France

France and the United States sign bilateral agreement on the implementation of the Foreign Account Tax Compliance Act (FATCA)

France and the United States signed a bilateral intergovernmental agreement (IGA) intended to implement FATCA. FATCA was enacted by the United States in 2010 to combat offshore tax evasion by US persons. France, with the United Kingdom, Germany, Spain, and Italy, was an original member of the ‘G5’ countries that agreed with the United States to advance the principles of FATCA under the concept of bilateral IGAs in order to address many of the legal barriers faced by financial institutions in complying with FATCA.

The French government has committed to drafting local laws and regulations to implement FATCA among all financial institutions resident in France (including French branches of foreign companies). Broadly speaking, the banking, life insurance, and asset management industries will be most affected, but certain estate (patrimonial) vehicles, holding companies, as well as hedging, finance, and treasury centres of non-financial groups could also be impacted, depending on the nature of their activities.

As expected, the US-France IGA is based on the Model 1A version with an Annex II negotiated to include provisions specific to the local French market and that contains categories of French financial institutions qualifying for exempt beneficial owner or deemed-complaint status.

Compliance with FATCA’s due diligence, reporting, and, in some cases, withholding requirements is necessary for foreign financial institutions (FFIs) to avoid suffering 30% withholding on certain US-source income and payments. The French IGA is intended to simplify the FATCA requirements for French financial institutions, but, in most cases, still requires significant efforts to maintain compliance.

The following are key points specific to the US-France IGA to consider:

• Inclusion of the ‘most favoured nation’ clause allowing adoption of certain provisions from other IGAs that may be more favourable to French financial institutions.
• Consistent with Notice 2013-43, the timetable for implementation of FATCA has been synchronised with the intended amendments to the US Treasury Regulations, starting with the entry into force of key provisions effective 1 July 2014.
• Annex II of the French IGA describes various classes of exempt beneficial owners and deemed-compliant financial institutions.
  • The deemed-compliant financial institutions described in Annex II are treated as Non-Reporting French Financial Institutions under the French IGA. In turn, these Non-Reporting French Financial Institutions are considered certified deemed-compliant FFIs under the US regulations and do not have to register to obtain a global intermediary identification number (GIIN).
  • Collective investment vehicles, including investment entities established in France that are regulated as collective investment vehicles, sociétés de crédit foncier and sociétés de financement de l’habitat, are Non-Reporting French Financial Institutions treated as deemed-compliant FFIs.
• The asset management industry should benefit from an exemption related to employee savings plans and a special status that is intended to reduce the FATCA obligations of investment vehicles and management companies that can ensure the absence of US investors and non-participating financial institution customers.
• The agreement also provides specific provisions for certain French institutions and financial products, including:
  • Exemption for certain local banks with an almost exclusively local client base. This could be beneficial to French institutions following the mutual banking model.
  • Most regulated savings products (savings books and savings plans), which are excluded from the definition of a financial account and will not be treated as US Reportable Accounts, whereas the share savings plan (PEA) remains within the scope of FATCA.
  • Products dedicated to retirement planning (Article 39, Article 82 , Article 83, Madelin, Madelin agricole, Perp, Pere, and Prefon), which are excluded from the definition of financial accounts and will not be treated as US Reportable Accounts.
  • Pension funds will also benefit from a specific exemption.

French financial institutions, as well as non-financial organisations with financial institutions within their groups, should be taking steps based on the IGA (and in some cases US Treasury Regulations) to ensure they are prepared to comply. Unofficial draft guidelines have been prepared regarding the US-France IGA. This draft is not binding on French tax authorities. Official guidelines were published on 5 August 2015.

DAC6 - Reporting obligations

Pursuant to the EU Council Directive 2018/822/EU regarding mandatory exchange of information in the field of taxation with respect to reportable cross-border arrangements, intermediaries and taxpayers are subject to new reporting obligations involving certain cross-border tax planning arrangements.

The DAC6 reporting obligations to local tax authorities focus on cross-border tax planning arrangements that meet characteristics or hallmarks intended to highlight risk of tax avoidance and enable more effective audits.

France transposed DAC6 on 21 October 2019, and its provisions took effect on 1 July 2020 as arrangements that occurred as of this date must be reported within 30 days as of 1 January 2021.

For arrangements that occurred between 25 June 2018 and 30 June 2020, the reporting obligation deadline is on 28 February 2021.

ATAD 3

The European Commission unveiled on 22 December 2021 a draft directive for preventing the misuse of shell entities for tax purposes (‘ATAD 3‘ or the ’Directive‘) also known as the ’Unshell Directive‘, by making the benefit of certain tax arrangements (including DTTs) conditional on the existence of a minimum substance for companies established in the European Union. 

Concerning the scope, the draft of ATAD 3 aims at companies:

• with a passive activity (more than 75% of their revenues during the two previous fiscal years were passive revenues)
• with an international activity (more than 60% of their revenues from cross-border transactions during the two previous fiscal years, or a balance sheet composed of more than 60% of real estate or private use assets worth more than EUR 1 million located abroad), and
• using subcontracting for the day-to-day management of the company or decision-making for the most important functions during the previous two fiscal years.

Companies meeting these criteria will be required to include certain information in their annual tax returns to enable the member state where they are established to verify their level of substance. It is called the annual reporting on minimal substance. In practice, the companies will have to disclose:

• if they own or have exclusive use of premises in the member state
• if they have at least one active bank account in the European Union, and
• if they have at least, alternatively:
  • one self-employed director or manager who is resident for tax purposes in the same member state as the company or in a nearby state, has decision-making powers relating to the company's business, has the autonomy to use them on a regular basis, is not employed by a third company, and is not performing a similar function for other unrelated companies, or
  • if a majority of FTE employees resides for tax purposes in the same member state as the one in which the company is established or resides in a nearby state and has the necessary skills to perform their functions.

Depending on the information provided in the tax return, the tax authorities of the member state concerned will be able to establish either (i) the presumption of a minimum substance (criteria fully met), or (ii) the company will be presumed to lack minimum substance and qualify as a shell company. If a shell company is qualified in France, the tax authorities would be entitled not to issue a tax residence certificate, or to issue a certificate stating that the entity cannot benefit from the provisions of the tax treaties or the EU Directives. However, such entity would remain subject to the French tax law.

It must be noted that the above could be amended with respect to the definitive version of the Directive to be further adopted.

On 17 January 2023, the European Parliament approved the European Commission’s draft directive as amended by the Committee on Economic and Monetary Affairs (ECON). The amendments impact the scope (notably by adjusting the thresholds), the reporting requirements, and the penalties that may apply. The draft ATAD 3 (as amended) will now go before the Council of the EU for consideration. It may be further amended. 

This directive is expected to be definitive on 1 January 2024, having a retroactive effect from 1 January 2022.

OECD Pillars 1 and 2

In October 2021, 136 of the 140 members of the OECD/G20 Inclusive Framework on Base Erosion Profit Shifting (BEPS), as well as the G20, signed on to a Declaration on a two-pillar solution to the tax challenges raised by the digitalisation of the economy.

Regarding Pillar 1, the Inclusive Framework is expected to prepare a Multilateral Convention by mid-2023, which could enter into force in 2024 (the timetable has been shifted by one year from the initial announcements), aiming to introduce a reform that allocates to ’market jurisdictions‘ a fraction of the global profits of ’MNEs, whether or not they locally have a physical presence. It would apply to MNEs with profitability above 10% and global turnover initially above EUR 20 billion. 

Regarding Pillar 2, a draft EU Directive (‘GloBE Directive‘) has been published in December 2022 by the EU Council, aiming to introduce an effective minimum corporate tax rate of 15% on the benefits of MNEs that fall within the scope.

The Finance Act for 2024 transposed this directive into French law. This transposition is compliant with the Pillar 2 EU Directive and instigates the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR). It also allows for the creation of a qualified domestic minimum top-up tax (QDMTT).  

Currently, France also levies a tax on digital services.