France – Tax proposals in pending legislation

Passage by the French assembly on 18 November 2014 of a draft Finance Bill for 2015 (which now will be presented to the Senate)

Introduction by the French government on 12 November 2014 of a second draft amended Finance Bill for 2014

In general, the draft Finance Bill for 2015 includes what may be referred to as “minor measures.” However, the second draft amended Finance Bill for 2014 includes measures that would address certain tax provisions determined to be contrary to the freedom of movement and establishment as guaranteed by the EU Treaty.

It is anticipated that these legislative packages could be enacted in late December 2014.

Second draft amended Finance Bill 2014

Extension to “sister companies” of the tax consolidation group regime

The French tax consolidation group regime (under Article 223 A of the French tax law) would be modified to bring it into compliance with EU law and to reflect judgments* issued in June 2014 by the Court of Justice of the European Union (CJEU).

*The cases concerned the tax unity regime rules in the Netherlands, with the CJEU concluding that the freedom of establishment precludes an EU Member State from treating a resident parent company holding resident subsidiaries as a single tax entity versus resident sister companies, the common parent company of which neither has its seat nor a permanent establishment in that EU Member State not being treated as a single entity.

Under the pending legislation, the French tax consolidation regime would be modified to allow a company that is a resident of the EU or European Economic Area (EEA), but not having a permanent establishment in France, to consolidate the taxable results of its French subsidiaries if ownership of such is at least directly or indirectly held at 95%.

KPMG observation

Tax professionals with Fidal* have noted that this measure is intended to make the French tax consolidation regime compliant with EU law. The proposal would affect, for purposes of tax consolidation, a parent company of a “horizontal integration”—i.e., a company whose capital is held continuously during the year (by at least 95%) by a non-resident parent entity either directly or indirectly through foreign companies. As a result, the parent company of a horizontal integration could opt to be solely liable for corporation tax on the overall results of the group consisting of itself, its French “sister” and/or “cousin” companies. At present, rules for implementing this measure (which is currently being discussed in the parliament and there could be subject to amendment during the legislative process) would be expected to be provided in guidelines by the French tax authorities.

Tax representatives

Another provision would repeal a requirement that persons who are residents of the EU or EEA to appoint a tax representative for purposes of withholding tax on capital gains related to real estate transactions and certain other operations conducted in France. The proposal would apply to persons who are non-French residents, but residents in the EU or (in certain situations) in the EEA.

The European Commission served notice on France that it needed to repeal the requirement for such persons in the EEA to appoint a tax representative, and the CJEU previously issued a judgment determining that this rule constituted a restriction on certain freedoms guaranteed by the EU Treaty (and because Directive 2011/16/EU on administrative cooperation in the field of taxation would reach the same outcome without restriction).

The requirement to appoint a tax representative would be repealed, subject to a condition that there is an agreement or treaty for mutual administrative assistance to address tax fraud and tax evasion and for assistance in tax collection. The repeal of the tax representative requirement would apply to transfers of real estate property beginning 1 January 2015.

The obligation to appoint a tax representative would continue to apply for non-residents that are established in a third non-EU or EEA country.

KPMG observation

This proposal would affect persons who are liable for withholding tax on real estate-related capital gains under Article 224 bis A of the French tax law and of the 3% tax assessed on the value of real estate owned by entities pursuant to Article 990 D of the French tax law.

Withholding tax exemption, dividends distributed to non-EU collective investment funds

A provision would clarify application of the exemption from withholding tax as applicable for dividend distributions made to non-EU collective investment funds. The provision aims to clarify the conditions when the withholding tax exemption would apply for dividend distributions from French sources paid out to non-French collective investment vehicles, by expressly stating that the existence of a convention or treaty for administrative assistance would not itself be sufficient for the exemption.

Rather, the withholding tax exemption would be granted solely to the extent that such convention or treaty effectively allows for a confirmation from the collective investment vehicle’s country of residence concerning the conditions for the exemption.

KPMG observation

Recall that a withholding tax requirement is subject to two conditions relating to non-French collective investment vehicles that must: (1) raise capital from a number of investors to invest in accordance with a defined investment policy for the benefit of those investors; and (2) conduct their activities in comparable conditions to a French collective investment vehicle (i.e., to be established, monitored and controlled under conditions equivalent to those provided under French law).

Draft Finance Bill 2015

Competitiveness tax credit, R&D credit in “overseas departments”

Businesses operating in the “overseas departments” face specific economic challenges that may result in a higher rate of unemployment than on the mainland.

To address these economic challenges, and to foster innovation in the overseas departments, the French government has proposed to increase the rates of the competitiveness tax credit and the research and development (R&D) tax credit.

Concerning the competitiveness tax credit, for wages paid in 2014, the ordinary rate of competitiveness tax credit is determined as 6% of wages, up to 2.5 times the minimum wage as set forth by law. Under the proposal, businesses located in the overseas departments could benefit as from 2015 of an increase of the rate, with the increase to be phased in over two years: (1) 7.5% for wages paid in 2015; and (2) 9% for wages paid in 2016 and the following years.

Concerning the R&D tax credit, industrial, commercial or agricultural companies that engage certain expenditure on scientific and technical research currently can benefit from a tax credit equal to 30% of eligible expenses incurred during the calendar year for the portion of the expenses lower than €100 million and 5% for the portion of the expenses exceeding this threshold. With regard to research expenditure incurred on or after 1 January 2015 on farms, the government has proposed to increase the rate to 50% (up from 30%).

Transfer pricing penalties

Another proposal would revise the penalty regime when a taxpayer fails to respond to a request from the French tax authorities for production of transfer pricing documentation. Read TaxNewsFlash-Transfer Pricing.

Penalty for third-party facilitating tax evasion and fraud

Any person who allows or facilitates tax evasion by others would be liable to a penalty equal to 5% of the turnover in respect of sanctioned transactions, with a minimum penalty amount of €10,000. This penalty would apply to actions beginning 1 January 2015.

KPMG observation

This provision would directly affect consulting firms playing a key role in the implementation of the alleged tax-abusive transactions. However, tax professionals have questioned whether this measure would survive review by the Constitutional Court.