Public Country-by-Country Reporting
On 21 June 2023, France transposed the EU Public CbC Reporting Directive. The measure requires both EU-based multinational enterprises (MNEs) and non-EU based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue of more than €750 million in each of the last two consecutive financial years to report publicly the income taxes paid and other tax-related information such as a breakdown of profits, revenues and employees.
Reduction of French production taxes
In order to improve competitiveness, the territorial economic contribution (CET) started to decrease down over previous years.
The 2021 Finance Bill also provided for a reduction of the rental value of industrial facilities (notably used to calculate the land contribution [CFE]) by half, pursuant to a defined accounting method. The reduction is applicable to the tax due as of 2021.
The Finance Bill for 2023 provides for the repeal of the business value-added contribution (so called “CVAE”, one of the components of the CET) over a two-year period. In practice, the CVAE rate will be halved in 2023 before the tax disappears in 2024.
In parallel with the abolition of the CVAE, the rate of the cap on territorial economic contribution (CET) according to value added, currently set at 2%, will be lowered to 1.625% in 2023 and then to 1.25% from 2024.
New tax regime for reinsurance captive companies
The Finance Bill for 2023 creates a specific tax regime for certain captive reinsurance, defined as an undertaking owned either by a financial undertaking (with certain exceptions) or by a non-financial undertaking, the object of which is the provision of reinsurance cover relating exclusively to the risks of the undertaking or undertakings to which it belongs, or to the risks of one or more other undertakings in the group of which it forms part. The purpose of this provision is to facilitate the creation of captive reinsurance companies in France by offering them a favorable tax regime in order to promote a better insurance offer, by allowing them to negotiate with third-party insurers ("fronters") insurance coverage more adapted to their needs.
This new tax regime provides that captive reinsurance undertakings held by an undertaking other than a financial undertaking and whose object is the provision of reinsurance cover relating exclusively to the risks of undertakings other than financial undertakings may constitute, tax-free, a provision to cover expenses relating to accepted reinsurance operations whose insurance risks fall within the categories of damage to professional and agricultural property, natural disasters, general civil liability, pecuniary losses and pecuniary damage and losses resulting from damage to information and communication systems and transport.
These provisions come into force on January 1, 2023.
Tax deferral applicable to free asset revaluation
In order to improve companies’ equity and financing ability, the 2021 Finance Bill temporarily allows companies to freely elect to revalue all their tangible and financial assets based on their fair market value under French GAAP.
The 2021 Finance Bill provides for a 'neutralisation' of the tax impact of such an asset revaluation by allowing companies to benefit from certain tax deferral rules based on the type of asset.
This temporary regime is subject to a formal election, specific documentation requirements, and commitments from each company choosing to benefit from this favourable tax treatment.
This new provision applies to the first revaluation process realised in a tax year ending on or after 31 December 2020 and until 31 December 2022.
Research and development (R&D) tax credit adjustments
The 2021 Finance Bill modifies the research tax credit as it aligns the regime of the expenses related to operations entrusted to public entities with the one related to the private sector i.e. (i) elimination of the double tax base mechanism, (ii) necessity for the subcontractor to be accredited for their expenses to be taken into account by the principal, (iii) the increase of EUR 2 million in the annual ceiling on subcontracting expenditure in the event of subcontracting to public entities is removed, and (iv) the subcontracted expenses (either private or public) are to be included within the limit of three times the total amount of other research expenses.
These measures apply to research expenditure incurred as of 1 January 2022.
However, to balance this alignment, the 2022 Finance Bill introduced a new Tax Credit for Collaborative Research for eligible expenses incurred between January 1, 2022 and December 31, 2025 within the EU or EEA as part of collaborative contracts with Research and Knowledge Dissemination Organizations, i.e. mainly universities. This tax credit is equal to 40% (50% for EU SMEs) of the sums invoiced by these organizations, up to a cap of 6 million euros per year.
Possibility to offset convention tax credits on French taxation (upon capital gains and dividends) - Key decisions
The French administrative jurisdictions have ruled that the French 5% taxation of dividends at the level of the beneficiary under the participation exemption regime (i.e., EU parent-subsidiary Directive) and the French 12% taxation of long-term capital gains (i.e., shares representing securities that qualify as “titres de participations”) constitute an effective taxation against which foreign tax credits may be offset (Administrative Supreme Court, 15 November 2021, n°454105, L’Air Liquide, Administrative Court of Appeal of Lyon, 27 January 2022, n°20LY00698, Sté A. Raymond & Cie and Administrative Supreme Court, 5 July 2022 n°463021, Sté Axa).
Claims can be addressed to the French tax authorities in order to benefit from the foreign tax credits over the years that are not statute barred (i.e., 2020, 2021 and 2022 for FY closed on 31 December and if the claim is sent in 2023).
There is still uncertainty about the exact amount that can be claimed (Administrative Supreme Court 7 April 2023 n° 462709, min. c/ Sté A. Raymond et Cie).
Application of the double tax treaty between France and the State of the beneficial owner (as not being the direct beneficiary) - Key decision
A recent decision from the French Administrative Supreme Court (Conseil d'État, 9e et 10e ch., 20 mai 2022, n°444451, Sté Planet) has recognized, for the first time, the applicability of a reduced withholding tax rate provided by the double tax treaty between France and the State of the beneficial owner (i.e., as being the indirect beneficiary of the income paid), as opposed to the withholding rate provided by the tax treaty between France and the State of the direct beneficiary of the income (in the case at hand, royalties).
Such possibility is subject to several and specific conditions (notably the collection of a precise and complete documentation) which are to be validated on a case-by-case basis.
As of 1 January 2023, Article 11 of the Directive 2006/112/EC of 28 November 2006, whereby each member state may regard as a single taxable person any persons established in the territory of this member state who are legally independent but are closely connected with each other for financial, economic, or organisational purposes, will be implemented in France under new Article 256C of the FTC. This new regime would be optional and would reinforce the neutrality of VAT for groups, particularly in sectors carrying out tax-exempt transactions. Taxable persons who have elected to form a single taxable person would have to appoint one of them as the head of the group in order to comply with all the obligations related to the tax and make the tax payments, in respect of which all members would remain jointly and severally liable. The group would be set up for a minimum period of three years.
In furtherance of Article 153 of the Finance Law for 2020, which aims to generalise e-invoicing between taxable persons with gradual entry as of 1 July 2024, Article 195 of the Finance Law for 2021 allows the government to take, within the nine-month period following the publication of the law, all the necessary measures to:
- generalise the use of e-invoicing and modify the terms and conditions of the e-invoicing model (i.e. e-invoicing obligation), and
- implement an additional obligation of digital transmission to the authorities of information relating to transactions carried out by persons subject to VAT who do not result from e-invoices, either that they are complementary to those resulting from it (e.g. data related to payment of invoices) or they relate to transactions that are not e-invoiced or are not subject to the invoicing obligation for the purposes of VAT (e.g. B2C flow or non-domestic flows) (i.e. e-reporting obligation).
The EU and United Kingdom (UK) Trade and Cooperation Agreement (TCA) concluded in December 2020 has a significant impact on supply chains. Indeed, for goods traded between the European Union and the United Kingdom to benefit from being duty free, they must meet with the requirements on 'rules of origin', which certify that the goods do really come from the European Union or the United Kingdom. This entails that companies must carefully assess their supply chains in order to determine which parts of their final products can benefit from an EU or UK preferential origin. As a consequence, to justify any tariff exemption or reduction, companies must provide customs authorities with a proof of origin based on the importer's knowledge of the origin of the goods or a certificate of origin issued by the exporter.
Moreover, the TCA does not provide for mutual recognition of product conformity assessment. This means that companies selling in both the European Union and the United Kingdom must comply with two different sets of regulatory requirements.
As of 1 January 2021, a part of the excise rights related to the general tax on polluting activities (taxe générale sur les activités polluantes or TGAP) will pass under the aegis of the Public Finances Directorate General (la direction des finances publiques or DGFIP). As a result, the TGAP tax returns will now be filed separately on the VAT returns. Moreover, the 'oil and lubricant' component of the TGAP is, as of 1 January 2021, no longer subject to taxation.
A project of a bill to combat climate change and strengthen resilience to its effects is currently in discussion. If it succeeds, it will end the tax exemption on the TICPE (domestic tax on the consumption of energy products) for road diesel fuel. This elimination will be phased out over a period from 2022 to 2030.
New temporary solidarity contribution (TSC) for companies in the petroleum, natural gas, coal and refining sectors.
This new contribution is exceptional and temporary and applies for the first financial year beginning on or after 1 January 2022.
The persons or permanent establishments carrying on business in France or whose profits are taxed in France by an international double taxation convention and whose turnover for the financial year concerned derives for at least 75% from economic activities in the crude oil sectors, natural gas, coal and refining (as defined in point 17 of Article 2 of the Council Regulation (EU) 2022/1854 of 6 October 2022), shall be liable to pay the TSC. Although it only marginally concerns France, through the sole activity of refining.
The TSC rate is set at 33%