
(EUROS)
(EUROS)
-
76,000
/
76,000
150,000
750
150,000
300,000
1,125
300,000
750,000
1,575
750,000
1,500,000
2,175
1,500,000
7,500,000
3,750
7,500,000
15,000,000
15,000
15,000,000
75,000,000
18,750
75,000,000
30,000
According to the Draft Finance Bill for 2006, the minimum tax schedule should be
modified.
Corporations should be exempt from the minimum tax up to an annual sales of € 200,000.
Moreover, corporations generating annual sales exceeding € 75,000,000 but not exceeding
€ 500,000,000 would be subject to a € 30,000 minimum tax and the corporations
generating annual sales in excess of € 500,000,000 would be subject to a € 100,000
minimum tax.
Corporations subject to corporate income tax have to pay a minimum annual tax (“imposition forfaitaire annuelle”
or “IFA”). Said minimum tax is due by March 15 of each year. It is a fixed amount based on the previous year’s gross
sales, according to a rate schedule provided by law. IFA is regarded as a prepayment of tax if the corporation has a
corporate tax liability that exceeds the applicable IFA. It may be used as a credit until December 31 of the second year
following the year during which the relevant IFA was paid.
According to the Draft Finance Bill for 2006, IFA would cease to be considered as a prepayment of corporate tax but
corporations would be entitled to deduct IFA from their taxable results.
1
-8-
CORPORATE TAX
TYPE
Standard regime
Special regimes2
RATE
APPLICATION
33.1/3%
Applicable to all corporations that are liable to corporate income tax
on their profits, irrespective of whether the same are distributed or
not.
-
Corporations' long-term capital gains: see below
-
Small and medium-size businesses: small and medium-size businesses3
enjoy a 15% reduced rate on a limited portion of their taxable profits (up to
€ 38,120), subject to certain conditions (Art. 219, I-b French Tax Code).
-
Newly organized corporations4: under certain conditions, a newly
organized corporation are entitled to full exemption of corporate tax (or, the
case arising, income tax) , with respect to profits generated until the end of
the 23rd month following the date on which it was incorporated; thereafter
they are entitled to partial exemption, paying corporate tax (or, the case
arising, income tax) on one quarter, one half or three quarters of the profits
generated depending on whether such profits were made during the first,
second or third 12-month period following the full exemption period (Art.
44 sexies, French Tax Code).
ADDITIONAL TAXES
TYPE
Additional tax
RATE
APPLICATION
1.5% in 20056
Applicable to those legal entities that are liable to corporate
income tax at the standard rate and at the reduced 15% rate.
3.37%
Applicable to those legal entities that are liable to corporate
income tax at the standard rate and at the reduced 15% rate8.
(Abolished as of
January 1, 20065)
Social security
contribution
(Finance Act for
2000)
2
Non-exhaustive list.
Namely a business [corporation] that satisfies both of the following conditions: (i) its sales in the relevant tax year do
not exceed € 7,630,000 and (ii) 75% of its capital stock at least is held by corporations that satisfy the said conditions
or by individuals.
4
This regime only concerns corporations incorporated between January 1, 1995 and December 31, 2009 that are based
in high-priority development areas. The corporate tax exemption is limited to a maximum amount of profits of
€ 225,000 generated over a period of 36 months.
5
Finance Act for 2005.
6
This tax is based on the general corporate tax, i.e., 1.5% of the 33.1/3% or 15%.
7
This new non-deductible surtax applies to the portion exceeding € 763,000 of the annual gross corporate income tax
(including tax credits).
8
Small and medium-size businesses are exempt of the Social Security Contribution, subject to certain conditions.
3
-9-
REFORM OF LONG TERM CAPITAL GAINS REALIZED BY
CORPORATIONS
The Revised Finance Act has reformed capital gains or losses regime applicable to those
corporations that are liable to corporate tax.
The tax rate applicable to long-term capital gains resulting from:
-
(i) transfers of certain stocks held for at least five years9
(ii) gains resulting from the sale of patents, registered inventions and certain
manufacturing processes,
(iii) dividends received from certain venture capital structures, and
(iv) profits realized on the sale of shares held for at least two years
has been reduced to 15% (coming from 19%) for the tax year beginning January 1st, 2005.
Capital gains resulting from the sale of shares of stock constituting a “Participation
Stock”10, provided the same have been held for at least two years as at the date of transfer,
:
-
will be taxed at the reduced rate of 8% for the tax year beginning on January 1 st,
2006,
will be fully exempt for the tax years beginning on January 1st, 2007 (except for
an amount equal to 5% of the profit, which is subject to corporate tax at the
standard rate, e.g. 33.1/3%).
The obligation to book the amount of the gain enjoying the reduced corporate tax rate in
the so-called “long term capital gains reserve”11 is now abolished.
Corporations which in the past have booked long term capital gain reserves must transfer
it to an ordinary reserve account before December 31st, 2005, subject to a limit of
€ 200,000,00012. This transfer triggers the application of a 2,5% surtax applicable to the
amount transferred after application of a € 500,000 rebate. The sums transferred and
taxed as indicated may be used free of tax by the corporation.
Specific rules are also provided for losses available on 31 December 2005. Those losses
may be offset according to different rules depending on their regime of taxation (reduced
rate or not) and on the nature of the shares sold (investment shares or not).
Such as “FCPR” and “SCR”; i.e., venture capital firms.
Participation Stock are those stockholdings that are considered as such under accounting and tax law. Participation
Stock does not include shares of stock held in “FCPR” and “SCR”.
11
The sums booked on this reserve account used to be subject to additional taxation, the effect of which was to bring
the effective tax rate at the level of the corporate tax standard rate.
12
Amounts exceeding € 200,000,000 must stay in the long term capital gains reserve. If the corporation chooses to use
any of those amounts, which are in the nature of after tax gains after application of a reduced tax rate, it will have to
bear a surtax that will bring the whole tax paid to the level of the corporate tax standard rate, i.e., 33 1/3%.
9
10
- 10 -
TRANSFER OF THE REGISTERED OFFICE OF A CORPORATION TO ANOTHER
EU MEMBER STATE
Since 1st January 2005, the transfer of the registered office of French corporations to
another EU Member State is no longer characterized as a cessation of business for tax
purposes. As, a consequence the profits of the relevant year and latent capital gains are no
longer immediately subject to corporate tax13.
Only the gain resulting from the sale of assets owned by the transferred French
corporation is liable to corporate tax.
In the event the transferred French corporation leaves assets in France for the purpose of
carrying out its business, the same will be characterized as a permanent establishment in
France of the corporation transferred abroad, the profits of which would be liable to
French corporate tax.
13
GTC, Article 221, 2°.
- 11 -
BRANCH TAX
- 12 -
BRANCH TAX14
WITHHOLDING TAX ON PROFITS MADE BY FOREIGN CORPORATIONS
CONDUCTING BUSINESS IN FRANCE (ARTICLE 115 QUINQUIES OF THE GENERAL TAX
CODE)
14
CATEGORY
RATE
Foreign corporations15
25%
Profits generated by branches of foreign entities, net of French corporate tax, are deemed to have been distributed to
the non-resident shareholders and thus subject to withholding tax.
15
Subject to (i) the specific exemption provided for corporations the effective place of management of which is
located in the EU and which are liable to corporate tax at the standard rate and to (ii) tax treaties.
- 13 -
WITHHOLDING TAX
- 14 -
WITHHOLDING TAX
ON DIVIDENDS AND INTEREST
PAID ABROAD
CATEGORY
RATE
Dividends16
25%
Interest
16%
The above-mentioned withholding tax rates apply subject to:
(i)
Specific exemption regimes applicable to EU beneficiaries (please see below, §
II. “Distributions” and III. “Interest”)
and
(ii)
16
Tax treaties.
GTC, Art. 119 bis 2.
- 15 -
VAT
- 16 -
VALUE ADDED TAX
CATEGORY
17
RATE
Standard rate
19.6%
Reduced rate17
5.5%
Specific rate18
2.1%
Applied, in particular, to non-refundable medical drugs, books, foodstuffs, water, public transport, transfer of
intellectual property rights on works of art and artistic interpretations, etc.
18
Applied, in particular, to refundable medical drugs.
- 17 -
REGISTRATION DUTIES
- Goodwill and leasehold rights
- Real estate
- Shares
- 18 -
REGISTRATION DUTIES ON
SALES OF GOODWILL AND LEASEHOLD19 RIGHTS
TAXABLE INCOME
Not exceeding € 23,000
Above € 23,00021
19
RATE
Until December
31st, 2005
as from January 1st,
200620
0%
0%
4.80%
5%
Commercial leases.
The Revised Finance Act for 2004 has increased the rate of the proportional registration duties and simultaneously
abolished stamp duties. This reform is applicable as from January 1st, 2006.
20
- 19 -
REGISTRATION DUTIES ON
SALES OF REAL ESTATE
CATEGORY
Residential buildings
RATE
until December
31st, 2005
As from January
1st, 200622
4.89%,
(i.e. 3.60% +
1.20% + a surtax of
2.50% computed
on the local tax of
3.60%)
5.09%,
(i.e. 3.60% + 0.2%
+ 1.20% + a surtax
of 2.50% computed
on the local tax of
3.60%)
4.89% (i.e. 3.60%
+ 1.20% + a surtax
of 2.50 %
computed on the
local tax of 3.60%)
5.09% (i.e. 3.80%
+ 0.2% + 1.20% + a
surtax of 2.50 %
computed on the
local tax of 3.60%)
0.615%
(i.e. 0.60% + a
surtax of 2.50%
computed on the
real estate
registration tax of
0.60%)
0.715%
(i.e. 0.60% + 0.10%
+ a surtax of 2.50%
computed on the
real estate
registration tax of
0.60%)
Other buildings23
Sales of buildings (not land) liable to VAT and real estate
acquisitions by real estate agents for the purpose of resale,
as well as sales of certain types of rural buildings.
22
The Revised Finance Act for 2004 has increased the rate of the proportional registration duty and simultaneously
abolished stamp duty. This reform is applicable as from January 1 st, 2006.
23
This only concerns commercial or industrial premises, real estate used for craft industry and rural buildings that do
not enjoy the 0.60% rate.
- 20 -
REGISTRATION DUTIES
ON SALES OF SHARES24
RATE
CATEGORY
Shares in a SARL26
Shares in a SA
24
until December 31st,
2005
As from January 1st,
200625
4.80%
5%
1%, capped at € 3,049
1.10%, caped at
€ 4,000
Irrespective of whether the buyer is an individual or a corporation.
The Revised Finance Act for 2004 has increased the rate of the proportional registration duty and simultaneously
abolished stamp duty This reform is applicable as from January 1 st, 2006.
26
From January 1, 2004, a rebate is applied on the sale amount. This rebate is obtained by multiplying the number of
shares sold by € 23,000 and dividing the result by the total number of shares.
25
- 21 -
PERSONAL INCOME TAX
- Tax residents of France
- Tax residents of jurisdictions other than France
- 22 -
FRENCH PERSONAL INCOME TAX
PAYABLE BY TAX RESIDENTS OF FRANCE
French personal income tax is computed by the tax office on the basis of the tax return
filed by the taxpayer. It is paid in the year following the year during which the income
was earned.
Income received in 2005 – The draft of Finance Bill for 2005 provides that tax rates
applicable to income realized in 2005 will be the following:
TAXABLE INCOME
FRENCH PERSONAL INCOME TAX
Under € 4,412
0
Between € 4,412 and € 8,677
(I x 0.0683 ) - (301.34 x S)
Between € 8,677 and € 15,274
(I x 0.1914 ) - (1,369.48 x S)
Between € 15,274 and € 24,731
(I x 0.2826 ) - (2,762.47 x S)
Between € 24,731 and € 40,241
(I x 0.3738 ) - (5,017.93 x S)
Between € 40,241 and € 49,624
(I x 0.4262 ) - (7,126.56 x S)
Above € 49,624
(I x 0.4809) - (9,841.00 x S)
I.
“I” corresponds to the individual’s taxable income, e.g., salary (after deduction of
social security contributions -employee’s portion-, a 10% deduction and a second
20% deduction), interest, dividends and rental income, but not capital gains.
II.
“S”corresponds to the number of so-called “family shares”. Each spouse counts for
one share. The first two children count for one half share each and each additional
child counts for one share. By way of example: S = 2.5 for a married couple with
one child, S = 4 for a married couple with three children.
III. Married couples are not allowed to file separate returns.
IV. In addition to French personal income tax, an individual who is a resident of France
is subject in addition to so-called “social contributions”.
Income received in 2006 – A significant reform of the personal income tax system
should be introduced by the Finance Act for 2006 taxable income.
The income tax schedule of tax brackets should be modified and the above-mentioned
20% rebate would be removed and directly taken into account in the form of a reduction
of the tax rate in each bracket. The proposed schedule would be as follows:
- 23 -
NET TAXABLE INCOME
INCOME TAX RATE
Under € 5,517
0
Between € 5,517 and € 11,000
5,5%
Between € 11,000 and € 24,432
14%
Between € 24,432 and € 65,000
30%
Above € 65,000
40%
Also on the positive side, a rule would be introduced whereby the total amount of taxes
due by a taxpayer (local taxes + personal income tax + wealth tax) should not exceed 60%
of his or her annual income. Over that percentage, a refund of the excess tax would be
obtained by the taxpayer.
On the negative side, certain tax niches would become subject to a blanket cap of € 8,000
per household plus € 1,000 per child.
.
- 24 -
FRENCH PERSONAL INCOME TAX
PAYABLE BY TAX RESIDENTS OF JURISDICTIONS OTHER THAN
FRANCE
FOR INCOME RECEIVED IN 2006
French personal income tax payable by tax residents of jurisdictions other than France
with respect to their French-source taxable income is withheld and paid to the tax office
on a daily, weekly, monthly or annual basis, depending on the length of time worked, in
accordance with the following table:
NET TAXABLE INCOME27
RATE28
Up to € 13,170
0%
Between € 13,170 and € 38,214
12%
Above € 38,214
20%
S
The net taxable income corresponds to taxable salaries (after deduction of social
security contributions (employee’s portion) and a 10% deduction).
S
The first two brackets are fixed. Concerning the third bracket, a second calculation
needs to be made on the basis of the system applicable to tax residents of France, i.e.
including other taxable income (e.g. rental income). The 20% withholding tax
already paid under the third bracket is taken into account as a credit but further
personal income tax may be due.
S
Specific rates are applicable depending on the nature of the taxable income:
INCOME CATEGORY
Artists and athletes without a permanent
establishment in France
Other income
RATE29
15%
33.33%
Please note that these rates may vary depending on applicable tax treaties.
27
According to the draft Finance Bill for 2006.
Those rates take into account the abolition of the 20% rebate provided by for in the draft Finance Bill for 2006.
29
Neither the 10% nor the 20% deductions apply to this withholding tax.
28
- 25 -
TAXATION OF CAPITAL GAINS ON SECURITIES
- 26 -
TAXATION OF CAPITAL GAINS ON SECURITIES
Capital gains realized by tax residents of France on sales of securities are subject to tax at
the rate of 16 % whenever total sales of securities in a tax year exceed € 15,000.
Individuals who are not tax residents of France are fully exempt on the condition that they
have not held, during the five years preceding the sale, directly or indirectly, alone or with
their relatives, more than 25 % of the capital of the French entity30 the shares stock which
are sold.
Capital gains realized
by tax residents of France
Substantial interest by
tax residents of jurisdictions
other than France
Income tax
16%
16%
Additional social contributions
11%
-
Effective tax burden
27%
16%
From
January 1, 2005
According to the Government, the Revised Finance Act for 2005 should provide partial or
total exemption of the 16% tax depending of the duration of ownership of the securities
sold.
-
30
A partial tax basis exemption of 35% would apply during the sixth year of
ownership;
A partial tax basis exemption of 66% would apply during the seventh year of
ownership.
Full exemption would apply after the end of the seventh year of ownership.
Subject to French corporate income tax.
- 27 -
ABROGATION OF THE EXIT TAX REGIME
Individuals transferring their residence outside France were subject to tax on all latent or
postponed capital gains relating to shares representing more than 25% of the capital stock
of a corporation.
Following a recent decision of the European Court of Justice, which ruled that the French
exit tax regime was in violation with the principle of free establishment in the EU 31, the
transfer of residence of French taxpayers outside France is no longer a taxable event.
Such persons must however report to the French revenue the income earned between
1st January of the year of transfer of residence to the date of such transfer. The relevant tax
return must be prepared and sent to the revenue on the normal filing date.
31
Court of Justice of the European Union, 11 March 2004, 9/02, de Lasteyrie du Saillant.
- 28 -
WEALTH TAX
- 29 -
WEALTH TAX FOR 2005
Wealth tax is currently calculated according to the following rate schedule:
NET TAXABLE PERSONAL ASSETS
RATE
2005
Not exceeding € 732,000
/
Between € 732,000 and € 1,180,000
0.55%
Between € 1,180,000 and € 2,3339,000
0.75%
Between € 2,3339,000 and € 3,661,000
1.00%
Between € 3,661,000 and € 7,017,000
1.30%
Between € 7,017,000 and € 15,255,000
1.65%
Above € 15,255,000
1.80%
I.
Since the Finance Act for 2005, the tax basis brackets of the wealth tax schedule are
indexed in line with the inflation rate. As regards the wealth tax due in 2006, the tax
basis brackets in the above schedule should be increased by 2.46%. Net taxable
assets with a value not exceeding € 750,000 should be exempt.
II.
As regards a tax resident of France, the net taxable personal assets are the person’s
worldwide assets after deduction of all debts (including personal income tax, local
taxes and the wealth tax itself), assessed on January 1st of the relevant year. Certain
assets are exempt, e.g., so-called “professional assets” and objets d’art.
III. As regards a tax resident of a jurisdiction other than France, only that person’s assets
that are located in France are taxable in France, unless tax treaties provide otherwise.
Financial investments in France by tax residents of jurisdictions other than France
are exempt.
IV. A tax reduction of € 150 is granted per child included in the tax household.
V.
Wealth tax is subject to limitations depending on the income received by the
taxpayer during the year.
VI. A tax return must be filed each year and the corresponding tax paid by June 15. Tax
residents of jurisdictions other than France may enjoy an extension of such time
limit, depending on the country of residence.
- 30 -
VII. A wealth tax exemption with respect to financial investments in businesses has been
created. Under that rule, if:
a. two or more of the stockholders of a corporation commit to retain their
stockholdings for a minimum of 6 years, and
b. their joint holdings exceed (i) 34% of the corporation’s capital stock (if the
corporation is not listed), or 20% (if it is listed), and
c. a manager of the corporation is a party to the undertaking,
50% of the value of the relevant shares is exempt.
This exemption should be raised to 75% of the value of the shares if the draft
Finance Bill for 2006 is enacted.
VIII. Moreover, the draft Finance Bill for 2006 provides a 75% rebate on the value of the
shares held by managers or by salaried individuals employed by the corporation that
issued the shares, on the condition that those individuals retain the shares for at least
six years.
The same rebate would apply to the same persons after retirement under certain
conditions.
- 31 -
INHERITANCE AND GIFT TAX
- 32 -
INHERITANCE AND GIFT TAX
S
TAX APPLICABLE AS BETWEEN PARENTS AND CHILDREN
Each asset transferred by inheritance or gift enjoys a € 50,000 basis reduction. The draft
Finance Bill for 2006 provides that this basis reduction will apply every six years as
opposed to the current 10 years. Therefore, a child receiving from his mother/father a gift
in 2006 would enjoy a € 50,000 reduction on the value of the gift made and would enjoy a
new reduction of € 50,000 for a gift made as from 1st January 2012.
A specific basis reduction of € 50,000 is applicable on assets transferred by reason of
death (this general reduction is not applicable to gifts)32.
French inheritance and gift tax remains subject to the following tax schedule:
TAXABLE AMOUNT
RATE
5%
Between € 7,600 and € 11,400
10%
Between € 11,400 and € 15,000
15%
Between € 15,000 and € 520,000
20%
Between € 520,000 and € 850,000
30%
Between € 850,000 and € 1,700,000
35%
Above € 1,700,000
40%
32
Up to € 7,600
This reduction is applicable to the net amount of the assets transferred, and therefore needs to be shared if there are
several beneficiaries.
- 33 -
S
TAX APPLICABLE AS BETWEEN SPOUSES
The surviving spouse enjoys a € 76,000 reduction. The surviving spouse should also enjoy
the above-mentioned € 50,000 reduction. As in the case of a transfer between parents and
children this additional reduction is limited to transfers by reason of death.
TAXABLE AMOUNT
RATE
Up to € 7,600
5%
Between € 7,600 and € 15,000
10%
Between € 15,000 and € 30,000
15%
Between € 30,000 and € 520,000
20%
Between € 520,000 and € 850,000
30%
Between € 850,000 and € 1,700,000
35%
Above € 1,700,000
40%
S
TAX APPLICABLE AS BETWEEN BROTHERS AND SISTERS OR NON-RELATIVES
Specific lump sums may be exempt from tax depending on the family relationship. In any
event, a minimum amount of € 1,500 is exempt from tax.
The draft Finance Bill for 2006 provides a specific reduction of € 5,000 that is applicable
between brothers and sisters to gifts and to assets transferred by reason of death.
The same reduction would be also applicable to gifts made to nieces or nephews.
TAXABLE AMOUNT
Between brothers and sisters
- Up to € 23,000
- Above € 23,000
RATE
35%
45%
Up to 4th degree of kinship
55%
Others
60%
Between members of a “PACS”33:
- Up to € 15,000
40%
- Above € 15,000
50%
A member of a so-called PACS (“Pacte Civil de Solidarité”) enjoys a € 57,000 reduction on assets transferred by
inheritance or gift. The PACS was added to the Civil Code on November 15, 1999. Article 515-1, Civil Code, defines
the PACS as a contract between two individuals, regardless of sex, governing their status as a couple.
33
- 34 S
SPECIFIC MEASURES CONCERNING GIFT TAX34
Specific tax reductions are provided that depend on the age of the donor. For instance,
gifts in full ownership enjoy a tax reduction of:
-
50% when the donor is less than 65 years old;
30% when the donor is between 65 and 75 years old35.
The draft Finance Bill for 2006 should increase the above age limits to respectively 70
and 80.
Any gift transferring full ownership between September 25, 2003 and December 31, 2005
enjoys a 50% tax rebate, regardless of the age of the donor.
35
No reduction is provided if the donor is older than 75.
- 35 -
II. DISTRIBUTIONS
- 36 -
REFORM OF THE REGIME APPLICABLE IN FRANCE
The Finance Act for 2004 has changed the tax regime applicable to distributions of
dividends. This reform entered into force on January 1, 200536.
1.
DISTRIBUTION TAX REGIME BEFORE 2005
A tax credit37 (so-called “avoir fiscal”) was allocated to beneficiaries (individuals or
corporations) of dividends where those dividends were distributed by corporations located
in France. Tax residents of jurisdictions other than France also enjoyed avoir fiscal, on the
condition that the applicable tax treaty, if any, provided for such a tax credit.
French corporations distributing dividends giving rise to a tax credit had to pay an
additional surtax (hereafter “précompte mobilier”) when the relevant dividends were paid
out of profits:
(i)
(ii)
2.
that had not been subject to corporate income tax at the standard rate; or
were booked more than five years prior to the distribution.
DISTRIBUTION TAX REGIME BEGINNING IN 2005
Beginning on January 1, 2005, distributions by French corporations no longer give rise to
a tax credit for individuals or corporations. Consequently, the précompte mobilier is no
longer due.
Individuals - The elimination of the tax credit applies to individuals receiving dividends
in 2005 (to be declared in 2006) but those dividends are subject to a 50% rebate. This
50% rebate applies when the distribution is made by a French corporation, a corporation
located inside the EU or in a jurisdiction with which France has entered into a tax treaty.
An annual rebate also applies on the taxable basis: € 1,220 for a single individual or
€ 2,440 for a married couple. Finally, a tax credit equal to 50 % of the amount distributed
but limited to € 115 (for a single individual) or € 230 (married couples) is applied.
Corporations - Corporations subject to corporate tax cannot use available tax credits
beginning on January 1, 2005. As mentioned above, the précompte mobilier is no longer
due by distributing corporations. A temporary surtax is due on dividends paid in 2005.
Such temporary surtax is due at a rate of 25% of the dividends distributed.
Foreign corporations lose the benefit of the tax credit beginning on January 1, 2005.
37
This tax credit is equal to 50% of the distribution for individuals and parent corporations and to 10% for other
corporations.
- 37 -
PARENT CORPORATIONS AND SUBSIDIARIES REGIME
Dividends – The Revised Finance Act for 2004 transposes into French law the EU
Council Directive 03/123/CE dated December 22, 2003.
This extends the scope of the exemption regime to dividends paid by French corporations
to EU parent corporations (using a corporate form as listed in the Council Directive)
assuming that their registered office is actually situated inside the EU and that they are
subject to corporate tax in the jurisdiction of incorporation38.
As regards French corporations, dividends paid by subsidiaries or bodies subject to
corporate tax in France at the standard rate (which includes the 15% rate applicable to
small businesses)39 are now fully exempt from French withholding tax.
The required percentages of shareholding giving right to the exemption regime are:
-
20% with respect to dividends paid between January 1, 2005 and December 2006;
15% with respect to dividends paid between January 1, 2007 and December 2008;
10% with respect to dividends paid as from January 1, 2009.
This exemption regime also benefits permanent establishments located in a EU Member
State.
38
39
GTC, Article 119 ter.
GTC, Article 119 ter.
- 38 -
III. INTEREST
- 39 French-source interest – Subject to tax treaties, individuals receiving French-source
interest are liable to French personal income tax.
In practice, tax residents of France may opt – on realization of the income - for the
application of a flat rate of tax equal to 16% (to which one must add the so-called “social
contributions”, i.e., a total taxation rate of 27%), which is directly withheld by the paying
agent. This option is attractive whenever the application of the French personal income
tax according to the progressive tax rate leads to a higher tax burden.
Tax residents of jurisdictions other than France are necessarily subject to the 16%
withholding tax and are not subject to social contributions.
From
Interests received
by tax residents of France
after option
Interests received
by tax residents of
jurisdictions other than
France
Income tax
16%
16%
Additional labor contributions
11%
-
Effective tax burden
27%
16%
January 1, 2006
EXEMPTIONS
Council Directive 2003/49/EC of June 3, 2003 has been transposed into the French legal
system. It provides that interest originating from a French corporation is exempt from
French withholding tax, on the condition that the beneficial owner of the interest is a EU
corporation or the permanent establishment of a EU corporation.
For the purposes of that directive, the term ‘corporation of a Member State’ means, in
particular, any corporation:
(i) that uses one of the corporate formats listed in the directive
(ii) which, in accordance with the tax laws of the relevant Member State is considered to
be a resident of that Member State and is not, under a tax treaty with a third state,
considered to be a non-EU tax resident; and
(iii) that is subject to corporate tax and is not exempt of that tax in whole or part.
The beneficiary must hold at least 25% of the capital stock of the paying corporation for
an uninterrupted period of at least two years.
The anti-abuse provision is the same as the one provided for exempt dividends under the
EU/Parent corporation regime.
- 40 -
IV. FOREIGN-CONTROLLED CORPORATIONS
- 41 -
FOREIGN-CONTROLLED CORPORATIONS
(ARTICLE 209 B, FRENCH TAX CODE)
Article 209 B, French Tax Code, allows French tax authorities to tax a French corporation
on the profits realized by its foreign subsidiaries or branches or by legal entities controlled
by it whenever such subsidiaries, branches or entities are domiciled in low-tax
jurisdictions40. On that basis:
a) The corporations concerned by this section of the code are those that are located in
France, are subject to corporate tax and which (i) run a business outside France or
(ii) hold directly or indirectly more than 50% of the shares of stock 41, financial
rights or voting rights in a legal entity when this business or entity is established or
organized outside France in a “low tax jurisdiction”;
b) A “low-tax jurisdiction” (Article 238 A, French Tax Code) is defined as a
jurisdiction where the tax payable, if any, is at least 50% lower than the tax due in
France on the same profits;
c) When the foreign entity is a branch, its profits are taxable as profits of the
corporation located in France, subject to the condition that the tax treaty signed
with the jurisdiction where the entity is located expressly allows the application of
Article 209 B, French Tax Code by the French revenue.
d) When a legal entity is concerned, its profits are deemed to be taxable securities
income of the French corporation. However, such income is only taxable in the
proportion of the shares of stock held by the French corporation in the relevant
foreign entity.
The provisions of Article 209 B do not apply to profits realized through an entity located
inside the EU (except if the purpose of the localization is to circumvent French law), nor
to profits realized by an entity localized outside the EU when those profits derive from an
effective industrial or commercial activity localized in the state where the foreign entity is
established.
40
Article 209 B, GTC, has been modified by the Finance Act for 2005 following a French Supreme Court decision
which held that the provisions of this article were inapplicable in case of inconsistency with the relevant tax treaty
provisions (French Supreme Administrative Court, June 28, 2002, n°232276, Schneider Electric). This decision
concerns a dispute relating to the interpretation and application of French internal tax law in parallel with provisions of
the former tax treaty between France and Switzerland.
41
This percentage is reduced to 5% when more than 50% of the shares of stock are held either (i) by businesses
established in France acting jointly or (ii) by businesses which directly or indirectly control or are controlled by, the
corporation located in France.
- 42 -
V. RULINGS:
- Permanent establishment in France
- Transfer pricing
- 43 -
RULINGS
According to Article L 80 B, Book of Procedure, a taxpayer is entitled to rely on formal
positions taken by the French tax authorities with respect to his or her factual situation. In
other words, the tax authorities are not allowed to reassess a transaction that a taxpayer
implemented in line with such a formal position.
The Amended Finance Act for 2004 has extended the above provisions to include the
following situations.
Permanent establishment in France42 – As from January 1, 2005, persons that are not
French residents may consult with the French tax authorities in order to determine
whether their business installation in France should be characterized as a permanent
establishment or as a fixed place of business, by reference to the tax treaty between
France and the country where the said persons are located. Failing a response within three
months of the date of the question, the French authorities will no longer be in a position to
make a reassessment on that basis.
The benefit of those provisions is subject to the conditions that the foreign person submits
to the tax authorities a written question providing for a precise and complete presentation
of the relevant situation43.
Transfer pricing agreement – A tax regulation dated September 7, 1999, also enables
multinational corporations to obtain from the French tax authorities a ruling on their
transfer pricing method.
The main benefits of this type of ruling is (i) to obtain confirmation that the transfer
pricing method used is consistent with the OECD principles and (ii) that a reassessment
on the ground of Article 57, French Tax Code, concerning indirect transfers of profits out
of France is no longer possible.
In practice, such a ruling may be granted either:
(i)
(ii)
Directly, by the French tax authorities, or
Indirectly, on the basis of an agreement between the French tax authorities and
the competent tax authorities of the relevant foreign tax treaty jurisdiction,
which presupposes that the applicable tax treaty includes a mutual assistance
clause equivalent to article 25 of the OECD model.
In contradistinction with the concept of tacit agreements that may apply to permanent
establishment (see above), no tacit agreements may be deemed with respect to transfer
pricing rules.
42
43
GTC, Article L 80 B, 6°.
This regime only applies to tax payers of good faith.
- 44 -
VI. THIN CAPITALIZATION RULES
- 45 -
THIN CAPITALIZATION RULES
The French Supreme Court ruled in two recent decisions that French thin capitalization
rules (Article 212, French Tax Code) do not comply with the provisions of certain tax
treaties and with EU legislation44.
Article 70 of the draft Finance Bill for 2006 modifies French capitalization rules in order
to conform with tax treaties signed by France and with EU tax rules, as follows:
(i)
Rate of deductible interest - Interest relating to (i) any sums that a corporation
owes to or borrows from, its stockholders or (ii) owing to or borrowed from a
directly or indirectly related corporation45, are deductible for tax purposes up to a
maximum amount being the interest calculated by using a rate equal to the yearly
average of the effective mean rates charged by credit institutions with respect to
variable rate loans to business enterprises, with a life in excess of two years46.
(ii)
Deductibility conditions - When the amount of interest paid (directly or
indirectly) to related corporations together exceeds, during a given tax year, the
three ceiling rules applicable under domestic law, the excess may not be deducted
for tax purposes during the relevant tax year.
This regime does not apply (i) when the amount exceeds the three mentioned ceilings but
is less than € 150,000 nor (ii) when the corporation can prove that the indebtedness ratio
of the group to which it belongs is the same as or higher than its own indebtedness ratio47.
The deduction of the said excess is allowed in subsequent years subject to a ceiling in
each year of the relevant year in which such a deduction is made, equal to 25% of the
gross profit in the said relevant year, less interest normally deductible.
However, the interest that are deductible in later years are reduced by 5% each year
starting from the second year.
Specific rules concerning the so-called “tax group” regime - Whenever the
consolidated tax group regime applies, non-deductible interest should be added back in
the individual results of the group members corporations’.
Any such interests cannot be deducted from taxable results in the following financial
years.
44
CE 30/12/2003 n°233894, sect., SA Andritz ; : CE 30/12/2003 n°249047, sect., SARL Coréal Gestion.
Or a partnership, if it is held by corporations subject to corporate tax.
46
Nevertheless, a higher rate should be taken into account if it corresponds to the rate that the borrowing corporation
could have obtained from independent financial establishments under similar circumstances.
47
This regime would also not apply (i) to financing transactions in connection with a group cash-flow centralized
management agreement carried out by the corporation in charge of such centralized management, (ii) to leasing
corporations and (iii) to any interest due by financial establishments
45
- 46 -
However, any such interest would be neutralized at the tax group level provided the
interest has been paid to corporations of the same group and that the whole amount of
interest paid outside the tax consolidated group does not exceed 25% of the current group
results before tax, discounting intra-group dividends.
Interest which cannot be neutralized at group level, can be deducted during the following
financial years subject to a 5% rebate in respect of each such financial year.
Merger or acquisition of the parent corporation - Interest remaining on the date of
merger or acquisition of a parent corporation, should be transferred to the surviving
corporation, subject to permission by the tax authorities.
The above is scheduled to come into force in the financial years beginning as from
1 January 2007.
- 47 -
VII. CASE LAW
- 48 -
ABUSE OF LAW
The French Administrative Supreme Court has ruled for the second time48 that a structure
can be disregarded by the French tax authorities on the basis of our “abuse of law”
concept when the structure has been incorporated for tax purposes only, without an
economic reasons or any other justification49.
The decision confirms that the tax authorities may tax income realized by French
taxpayers through a Luxembourg entity on the basis that:
(i)
(ii)
(iii)
(iv)
the Luxembourg entity does not have real substance;
the structure was evidently incorporated for tax purposes, without economic
reasons or any other justification;
the French stockholders are not involved in its management on a regular basis; and
the entity enjoys full tax exemption on its profits.
The French Supreme Court ruled that the “abuse of law” concept is not incompatible with
Article 43 of the EU treaty relating to the freedom of establishment.
The court has thus created a link between the French “abuse of law” concept and the
“purely artificial arrangements” concept created by the European Court of Justice50 with a
view to keep under close scrutiny establishment of taxpayers inside the EU.
48
See for the first decision: French Administrative Supreme Court, February 18, 2004, SA PLEIADE, n° 247 729.
French Administrative Supreme Court, May 18, 2005, Min. v/ Sté Sagal, n° 267 087.
50
Court of Justice of the European Union, July 16, 1998, Imperial Chemical Industries, C-264/96.
49
- 49 -
VIII. TAX TREATIES
- 50 -
RECENT MODIFICATIONS IN TAX TREATIES
Tax treaties recently signed or amended by France, or commented by the French tax
authorities are the followings:
COUNTRY CONCERNED
TAX
IN FORCE SINCE
CZECH REPUBLIC
Income tax, wealth tax
July 1, 2005
(Amendment)
EGYPT
Income tax, wealth tax
June 1, 2004
(Amendment)
GUINEA
Income tax, wealth tax,
inheritance and gift tax
October 1, 2004
MONACO
Wealth tax
August 1, 2005
(Amendment, with a
retroactive effect)
QUEBEC
Income tax, wealth tax
August 1, 2005
(Amendment)
UNITED STATES OF
AMERICA
Tax regime applicable to
dividends received by US
partnerships
French tax authorities
regulation dated February
23, 2005
UNITED STATES OF
AMERICA
Tax regime applicable to
dividends paid to US
pension trusts and not-forprofit organization
French tax authorities
regulation dated October 5,
2005
oo0oo