Digital services tax
As of 1 January 2019, a 3% digital tax applies to companies providing certain digital services in France with global annual revenue in excess of 750 million euros (EUR) and annual revenue in France in excess of EUR 25 million. The tax applies in particular to the provision of a digital interface by means of electronic communications allowing to contact and interact with other users as well as services to advertisers or their agents aimed at placing targeted advertising messages on the digital interface based on the interface user's data collected or generated through the case of such interface. Detailed regulations on this digital services tax are expected in the coming months.
New Double Tax Treaty (DTT) between Luxembourg and France
On 20 March 2018, the Luxembourg and French governments signed a new DTT, together with an accompanying Protocol.
The new DTT seeks to modernise the treaty as a whole; the current treaty between Luxembourg and France was signed as long ago as 1 April 1958. The new DTT is fully ‘post-BEPS’. It implements the new approaches developed at the international level during the Organisation for Economic Co-operation and Development (OECD)/G20 base erosion and profit shifting (BEPS) project, and now reflected in the 2017 version of the OECD Model Tax Convention and in the Multilateral Convention to Implement Tax Treaty Related Measures, signed by both Luxembourg and France in June 2017.
More specifically, the DTT redefines what constitutes a permanent establishment (PE) for the purpose of the DTT and introduces new rules for the taxation of cross-border payments, such as dividends, interest, and royalties. The Protocol clarifies the situation of cross-border workers and grants limited access to the DTT to Undertakings for Collective Investments (UCIs).
Assuming that both the Luxembourg and French governments complete the necessary processes for ratification of the new DTT, the provisions of the new DTT could be applicable in many situations from as soon as 1 January 2020.
Progressive reduction of the corporate income tax (CIT) rate
Pursuant to the action plan released by the French Prime Minister in September 2017, the French CIT rate cuts will apply over a five-year period as follows (for all companies with revenues exceeding EUR 7.3 million):
||CIT rate (%)
|Fiscal year (FY) opened as of 1 January 2019
||FY opened as of 1 January 2020
||FY opened as of 1 January 2021
||FY opened as of 1 January 2022
|0 to 500,000*
|In excess of 500,000
* Situation of small corporations not addressed.
** Raised to 33.33% for corporations having revenue in excess of EUR 250 million.
Modification of the interest deductibility limitation rules
New thin capitalisation rules were adopted and enter into force for financial periods open as of 1 January 2019. They impact the so-called ‘rabot’ as well as the ‘Carrez’ regulation. These new rules implement the European Union Anti-Tax Avoidance Directive (EU ATAD).
Modification of the patent regime
As of 1 January 2019, new rules under the new patent regime apply to patent income with the view of making the regime EU compatible.
Eligible patent box net income is subject to CIT at the rate of 10%.
Modification of the tax consolidation rules
As of 1 January 2019, new rules apply to certain aspects of tax consolidation (namely taxation of certain capital gains and taxation of subsidies within the tax consolidation).
Transformation of the CICE tax credit into a decrease in employer’s charges
The CICE (‘Crédit d’Impôt Compétitivité-Emploi’) tax credit is calculated as a percentage of wages paid during a calendar year to employees earning less than 2.5 times the French regulated minimum wage (SMIC).
For wages paid on or after 1 January 2018, the 2018 Act reduces the CICE tax credit rate from 7% to 6%.
For wages paid on or after 1 January 2019, the CICE tax credit is repealed and replaced by a permanent decrease in payroll charges paid by employers to finance the French social security system.
This new regime enhances the scope of intellectual property (IP) eligible to the favourable regime by including software in addition to patents.
This new regime defines eligible revenue as being the net of the IP revenue (licence, sub-licence, and sale) and of the related research and development (R&D) expenses and then is applied as a nexus ratio (the percentage of R&D expenses incurred by the taxpayer and independent suppliers over the total R&D expenses). In other words, the R&D expenses charged by related parties or by a PE are excluded when determining the numerator.
This regime is optional, including per product/per group of products, and provides for transactional rules applicable to FY19 and FY20. It also provide for specific rules for tax consolidated groups.
Calculation of the revenue generated by tax group members for CVAE tax rate purposes (article 15 of the 2018 Act)
The CVAE (‘Cotisation sur la Valeur Ajoutée des Entreprises’) is a tax based on the added value that a taxpayer produces, and it depends on its gross revenue.
The CVAE tax rate applicable to a French group of companies complying with the conditions to set up a French tax group (i.e. 95% ownership) is based on the consolidated gross revenue recognised by the group of companies for a given year, whether or not they are effectively part of a French tax group.
The regime applies to the CVAE due in 2018.
Elimination of the 20% increased payroll tax rate (article 90 of the 2018 Act)
The payroll tax is due from French employers whose activity is not subject to value-added tax (VAT). It is assessed annually on gross wages and benefits in kind paid by the employer.
The standard rate of the payroll tax is 4.25%, but increased rates apply to gross individual wages that exceed certain thresholds. Those increased rates are:
- 8.5% for wages ranging from EUR 7,924 to EUR 15,822.
- 13.6% for wages in excess of EUR 15,822.
As a result of Brexit and to increase hiring of foreign executives by cutting the related tax costs, the 2018 Finance Act eliminated the 20% increased rate.
Financial transaction tax (FTT) (article 39 of the 2018 Act)
The 2018 Act repeals the FTT provision that otherwise would have applied to intra-day trading for acquisitions made on or after 1 January 2018.
Therefore, the scope of the FTT remains the same and excludes intra-day trading transactions.
Modifications of the tax deferral regime applicable to French reorganisations
The 2017 Act brought several amendments to the favourable tax regime set forth in Article 210 A et seq. of the French Tax Code (FTC):
The 2017 Act introduces a requirement to benefit from the tax deferral regime when a French entity is absorbed by a non-French entity: The assets of the merged entity have to be part of a French PE of the foreign receiving entity.
- A specific filing is required for absorptions benefiting non-French entities.
- Under an anti-avoidance provision, mergers, spin-offs, and partial contributions of assets whose main purpose is tax fraud or tax evasion are now excluded from the tax deferral regime.
- For a partial contribution of assets, attribution of shares to the shareholders of the contributing entity is possible without any prior ruling as long as, inter alia, the following cumulative conditions are met:
- The shares in the beneficiary company are attributed to the shareholders of the contributing company on a pro rata basis with respect to their shareholding in the latter, within one year of the contribution.
- The initial contribution benefited from the favourable merger tax regime.
- At least one complete line of business remains within the contributing company once the contribution is completed.
- The shares that are attributed have been received in exchange for a contribution of assets constituting a ‘complete line of business’.
- Some interim operations made by companies (e.g. a division or regrouping of shares) normally generate a taxable capital gain or loss unless the tax authorities have granted deferral of taxation on these transactions, subject to conditions. This deferral regime is codified as part of the French tax law so that a tax deferral applies.
The above measures apply to mergers, de-mergers, contribution of assets, and spin-off operations completed on or after 1 January 2018.
Restricted deduction of foreign withholding tax (WHT) (article 14 of the 2017 Act)
French loss making companies receiving a foreign tax credit for a WHT were not able to offset this credit. Consequently, the expense corresponding to the tax paid abroad was deducted for French tax purposes.
While the French tax authorities challenged this position, the French Administrative Supreme Court ('Conseil d’Etat') ruled that companies could take a deduction if such deduction was not expressly forbidden by the applicable tax treaty.
According to the new legislation, regardless of the tax treaty, foreign WHTs are no longer deductible.
However, absent a tax treaty entered into with the country applying a WHT, or if the tax was withheld in breach of the relevant treaty provisions, it remains deductible for French tax purposes.
France aligned transfer pricing documentation requirements with OECD Action 13
Large corporations located in France (i.e. with annual turnover or amount of gross assets in excess of EUR 400 million) are required to provide documentation containing general information regarding the relevant group of companies.
For financial years beginning on or after 1 January 2018, these French entities would have to present to the French tax authorities transfer pricing documentation that is largely inspired by the OECD’s recommendations, now published as the new Chapter V of the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The new legislation mostly aligns with the list of information recommended by the OECD for the master file and the local file, and the following informational elements will now be required by law to be included in French transfer pricing documentation reports (non-exhaustive list):
- The group’s organisational chart.
- A description of the supply chain of the five main products and services offered by the group as well as any other goods and services amounting to more than 5% of the group’s turnover.
- The intangible assets.
- The inter-company financial activities and its main sources of external financing.
- The group’s financial and tax positions.
- A description of the significant intra-group transactions and the conditions under which they were entered into.
- A reconciliation of the financial data used for transfer pricing purposes and the French entity’s statutory accounts.
The penalty regime has not been modified, and companies that do not meet their transfer pricing documentation obligations expose themselves to a penalty that is the greater of:
- A minimum of EUR 10,000 for each fiscal year concerned.
- 5% of the taxable profits deemed to have been transferred for each fiscal year.
- 0.5% of the amount that represents non-documented transactions.