France: 2019 Finance bill– Taxation of companies January 2019

By its decision #2018-777 DC of December 28th, 2018, the Constitutional council did not censor any major provisions.

New interest deduction limitation rules (article 34)

Net interest expenses are now deductible from the taxable income only to the extent that they do not exceed the higher of the two following thresholds:

• 3 million euros or
• 30% of the company’s EBITDA (i.e. taxable income including certain items such as the net interest expenses, depreciations, provisions). 

These thresholds are respectively reduced to 10% and one million euros when the sums left or made available to the company by related companies exceed 1.5 times the amount of its own funds.

Safe harbour provisions can apply under conditions.

New patent box and software regime (articles 37 and 38)

The net income (licensing and sub-licensing) and capital gain realized on patents (and patentable rights for small and medium-sized companies under certain circumstances) and on software protected by copyright are taxed at a rate of 10%.

The net income is determined by application of a “nexus” ratio comparing (i) the R&D expenses incurred for the creation, or the development of the qualifying patent, either by the claiming taxpayer or by non-related parties to (ii) the total R&D expenses incurred for the creation, the development, or the acquisition of the qualifying patent.

Adjustment of the tax consolidation regime (article 32)

The Finance Act amends several aspects of the French tax consolidation regime in order to bring it into line with the European Union principles.

The main topics are:

• the dividend distributions;
• withdrawal of the system neutralising the share of taxable expenses and charges of 12% due to capital gains on the sale of equity interests within a tax consolidation group;
• withdrawal of the system neutralising the subsidies and debt waivers granted between group companies; new provisions to avoid cases of group termination related to Brexit. 

New general anti-abuse provision (article 108)

Transposition of the ATAD directive. Arrangement or a series of arrangements which are put into place for the main purpose, or one of the main purposes, of obtaining a tax benefit that is contrary to the aim or purpose of the applicable legal provisions, can be now disregarded by the French tax authorities to requalify a transaction.

Extension of the obligation to provide information regarding the nature of the expenses financed via the CIR (article 151)

The threshold triggering the obligation to provide information regarding the expenses financed by the CIR (research tax credit) has been reduced from 100 M€ to 2 M€.

This provision should apply to declarations filed as of January 1st, 2019.

The tax credit helping employees to take over their company is temporarily softened (article 110)

New conditions to benefit from this tax credit apply to financial years ending as of December 31st, 2019 for the buyback operations carried on through December 31st, 2022.

During this period, the condition requiring a minimum number of employees to participate in the operation is withdrawn. In return, a new condition is introduced; requiring employees to work in the company for at least 18 months.

The tax credit for the production of phonographic works is amended (articles 143 and 144)

This scheme, which was due to expire on December 31st, 2019, is extended for three more years, until December 31st, 2022. In addition, the conditions allowing phonographic production companies to benefit from the tax credit are amended for provisional approval’s applications filed as of January 1st, 2020.

As the one-year seniority requirement was withdrawn by the Finance Bill, the phonographic production companies can now benefit from the tax credit system at the beginning of their activity.

The notion of new talent is also redefined to take into account new online listening and streaming uses. The threshold of 100,000 sales is extended to sales and listening and will be further detailed in a decree yet to be issued.

The international movies tax credit is extended and reinforced (articles 144 and 146)

The tax credit for the production of foreign movies and audiovisual work is extended for three more years, until December 31st, 2022.

Also, for works of fiction with intensive visual effects (subject to substantial digital processing), the credit rate increases from 30% to 40%.

SIIC’s obligation to distribute capital gains is amended (article 45)

The capital gains distribution threshold allowing SIIC (listed real estate investment companies) to be exempt from corporate income tax is increased from 60% to 70%.

Partial contribution of assets: clarifications regarding the holding period calculation (article 35)

The Finance Bill supplements CGI article 201 B by specifying that the holding period for the securities received by the contributor in return for the partial contribution of assets is computed starting from the acquisition date of these elements by the contributor.

Documents relating to the life of companies are registered free of charge (article 26)

Documents relating to the life of companies (incorporation, existence – capital increase, merger - and dissolution) are now registered free of charge.

The "mini-abuse of law" : schemes primarily for tax purposes (article 109)

The Finance Bill establishes a procedure allowing the French tax administration to classify as abusive schemes primarily set-up for tax purposes.

Therefore, it is now possible for the French tax administration to alternatively adjust schemes for exclusively following a tax purpose within the meaning of LPF article L64, for which a 40% or 80% increase is applied, or schemes primarily set-up for tax purposes for which no specific penalty is provided.

The opinion of the Committee on the Tax Law Abuse no longer has, in principle, any effect on the burden of proof (article 202)

From now on, when, after the additional taxes have been levied, the taxpayer has a contentious claim, the administration bears, in principle, the burden of proof, notwithstanding the opinion of the Tax Law Abuse Committee.

However, the burden of proof lies with the taxpayer in two cases:

• where its accounting contains serious irregularities and the Committee's opinion is in line with the taxation established by the administration;
• where the taxpayer has not communicated books or corresponding documents.

Profits from operations related to communication satellites are not subject to CIT (article 63)

French communication satellite companies placed in space now benefit from a derogation to the French corporate income tax territoriality principle.

Thus, profits from the operation of communication satellites located on geostationary orbital positions not company-owned are exempt from corporate income tax for the financial years ending as of December 31st, 2018.

However, these profits must be determined under the conditions set out in article 57 of the CGI related to transfer pricing.

Large companies’ last CIT instalment is once again increased (article 39)

As from the financial years beginning as of January 1st, 2019, the last instalment computation methods for large companies are modified for companies with a turnover ranging between €250 million and €5 billion.

The estimated tax amount quota is increased. The thresholds triggering the application of underpayment penalties are also updated. However, the conditions for triggering penalties are softened for all companies subject to the last CIT instalment.

VAT - the EU Directive 2016/1065 (27/06/2016) on warrants has been implemented (article 73)

The provision is applicable to warrants issued as of January 1st, 2019.

Minimum harmonization of the warrants’ definition: "any instrument with an obligation to accept it as total or partial consideration for the supply of goods or services and for which the warrant or services to be supplied or the potential suppliers identity or the service providers are indicated either on the instrument itself or in the corresponding documentation (general conditions of use for instance)".

It applies to warrants in physical or electronic form, which are divided into two categories.

Such a definition of the warrant excludes discount warrants, payment instruments, transport tickets, cinema tickets but does notably include gift boxes or prepaid telecommunications.

The warrants are divided into two categories with, for each, a different definition and VAT regime:

• the single-use warrant (BUU)
  – the place of the transaction to which it relates and the VAT regime are known at the time the warrant is issued;
  – VAT is collected when the BUU is issued and each time the BUU is transferred. However, no VAT is charged when the services is carried out or the physical goods delivered.

• the multi-usage warrant (BUM)
  – gather all the warrants that do not meet BUU conditions;
  – VAT is charged on the physical delivery of the goods or when the service is provided , which can be either a partial or total consideration for the warrant. Upstream transfers will not generate VAT;
  – the taxable amount of the transaction carried out in connection with a BUM is equal to the consideration paid in exchange for the warrant, less the VAT on the goods or services supplied.
  
  

VAT on petroleum products is now recovered by the DGFiP (article 193)

These provisions are applicable to transactions for which VAT will be payable as of January 1st, 2021.

This measure enables the implementation of a single actor for tax collection.

The VAT due on petroleum product’s release for consumption would thus be recovered by the DGFiP: the declaration and payment of the VAT due on the release for consumption of these products (exit from the suspensive regime or on importation) would be made on the VAT return to be filed with the DGFiP.

However, there is no change in the regime applicable to operations post-petroleum products’ release for consumption.

The reverse charge on imports has been adjusted (article 193)

This measure is applicable to transactions for which VAT will be payable as of January 1st, 2020.

The conditions for reverse-charge on imports are adjusted: companies that have been in existence for at least 12 months may now apply for the benefit of this regime provided that they meet the three following conditions, even if they do not meet the first requirement of four imports into the Union in the previous 12 months:

• possession of a customs and tax records management system to monitor import operations;
• capacity to justify that there has been no serious or repeated infringement of customs and tax provisions (required from the company manager requesting the measure);
• proof of financial solvency enabling the company to fulfil its commitments during the 12 months preceding the request.

The first condition requiring four imports will therefore only be asked to companies with less than a year of existence.

Also, an additional period of one month is granted to declare import operations subject to reverse VAT liability on CA 3 returns or their regularization.

The measures of the EU Directive 2017/2455 (5/12/2017) scheduled to enter into force on January 1st, 2019 have been transposed (article 72)

These measures will apply from January 1st, 2019.

Adjustments have been made regarding the territoriality rules for rendering telecommunications, broadcasting and electronic services to non-taxable persons.

• therefore, a derogation from the territoriality rules is implemented for these services providers established in the EU whose EU services total value excluding VAT does not exceed € 10,000 during the current calendar year and did not exceed this threshold during the previous calendar year;
• the place of supply of such services is deemed to be their place of establishment;
• as soon as the threshold is exceeded, the common law rules apply again;
• an option for the application of the common law rules may be granted by the service provider member state of establishment. It may last for 2 calendar years. The goal for the service provider is to continue to use the single window if necessary.

The territoriality rules for invoicing are changed in the event of a single window use: the invoicing rules will be those of the place where the member state identifying the service provider.

Suppliers established outside the EU but identified for VAT purposes within the EU can now use the One stop Shop which was not the case before.

A decree from November 28th, 2018 has already anticipated this measure: a company not established in the EU does not have to justify not having an EU VAT number.

The scope of the VAT exemption on personal assistance services is reduced (article 71)

This measure comes into force on January 1st, 2019.

Only services provided to fragile or dependent persons will be eligible for the exemption.

Previously, the beneficiary’ situation was not taken into account when the operations were carried out by approved or authorized associations whose management was disinterested.

The specific waste management services 5.5% VAT rate is extended starting in 2021 (article 190)

The specific HIV self-testing 5.5% VAT rate is maintained (article 75)

The penalty for solidarity estate organizations (“foncier solidaire”) not complying with the reduced rate conditions is adjusted (article 76)