On 24 September the Ministers of Economy and Finance presented the Finance Bill for 2019 ("the Bill"), which includes many substantial tax measures, at the forefront of which major tax reforms for companies. The main provisions in this respect concern:
- The tax consolidation regime, parent-subsidiary regime, participation-exemption on capital-gains
- The interest limitation rules
- The French patent box regime
- The last corporate income tax installment payment
- A new general anti-abuse rule
1. Tax consolidation regime, parent-subsidiary regime, participation-exemption on capital-gains (Article 12)
Article 12 of the Bill provides for several measures aimed at amending the tax consolidation regime, the parent-subsidiary regime, and the taxable portion of gains eligible to participation-exemption under the long-term regime. The Government has taken note of several rulings of the European Court of Justice that have called into question certain tax benefits available to French tax-consolidated groups. The proposed changes are aimed, mainly, at bringing French domestic law into conformity with European Union law and, hence, at reducing legal uncertainty.
To this effect, Article 12 of the Bill provides for the repeal of the neutralization of certain intra-group transactions for the determination of the group's overall taxable income, including subsidies, waivers of debts and sales of substantial shareholdings eligible to participation-exemption under the long term regime. To be noted that Article 12 nevertheless maintains the tax neutralization of indirect subsidies granted between member companies of a same tax-consolidated group as a result of the invoicing of supplies of goods (other than fixed assets) or services at a price lower than fair market value but at least equal to net book value.
In addition, 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 for tax purposes. However, these distributions would be deducted for the determination of the group's overall taxable income by 99% of their amount, thus unifying the regime for all dividend distributions within a tax-consolidated group. Furthermore, this 99% deduction would be extended to dividends received by member companies of a group of companies subject to a tax equivalent to French corporate income tax in a 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.
Regarding the parent-subsidiary regime, it is also proposed to extend the application of the taxation of a reduced 1% portion of the dividend (instead of 5%) to distributions received by companies which are not members of a tax-consolidated group from companies subject to a tax equivalent to French corporate income tax in a Member State of the European Union or in another State party to the Agreement on the European Economic Area which, if established in France, would have met the conditions required for being members of a tax-consolidated group.
Finally, the taxable portion of capital-gains on sale of substantial shareholdings eligible to participation-exemption under the long term regime would be reduced from 12% to 5% for all companies.
2. Reform of interest limitation rules (Article 13)
The Bill provides for an in-depth reform of the rules governing the tax-deductibility of financial charges, due to the implementing into French tax law of the general limitation set forth in the European "ATAD" Directive.
As a result, the so-called "25% non-deductibility rebate" currently in force, which limits the deductibility of net financial charges to 75% of their amount, would be repealed and replaced by a deduction limit equal to the higher of 30% of the adjusted EBITDA (earnings before interest, depreciation, provisions and gains or losses subject to reduced tax rates) or €3M per FY (possibly prorated if the FY is less than 12 months). The €3M threshold has, de facto, the effect of excluding from the limitation rule companies bearing interest for an amount lower than this figure. The new rule provides for an exhaustive list of net financial charges falling within its scope. A catch-up deduction of 75% of the net financial charges non-deductible under the above mentioned 30% EBITDA or €3M threshold is available when the equity / assets ratio of the company is higher than that if its consolidated group (as determined under accounting consolidation rules).
By way of exception, when the average amount of related party debt exceeds 1.5 times the net equity of the company, the deduction limitation is reduced to the highest of 10% of the adjusted EBITDA or €1M, and the 75% catch-up rule is not applicable.
For tax-consolidated groups, the limitation applies to the sum of the net financial charges incurred by all the group member companies, and is assessed taking into account the overall adjusted EBITDA of the group. The 75% catch-up rule is applicable at the level of the group under similar conditions. The reduced limitation of 10% of adjusted EBITDA or €1M applies when the average amount of related party debt made available to the group by lenders that are not group members is higher than 1.5 times the net equity determined at group's level.
Finally, non-deductible financial charges may be deducted in subsequent years within the limits referred to above, with no rebate, whereas unused deduction capacities may be deferred over the next five years.
The thin-capitalization rules (art. 212, II of the FTC) are repealed, together with the so-called "Amendement Carrez" provision (art. 209, IX of the FTC) limiting the deduction of financial expenses incurred for the acquisition of substantial shareholdings where the decisions relating to the purchased shares are not taken in the EU or the EEA. On the other hand, the limitation of the deductible rate interest and the anti-hybrid mismatch rules (art. 212, I of the FTC) are maintained.
3. French patent box regime is being substantially revised (Article 14)
The French patent box regime, which was considered by the OECD as a potentially "harmful practice", is subject to substantial changes aimed at bringing the French legislation in line with the OECD principles (Action 5 of BEPS). The French attractive patent box regime was notably based on (i) a reduced CIT rate of 15% for royalties and gains generated by patents and assimilated IP assets without any requirement regarding the place the where the R&D activities are carried out and (ii) the deduction of the R&D expenses from the taxable income subject to corporate income tax at full rate.
The Bill makes significant changes to this patent box regime. First, the Bill now excludes patentable inventions from the reduced rate. In the meantime, the Bill extends the scope of the 15% rate to original software protected by copyright, which were not eligible until now. Secondly, the income benefiting from the reduced tax rate would be reduced by the amount of R&D expenses incurred to obtain this income. This would put an end to the deduction of certain R&D expenditure at full corporate income tax rate. Finally, the reduced rate would only benefit to a portion of the net income from a qualifying IP asset determined according to the OECD's "nexus approach". This approach consists in applying to the overall income eligible to the reduced 15% rate a "nexus" ratio equal to R&D expenses incurred by the asset holder in France or incurred by unrelated companies wherever located (in the numerator) over the total R&D expenses including acquisition costs (in the denominator). By measure of favor, the expenses in the numerator would be automatically increased by 30%.
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 subject to an election by the taxpayer for the reduced tax rate, to be made per asset, per product or per family product.
This reform is in line with the global revision of patent box regimes driven by the OECD in Europe and worldwide which resulted in recent reforms in the UK, Luxembourg, Spain, Ireland, Belgium and Italy in the area of R&D taxation.
4. Exceptional increase of the last corporate income tax installment payment for large companies (FY opened in 2019 only) (Article 15)
Article 15 of the Bill provides for an exceptional increase of the amount of the last corporate income tax installment payment for fiscal years beginning between 1 January and 31 December 2019, for companies with total revenue between 250 million and 5 billion euros.
Consequently, the last installment payment for FY2019, shall not be lower than:
- for companies with total revenue between €250M and €1B: 95% (instead of 80% currently) of the estimated corporate income tax charge reduced by the amount of previous installment payments;
- for companies with total revenue between €1B and €5B: 98% (instead of 90% currently) of the estimated corporate income tax charge reduced by the amount of previous installment payments.
For companies with total revenue exceeding €5B, the 98% quota is maintained.
5. A new general anti-abuse rule (Article 48)
Article 48 of the Bill will implement into French law the general anti-abuse rule included in Council Directive (EU) No 2016/1164 of 12 July 2016 (ATAD), which applies to corporate income tax as a whole. The application of the rule requires the fulfillment of two conditions: (i) 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 (ii) 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. When such conditions are met, the arrangement, or series of arrangements, can be disregarded for the assessment of corporate income tax.
This general anti-abuse rule, which comes in addition to the arsenal of already existing rules, will apply to financial years starting on or after 1st January 2019. Unlike the current rules of abuse of law, there will be no specific procedural safeguards or aggravated penalties.
This general anti-abuse rule will undoubtedly raise a number of issues regarding its interpretation and articulation with the many other French anti-abuse rules.