Principal end of year tax measures applying to companies and adopted under the amended Finance Acts for 2011 and Finance Act for 2012

09 January 2012

Laurence Clot

Limitation of potential use of carry forward of tax losses (2nd and 4th amended Finance laws for 2011)

Arrangements for the carry back and carry forward mechanisms related to tax losses were made under the second amended Finance law for 2011 with regard to all accounts closed since September 21st, 2011.

For all profits of over €1 million, companies may only charge their carry forward tax losses up to 60% of taxable profits and must pay therefore pay corporate tax on at least 40% of their taxable income.

On the other hand, the non-charged fraction of the losses is still carried forward over the following years, without time limitation.

The deficit carried back is capped at the taxable profit for the previous year, up to a limit of 1 million euros.

The carry-back credit however remains usable over the next five financial years.

The new mechanism applies to the stock of losses eligible for carry forward at closure of the previous year’s accounts. 

Calculation of profit-sharing reserves (Finance law for 2012)

This reform of tax loss arrangements will have to be taken into account in calculating special profit-sharing reserves for accounts running from September 21st, 2011.

Equally, the limitation of eligibility for charging only to tax losses of less than 5 years is removed, but only for accounts running from September 21st, 2011.

Therefore, companies which close their accounts on 31st December 2011 are obliged to take both limitations into account in calculating the reserve for 2011.

An exceptional and “temporary” corporate tax contribution for large companies (4th amended Finance Law for 2011)

Applying only to companies with a gross pre turnover of over €250 million (excl. VAT) (adjusted over a 12 month period if necessary) the new exceptional corporate tax contribution applies at a rate of 5% and thus increases the effective rate of corporate tax to 36.10%.

In consolidated tax groups, the head of group parent company will be liable to pay this exceptional contribution and will generally be unable to claim payment of this supplement from its subsidiary companies, which would not reach the tax threshold.

The exceptional contribution will have to be settled at the same time as the balance of corporate tax, but is known as a “temporary” measure, since, for the moment, it is only due for the accounts closed between  December 31st, 2011 and December 30th, 2013, so two sets of accounts only for fiscal years coinciding with the calendar year.

Progressive entry into taxation for mutual insurance companies and pension funds (4th amended Finance law for 2011)

Mutual insurance companies and pension funds will be taxed as from January 1st, 2012, under specific rules, however, allowing taxation to be applied progressively, i.e.

  • 40% of taxable income for accounts opened in 2012

  • 60% of taxable income for accounts opened in 2013

  • 100% of taxable income for accounts opened in 2014

With regard to CET business tax (“Contribution Economique Territoriale”) this will gradually be applied to mutual insurance companies and pension funds over 2013 and 2014 to apply completely as of 2015.

Portion for costs and charges increases from 5% to 10% on sale of shares (the 2nd amended Finance law for 2011)

For any transfer of shares related to accounts running from January 1st, 2011, the portion of 10% (no longer 5%) will apply on net sale income.

Henceforth, only short term capital losses on sales of shares between dependant companies will benefit from the carry forward mechanism (4th amended Finance law for 2011)

For accounts running from January 1st, 2012, only short term capital losses will be subject to the carry forward mechanism, short term capital gains (less than two years of detention) on shares will be immediately taxable, subject, however, to the tax consolidated group’s specific rules.

A new mechanism allowing limitation of financial expenses related to the acquisition of shares (4th amended Finance law for 2011)

A new measure has been adopted, intended to limit financial expenses related to the acquisition of shares, on the model of the current mechanism called “Charasse amendment”. The penalty for failure to respect this measure is adding back of a portion of interests for the financial year in which the acquisition was made, and the 8 following years.

Where this mechanism is applied, the portion of non  deductible interest will be limited to the ratio between the acquisition price of the shares and the average amount of the company’s debt during the related financial year.

This penalty will apply each time the company is unable to demonstrate:

  • Firstly, that the decisions related to the shares acquired are really taken by the company itself, or by an other dependant company established in France,

  • Moreover, that the company has an influence or control over the acquired company.

The limitation will not apply to the following situations:

  • Acquisition of shares in a real estate company,

  • if the value of the shares is lower than €1 million,

  • if the acquisition of shares were not financed by debt,

  • or, finally if the debt ratio of the transferee company is lower than the debt ratio of the integrated group to which it belongs.

Application of the mechanism is planned not only for new acquisitions but also for acquisitions having taken place in the 8 previous financial years.

Like the “Charasse” amendment, this new mechanism is likely to create much debate between taxpayers and tax authorities.   

Limitation of the beneficial mechanism on patent concessions and sub-concessions between related companies (Finance law for 2012)

Regarding patent concessions between related companies, the new measure introduces reinforced provisions to prevent abuse.

Indeed, where the licensor and concessionary companies are related by dependent links, royalties paid will be deductible under the provisions of common law (and taxable at a reduced rate for the licensor), only if the concessionary company can demonstrate, with proper documentary evidence, that

  • Firstly, the granting of the patent gives it genuine added-value, which supposes that the profitability of the operation can be shown

  • And, also that the concession is real and does not constitute an artificial operation.

Otherwise, the cessionary company will only be allowed to deduct a portion (15/33.1/3) from the royalties paid to the related licensor company.

Concerning sub-concessions of patents between related companies, the reform partially brings into question the advantages introduced last year because the reduced rate corporate tax (15%) will only apply to the net income from the sub-concession.

On the other hand, if the royalties paid to the rights’ holder are higher than the net income from the sub-concession, the difference will be deductible from the taxable income up to the limit of the portion (15/33.1/3) of this amount.  

Removal of the cap on registration fees on acquisition of shares in French companies (Finance law for 2012)

Currently capped at €5,000 (except for shares in real estate companies), transfer taxes paid by new buyers of shares in French companies will be significantly increased, as it will be paid at the rate of:

  • 3% for the fraction of tax basis  lower than €200,000

  • 0.5% for the fraction between €200,000 and €500 million

  • 0.25% for the fraction over €500 million.

All such acts occurring in France or abroad and having regard to shares in French companies are now liable to this new rate.

However, the new transfer duties rate will not apply to certain transactions, (repurchasing of a company’s own shares, or for a capital increase; acquisitions of shares in case of backup procedure or receivership, transfers between companies in the same consolidated tax group, and partial business transfers already subject to the favorable tax rules under article 210B of the CGI).

Changes in calculation of registration fees on transfers of shares in real estate companies (Finance law for 2012)

Only the liability directly related to the acquisition of real estate assets or rights may be taken into account for calculation of the tax basis for registration fees (at the rate of 5%) on transfer of shares in real-estate companies, which will bring to an end the common practice consisting of increasing the company’s liability in order to decrease registration fees.

Increase in the reduced VAT rate from 5.5% to 7% on many products (4th amended Finance law for 2011)

Most sales transactions of goods or services benefitting from reduced VAT will be taxed at the new reduced VAT rate of 7% instead of the previous rate of 5.5% from January 1st, 2012 (or April 1st for certain transactions).

Those categories particularly concerned are sales of fast food products (for immediate consumption), passenger transport sales, sales of paper books and e-books, household work, personal and domestic services, sales of tickets for shows and concerts, etc, other than staple goods which will remain subject to the rate of 5.5% (some food products, delivery of electricity and gas, products and services for handicapped people, school canteen services, etc).

Thus, France has maintained its decision to apply the reduced VAT rate to e-books whilst awaiting the reaction of the European Commission.

To date, therefore, 4 VAT rates remain applicable in France, the normal VAT rate at 19.6%, and three reduced rates fixed at 7%, 5.5% and 2.1%.

Finally new taxes are created within the framework of the Finance law for 2012 and in particular:

A new tax on sweetened drinks relates to all sodas containing added sugar. Fixed at 7.13 Euros per hectoliter (0.23 centimes for a 33cl can), the new tax will be re-evaluated each year. Both drinks producers based in France and importers will be liable to pay this contribution which will be paid to the Customs and Excise administration and the product of which is intended to finance the CNAM (“Caisse Nationale d’Assurance Maladie”) – the National Health Insurance Fund.

A new tax on the transfer of shares in companies providing audio-visual communication services: As of January 1st, 2012, other than transfers between dependant companies, a tax of 5% will be taken on first transfer (transfer, business transfer or exchange of shares) (subject to reductions) related to shares in companies providing audio-visual communication services (radio or television) which occur following initial permission to broadcast granted by the CSA. The tax is due on the day of CSA approval authorizing the transfer of control of the company holding such authorization.

Contacts :

Should you need more information, please feel free to contact:

Laurence Clot, Partner, Tax
laurent.clot@twobirds.com

Vaea Pery, Associate, Tax
vaea.pery@twobirds.com

Bertrand Biette, Partner, Corporate
bertrand.biette@twobirds.com

Arnaud Larousse, Partner, Corporate
arnaud.larrousse@twobirds.com

Gildas Louvel, Partner, Corporate
glidas.louvel@twobirds.com

David Malcoiffe, Partner, Corporate
david.malcoiffe@twobirds.com

Authors