France

Renaud Jouffroy
Landwell & Associés
Paris

Though the French Parliament passed a number of tax measures this year, the biggest impact on a company's corporate taxes has come from the courts, explains Renaud Jouffroy of Landwell & Associés

The French tax system may appear to be one of the most onerous in the world with its corporate income tax rate at 34.43%, but the rate at which a company pays tax on its profits depends very much on the basis on which this tax is computed. There are many ways to reduce a French company's effective tax burden. The 2009 update to French tax did not contain large reforms but included a number of changes that demonstrated the will of the legislature to modernise the tax system and improve performance for enterprises. However, budget restrictions have limited the scope of the changes and most of the significant changes have come through case law.

From a corporate income tax perspective the most important updates include:

accelerated reimbursement of tax receivables;
repeal of minimum income tax,
enlargement of the French group relief group;
clarification and improvement of the share capital restructuring tax rules; and
the wider use of losses generated by subsidiaries.

Accelerated reimbursement of tax receivables

In response to the financial and economic crisis, the government has confirmed that a number of tax receivables owned by taxpayers can be reimbursed earlier than anticipated in 2009 to improve their cash flow positions. This covers the excess of corporate income tax (CIT) instalments over the final CIT expected to be due for fiscal years closing on or before September 30 2009.

In France a carry-back does not trigger an immediate refund of CIT previously paid, however it can be used to reduce CIT payable for the following five years and is refunded in any case at the end of this period. The new rules allow an immediate refund of any carry-back receivables existing at January 1 2009 and tax receivables requested for the fiscal years closing on or before September 30 2009.

The R&D credit can be used to pay CIT due for the given year and the following three years. The new rules allow an immediate refund in 2009 of the receivables corresponding to the R&D credit claimed for the years 2005/2007 not yet offset and the one corresponding to the year 2008.

Repeal of the minimum corporate income tax

The minimum corporate income tax "minimum CIT" (the amount of which depends on the turnover of the company and which could total a maximum of €110 000 ($156,000)) has been repealed from January 1 2009 for companies with a turnover of not more than € 1.5 million ($2.1 million). This measure will be applicable during 2010 for companies with a turnover of not more than €15 million and to all companies from 2011.

Enlargement of the French group relief

The most significant changes have arisen not from the law itself or regulations but from judicial decisions.

The most important case law decision for companies is without doubt the Papillon case (ECJ 27/11/2008, C-418/07). This case deals with the provision in the French tax code which states that a French parent company may not include in its tax group a French lower-tier subsidiary held indirectly by a subsidiary established in another EU member state. However, it may include in its tax group a lower-tier subsidiary held by a subsidiary established in France. The question was whether this provision constituted a restriction to the freedom of establishment (article 43 EC Treaty) and in the latter case, whether or not the restriction was justified. In its ruling the ECJ decided that such a restriction is incompatible with the freedom of establishment.

This case opens the possibility of filing claims in France for previous years dating back to 2005 (for example, tax groups in a loss position that have a profitable lower-tier subsidiary or vice versa). More importantly it may, under the present legislation, facilitate M&A structuring opportunities. For example, when a French entity acquires a foreign group having lower-tiered French subsidiaries (held indirectly by subsidiaries established in other EU member states) it could include them in its French tax group without having to transfer the shares back to France which could otherwise have triggered tax leakages (for example, capital gains and registration duties) in the country they are being transferred from or even in France.

Many rules of the French group relief will have to be adapted to take into account this new environment (for example, intra-group neutralisations, thin capitalisation and anti-internal debt push-down rules).

Clarification and improvement of share capital restructuring tax rules

A number of restructuring transactions can have an impact on the share capital of companies. Case law in 2009 has clarified the rules of these transactions in favour of taxpayers both in terms of capital gains and registration duties.

Often when a company wishes to sell a loss-making subsidiary it has to restore its equity before the disposal through an increase in share capital, sometimes followed by a reduction in the latter against losses booked in negative earnings.

The question is whether the capital loss recognised by the selling entity could be considered as a short-term capital loss deductible at the full rate against other income of the seller, even though the subsidiary has been held for more than two years. The supreme administrative court (CE 26/03/2008 SA Financière Fauvernier) has ruled that even if the shareholding percentage has continued to be the same, the capital loss must be considered short term for the part corresponding to the new shares issued in the two year period preceding the sale.

In terms of registration duties the Supreme Judicial Court (Cass Com 12/02/2008, 05-17085) has ruled that the transfer of real estate to a shareholder through a distribution of dividends is not a sale and is therefore not subject to costly transfer tax applicable to a sale of a real estate.

A transfer of assets to shareholders could also be achieved through the redemption of share capital. The question has been whether the reduction of share capital must be considered as a partial liquidation of the company subject to a 1.1% registration duty. Again, the court ruled in favour of the taxpayer in deciding that the 1.1% registration duty applies only to the liquidation itself (Cass Com 23/09/2008, 07-12.493). This position has been confirmed by the legislature (rectificative finance law for 2008 art.39).

Wider use of losses generated by subsidiaries

There are many ways to take advantage indirectly of the benefit of losses generated by French or non-French subsidiaries: losses of lower-tiered French subsidiaries held indirectly by subsidiaries established in another EU member state (Papillon) could be used by a French tax group and the restructuring of equity of a loss-making subsidiary may allow the seller to generate short-term capital losses in some instances (Fauvernier).

Case law confirmed in 2009 that a waiver of debt or subsidies granted to subsidiaries in difficulty may be tax deductible in France when a number of conditions are met.

Finally, article 22 of the 2009 Finance Law authorised that companies having fewer than 2000 employees (or belonging to a French tax group or owned by companies having fewer than 2000 employees) are allowed to deduct temporarily the losses generated by foreign branches or at least 95% owned subsidiaries. However, this deduction is subject to de minimis rules and is reversed according to the profits of the foreign subsidiary (at the latest after a five year period).

Impact on personal income taxation

The two recent changes worth mentioning include the new regime for international assignees working in France and the ceiling for individual income tax incentives.

New inbound assignee regime

This new regime came into force on August 6 2008 and is applicable from the 2008 French income tax year onwards. It applies to assignees sent by a company established in another country to work for a connected company established in France (intra-group transfers), or locally hired from abroad by a company established in France, as from January 1 2008. In both cases the individual must not have been French tax resident during five calendar years preceding the year that begins their assignment/employment in France.

Under this new regime, individuals assigned to France by their foreign employer can benefit from a French income tax exemption on the salary supplements connected with their assignment.

For employees directly recruited abroad, the new regime offers this option with regards to the tax treatment:

the exemption of the actual amount of salary supplements received (called also an impatriation premium); or
For intra-group transfers, in the event that there are no such salary supplements, upon election, a flat rate exemption of 30% of the total remuneration.

The new regime provides for a floor or reportable compensation (that is, the taxable compensation cannot be lower than the taxable remuneration paid for a similar job in a similar company in France).

It also includes an exemption of part of the remuneration based on foreign workdays.

The remuneration attributable to non-French workdays can be fully tax exempt in France, even if not taxed abroad, up to the highest of the two following ceilings:

20 % of the total remuneration (excluding the tax exempt impatriation premium); or
the total tax exemption (that is, impatriation premium-actual or not-and foreign workdays) cannot be more than 50% of the total remuneration.

This new inbound regime applies until December 31 of the fifth civil year following the beginning of the French duties.

Ceiling of income tax incentives

A number of tax incentives are available to individual taxpayers to reduce their income tax. Each year the legislature adds new incentives or modifies previous incentives. For a number of years there has been a common feeling that the use of these multiple tax incentives may be excessive, especially for the high-level income earner. The legislature tried to adopt a general ceiling in 2006 but the Constitutional Council considered the measure too complex and not sufficiently "legible".

In Finance Bill 2009 the legislature has therefore reformed a number of tax incentives (mainly the overseas investment regime and a number of real estate tax incentives) including a change in the nature of the tax incentive: income deduction or tax credit.

It has also introduced a general (each tax incentive having its own limits) ceiling equal to €25000 ($35,000) and 10% of the income of the taxpayer, and is applicable for the first time to 2009 income. This ceiling is applicable to a long list of tax incentives, all taking the form of tax credits (to ensure that the measure is legible). To explain the rationale of this list one could say that the ceiling is not applicable to:

tax incentives where the taxpayer has not obtained direct or indirect compensation (for example, gifts to charities) or
tax incentives which relate to unavoidable passive situations (handicap, alimony...etc.).

This being said, even if this new ceiling is deemed to be understandable the taxpayer will have to enter into complex computations each year to make sure that their tax position is optimised appropriately.

Renaud Jouffroy, (renaud.jouffroy@fr.landwellglobal.com), partner, Landwell & Associés