OASIS

                        ORGANIZATION OF ADVOCATES SPECIALISING IN INTERNATIONAL SERVICES

FRANCE 2010/2011

 FRENCH DEVELOPMENTS 2010/2011 

 Manuel Castro, Cabinet Castro et Associé

       I.            TAX DEVELOPMENTS

1.     Measures regarding corporate tax

1.1 Participation exemption regime

A participation exemption on dividends applies when the shareholders holds 5% of the shares (both by vote and value) of the distributing companies and keeps the shares for at least two years.

Share of costs and charges:

Dividends received by the shareholders are exempted, apart from a share of costs and charges equal to 5%.

This share of costs and charges could be limited to the actual costs and charges incurred.

New legislation:

The 2011 finance law abolished the option for the actual cost and charges incurred. This change may impact parent companies with a mere holding activity that previously could effectively cap their 5% taxable portion of qualifying dividend income to the actual amount of all charges incurred during the given fiscal year.

1.2 Anti-abuse measures

Transfer of shares held for less than two years

Sales of shares are taxed differently depending on their ownership period:

•         shares that have been held for less than two years are subject to a short-term tax regime, which taxes capital gains at the standard corporate income tax rate (33,1/3%) and permits capital losses to be immediately deducted from corporate the income tax.

•          shares that have been held for two years are exempted (although if a gain is made, a lump sum of 5 percent of the net gain is taxable at the standard corporate tax rate) and conversely, capital losses are not tax-deductible

New anti-abuse legislation:

The new legislation aims at preventing the tax deduction of short term capital loss recorded on resale, inside a group of shares that have been held for less than two years.

For fiscal years ending on or after December 31, 2010, capital gains or losses on shares held for less than two years and transferred to a related company are deferred until:

•          the shares are sold outside the group /to a unrelated company;

•          the seller become no longer subject to the corporate tax or is absorbed by a company which is unrelated to the company holding the shares sold;

•        the expiry of a two years holding period from the date of the acquisition.

 Distribution followed by a share exchange

From now on, dividends received by a parent company from its subsidiaries of which it owns at least 5% are exempted from corporate income tax (except for a 5% share of costs and charges). Furthermore, the capital loss on the sale of shares held for less than 2 years are deductible from corporate income tax at the standard rate. Therefore, a mother company could benefit from the exemption of dividends received from its subsidiaries and, in connection with the absorption or disposition of these subsidiaries, deduct from its taxable income capital losses at the standard rate.

Finance Law for 2011 introduced an anti-abuse rule that applies to financial years ending December 31, 2010.

The new system aims to prevent the cumulative effects of an exemption distribution according to the participation exemption regime or consolidated tax regime, and the deduction of a short-term capital loss on the sale or exchange of shares of the subsidiaries that distributed these dividends (the loss resulting from the depreciation of such shares as a result of prior distributions).

This new tax provision applies differently to integrated groups and other groups:

In integrated groups: the price of the shares is reduced by the amount of the distribution (no deduction of the capital loss).

In other groups companies: the participation exemption regime is refused

Thin Capitalisation rules

Strengthening of the rules fighting thin capitalisation

Thin capitalisation rules limit the amount a company can claim as a tax deduction on interest when it receives loans directly or indirectly from related parties.

Thus, the deductibility of arm’s length interest is limited by the highest of the three following thresholds:

•        Interest accrued on 1.5 times the net equity of the borrower

•         25% of its net adjusted income before tax (interest cover ratio)

•         Interest received from related parties

For this purpose, “related parties” are defined as person who (i) either directly holds more than 50% of the financial or voting rights of the borrowing company; or (ii) manages, the borrowing company.

As a result, the thin capitalisation rules only applied to loans granted by direct or indirect controlling shareholders, sister companies, or subsidiaries.

New scope:

Since January 1st, 2011, the scope of thin capitalisation rules has been extended to loans granted by a third entity but guaranteed directly or indirectly by a related company.

The new legislation aims at avoiding certain abusive schemes such as “back to back” arrangement in which a bank loan is granted to a group company and secured by related companies in order to avoid thin capitalisation rules.

From now on loans granted to a French entity by third-party lenders fall within the scope of thin capitalisation rules if they are guaranteed:

•         by a company related to the French borrower or

•          by a third party whose commitment is in turn secured by a company related to the French borrower.

Exceptions

The finance law for 2011 provides several exceptions:

•         loans secured by a pledge of shares of the debtor, a pledge of receivables held against the debtor, or a pledge of shares of a company that owns, directly or indirectly, the debtor when the holder of these pledged shares and the debtor are members of the same tax consolidated group.

•         loans refinancing a previous loan the reimbursement of which was compulsory due to a change in control of the debtor (up to the amount of repaid principal and corresponding due and unpaid interest)

•          bonds issued through a public offering

The new legislation is effective for fiscal years closed as from December 31, 2010 so that it had a retroactive effect on 2010 fiscal years.

1.3 Intellectual property rights

Yesterday:

The 15% reduced rate of the long-term capital gains tax regime applied on:

 Royalties, long and short capital gains patents, patentable inventions, benefits from licensing as long as they were qualified as fixed assets and owned for at least two years.

Nevertheless, royalties paid to a related party were subject to certain restrictions regarding their tax deductibility.

Today:

From now on, royalties are fully tax deductible even though the royalties are paid to a related entity.

However, when those royalties are paid to a related party, their full deduction is subject to the effective exploitation of the licensed intellectual rights; otherwise, the tax deductibility of the royalty payments is limited.

 In addition, the finance law for 2011 has extended the benefit of the 15% reduced tax rate to:

•          the improvements of patents or patentable rights provided that those intellectual property rights are qualified as fixed assets;

•       companies sub-licensing patent, as long as (i) the intermediary company is the first to benefit from the reduced tax rate and (ii) the royalty income corresponding to the sub-license represents at least twice the sum of payments paid by that company to the original patent holder

1.4 Research and development tax credit

The finance law for 2011 provides several measures to adjust the mechanism of the tax credit granted to companies for research and development (R&D), although in a way that is less favorable to businesses.

Firstly, the rule allowing to immediately refund the tax credit is over, except for small and medium size companies (SME’s), innovative and new companies or businesses facing difficulties that can still benefit from an immediate refund.

In addition, the increased rate of the tax credit during the first two years is reduced from 50% to 40% and 40% to 35%.

The evaluation method of operating expenditures is also changed: these are set at 50% of the staff cost and 75% of the depreciation allowance (instead of 75% of operating expenditures, as this was the case previously).

The conditions to benefit from this tax credit are strengthened. For instance, companies incurring R&D expenses in excess of €100 millions must attach to their credit tax return a specific schedule describing the status of their ongoing project of R&D.

2. Territorial Economic Contribution

Since January 1st, 2010, the professional tax has been replaced by the creation of the Territorial Economic Contribution (TEC), made up of the Land Contribution of the Companies (LCC) and the Contribution of the Added Value of the companies (CAVC). The finance law for 2011 provides further details regarding the LCC and the CAVC.

 In the majority of cases, the new rules do not significantly impact the amount of business tax suffered.

·         The land contribution of the companies (LCC)

The rental value floor (that is to say, the minimum rental value) to calculate the CFE is increased when transactions happen between related companies. On the other hand, the ceiling of the minimum contribution of CFE is increased for taxpayers whose turnover exceeds 100 000€.

·     The Contribution of the Added Value  of the Companies (CAVC)

When calculating the CVAE, the turnover of the member firms belonging to a consolidated tax group is globalised (in order to reduce the CVAE relief open to businesses with a turnover below 50 000 000€). In addition, for now on, trustee are subject to the Contribution of the Added Value  of the Companies.

3. VAT

Consolidated payment of VAT

The finance law for 2011 provides a new option for consolidated VAT payment.

As from January 1st, 2012 companies belonging to the same group will be allowed to elect to the consolidated VAT payment.

This new measure will allow group of companies to enhance their net cash position by netting the VAT due by certain group companies to the VAT to be refunded by other group companies. All group companies will remain taxable, but the taxpayer will pay the VAT owed by the group. The current VAT standards rules will continue to apply to transactions between group companies.

Scope of the consolidated group

The taxpayer will have to hold directly or indirectly more than 50% of the shares or the voting rights of the members companies. Moreover all members companies 'agreement will be required to elect to the consolidated VAT payment

To be eligible, members will have to meet one of the following requirements:

•          Turnovers or gross assets exceeding €400 millions or;

•          A direct or indirect holding of at least 50% of the share of capital or voting rights of companies meeting this €400 millions threshold or;

•          Be directly or indirectly held by at least 50% by companies meeting this €400 millions threshold or, be a member of a French tax consolidation group of which at least one member meets one’s of the above conditions.

The election will only be cancelled as from the third financial year following the effective date.

A change in the scope of the group is possible as from the second financial year.

In addition all companies will have to end their financial year on the same date. Every month, each company will have to fill its VAT declaration and the tax payer company will fill a summary declaration and pay the VAT due by all the group companies.

The tax due corresponds to the difference between the total of the net taxes due and the sum of the tax credits. Where this balance is negative, the VAT credit is either refunded or carried over to a subsequent period.

Each group companies will be severally and jointly liable for VAT payment and penalties with the taxpayer company.

4. Changes regarding several taxes

Annual flat-rate tax

Companies whose turnovers exceed €15 millions are subject to an annual flat-rate tax. The finance law for 2009 provided the abolishment of the annual flat-rate tax as from January 1st, 2011.

 However, the 2011 financial bill has postponed the abolishment of this tax to 2014.

“Google tax”

A 1% tax on purchases of online advertising services (known as the Google tax) will be introduced from July 1, 2011, for the recipients of those online services (the advertisers). Advertisers that are not located in France will not be subject to this tax.

Systemic risk banking tax

The finance law for 2011 provides a bank levy to prevent bank’s failure by deterring banks from using risky funding. Banks and others financial institutions are subject to 0.25% tax assessed on the amount of private equity required to respect solvency ratio. 

The systemic risk banking tax may affect the French operations of foreign institutions, except those headquartered in the European Economic Area (which includes European Union member states as well as Iceland, Liechtenstein and Norway) which operate in France through branches or through the free provision of Services.

     II.            LEGAL DEVELOPMENTS

The banking and financial regulation law, adopted in October 22, 2010 implements the decisions of the 2009 G20 meeting in Pittsburgh at the national level. This law has two main goals:

•          Strengthening the supervision of financial intermediaries and markets

•          Supporting the financing of the French economy in order to accelerate the French recovery

Mains measures:

Empowerment of the French Financial Markets Authority (AMF): the AMF is empowered to ban short selling of all financial instruments in exceptional circumstances. Furthermore, the AMF will be able to require disclosure with respect to these operations. The Act prohibits naked short selling where the seller has not taken the necessary measures to ensure that he will actually possess the shares on the settlement date (“locate rule”). The maximum fine which the AMF can impose is increased tenfold to €100 million.

Regulation of the derivatives markets and of Credit Default Swaps (CDS): From now on, the AMF will be able to impose penalties for market abuse in the derivatives and particularly CDS markets.

Monitoring of the rating agencies: The AMF will now be able to license, monitor and impose penalties on rating agencies. Rating agencies were previously unregulated.

Regulation of the carbon markets: The law creates inter alia a watchdog to supervise and monitor the CO2 emissions markets.

Strengthened oversight of the financial sector – The law ratifies the creation of a single oversight and surveillance authority for the banking and insurance sectors: the Prudential Control Authority. The Act creates a Financial Regulation and Systemic Risk Council, a genuine financial sector lookout tower, which will more effectively forestall risks in the financial sector.

Establishment of a regulatory regime for market operators’ compensation packages: The law entrusts the Prudential Control Authority with the task of monitoring the banks’ compliance with the rules governing the award of bonuses decided on by the G20.

Strengthened framework for the security financial products consumers: All financial intermediaries will now have to register on one single register, accessible to all consumers.

Prevention of rampant takeovers: The threshold triggering a mandatory tender offer is lowered to 30%. Investors will have to aggregate the derivative financial products they hold in shares or voting rights to assess whether this threshold has been reached.

Disclosure action of activist funds – The law requires the disclosure of share loans three days before general meetings of shareholders so that the company and in particular long-term shareholders are informed about shareholders with temporary voting rights.

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