The French Finance Act passed its constitutional review for 2019Â on 28 December 2018. This follows the approval of the law by Parliament on 20 December 2018. The main measures of the law are summarized as follows:
Corporate Income tax rate:
Starting in 2019, all businesses will be taxed at 28% on their first €500,000 of earnings and 31% above this level. The Act also introduced a progressive reduction of the corporate income tax rate to 25% in 2022.
From 1 January 2019, a new interest deduction restriction rules are introduced in line with the Article 4 of the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD 1), which provides that the deductible interest would now be limited to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA), or EUR 3 million, whichever amount is higher. This adjusted EBITDA will be calculated from the tax result after the adjustments mentioned, thus including extraordinary gains and expenses. Further, a safeguard clause is provided, which allows a company that is a member of a consolidated group to deduct 75% of excess interest expense if it can show that its equity-over-assets ratio is at least equal to the ratio of its consolidated group. The bill also repealed the existing 25% general reduction and the thin-capitalization rules. Taxpayers can carry forward non-deducted interest for an unlimited time; or can carry forward unused interest capacity for five years.
Incentive-the patent box regime:
The patent box regime is amended to comply with BEPS Action 5. This includes the introduction of the modified nexus approach to provide that the amount of patent income qualifying for the regime is limited to the amount resulting from the ratio of R&D expenditure incurred by the taxpayer and unrelated parties for the creation/development of the asset with a 30% uplift / total R&D expenditure. Further, the scope of qualifying assets is amended so that the regime only applies for patents and copyrighted software, while non-patentable inventions are excluded, except for SMEs subject to certain conditions. In addition to amendments to comply with BEPS Action 5, the reduced tax rate for qualifying income under the patent box regime has been reduced from 15% to 10%. The amended regime generally applies from 1 January 2019.
Incentive for SME:
A special incentive is introduced for certain investments that are contemplated between 1 January 2019 and 31 December 2020 to support the robotization and digital transition of qualifying companies. This exceptional depreciation regime that will allow qualifying assets to be depreciable at a 40% rate, will benefit small and medium-sized enterprises in the industrial sector.
GAAR:Â
The new finance law implements the ATAD GAAR into domestic law. The GAAR provides that, with respect to corporate income tax, no genuine arrangements put in 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 should be ignored. An arrangement is defined as no genuine to the extent it is not put in place for valid commercial reasons that reflect the underlying economic reality. nA complementary measure will allow the French tax authorities to ignore arrangements put in place for the main purpose of avoiding or decreasing the normal tax liability (other than corporate income tax liability).
Tax consolidation:
The finance law abolishes the following rules relating to intragroup transactions:
The “neutralization” of capital gains arising from an intragroup sale of participations for purposes of determining the taxable income of the tax group. As from 1 January 2019, the standard rules in France will apply, i.e. the capital gains resulting from the sale will be 88% exempt from corporate tax.
The neutralization of intragroup grants or waiver of intragroup debt.
Participation exemption for dividends:
Under French law, dividends eligible for the participation exemption generally are 95% exempt from corporate tax. As from 1 January 2019, the 99% participation exemption will be extended to apply to dividends paid by an EU/EEA company to a French company that is not a member of a French tax-consolidated group, provided the payer would fulfill the conditions for being a member of the recipient’s French tax group if it were established in France.
Currently, dividends paid by one company to another company that is not at least 5% held by the distributing entity are fully taxable at the level of the recipient entity. As from 1 January 2019, if the recipient is a member of a tax-consolidated group and the payer entity could be member of the group if it were established in France, the 99% participation exemption will apply to the dividends paid.
Corporate income tax installment:
For large companies with a turnover of more than EUR 250 million, the final corporation tax payment will change as of 1 January 2019 as follows:
- revenue of up to EUR 1 billion : 95% of the estimated tax liability for the year less the installments already paid (increased by 80%);
- Revenue of more than € 1 billion up to € 5 billion: 98% of the estimated tax liability for the year less the installments already paid (increase of 90%); and
- Revenue over EUR 5 billion: 98% of estimated tax liability for the year, less installments already paid (unchanged).
