1. Corporate income tax rate reduction

The French standard corporate income tax rate will be gradually reduced to 25% in 2022, over a four-year period (2018-2021). This is the continuation, with an acceleration, of the reduction scheduled by the 2017 Finance Law.

In any case, the reduced 15% rate remains applicable to the first € 38,120 of taxable income of companies that individually have a turnover under M€ 7.63.

The rate reductions adopted under the 2017 Finance Law remain unchanged for tax periods opened as from January 1st, 2017 and 2018.

For tax periods opened as from Jan. 1^st, 2019, the standard rate will drop to 31%, but a 28% rate will apply on profits below € 500,000.

The 31% rate will be reduced to 28% in 2020 (applicable on the entire amount of taxable profits), 26.5% in 2021 and finally 25% in 2022.

The 3.3% social surcharge that applies in certain circumstances will continue to apply, bringing the 25% standard rate in 2022 to an effective rate of 25.8%.

Thus, the following schedule summarizes the new rates to be applied (except for companies having a turnover under M€ 7.63):

1. Including social surcharge

2. Changes to tax credit for competitiveness and employment (CICE)

The CICE (“Crédit d‘impôt Compétitivité Emploi”) is a tax credit assessed, in 2017 at a 7% rate, on the gross wages (i.e. before deduction of employees’ social security contributions) an entity pays to its employees over the calendar year and that do not exceed 2.5 times the national minimum wage (called “SMIC”, equal to approx.. K€ 18 per year).

When unused (because, for instance, not sufficient corporate income tax to offset against), the CICE generates a receivable against the French treasury that may be offset against the entity’s corporate income tax liability, or refunded after three years of carry-forward.

The 2018 Finance Law:

• reduces the CICE from 7% to 6% as from 1^st January 2018;
• suppresses it as from 1^st January 2019;
• replaces it as from 1^st January 2019 with a permanent decrease of 6 points of the employer’s social security contribution paid for disease (“assurance maladie”).

3. CVAE

CVAE is a local tax based on a company’s “added value”. Although the standard tax rate of this tax is 1.5%, the effective tax rate for companies which turnover ranges from K€ 500 to € 50 million is assessed according to a progressive scale that ranges from 0% to 1.5%.

For companies belonging to a French fiscal unity, the law provided until 2017 that the applicable tax rate had to be computed by reference to the total turnover of the members of the fiscal unity (understood as the algebraic sum of the turnovers of each member company respectively).

This rule was held invalid by the Conseil Constitutionnel (French Constitutional Supreme Court) in a decision of May 19, 2017, on the ground that it created an unjustified difference of treatment between companies member of a fiscal unity and companies taxed on a stand-alone basis but meeting the same criteria re. shareholding.

However, the 2018 Financial Law reinstates the rule, but in a way compliant with the Supreme Court decision.

Indeed, it now includes in the computation mentioned above the turnovers of all the French companies meeting the shareholding requirements (i.e. 95% direct or indirect holding test) for being included in the same tax consolidated group, even if no election is made for forming such a tax group.

This new rule starts applying to the CVAE 2018 paid in 2018 (2 installment) and settled definitely in May 2019.

For more details, please see the other article already published on our website and presenting this new rule.

4. Tax deductibility of withholding taxes paid abroad in accordance with tax treaty provisions

In cases where a tax treaty allocates taxing rights to both France and the relevant country treaty partner, double taxation is frequently eliminated by granting to the French beneficiary of the payment a tax credit equal to the amount of tax withheld abroad (another possibility being the taxation in only one of the 2 countries, as for real estate gains or revenues, for instance).

Based on a set of case law, until now, a French company receiving foreign source income, and that could not offset the foreign tax credit provided under the applicable double treaty in full (e.g. a tax loss making company, or taxation of revenues in France at a lower rate than the foreign withholding tax’s), could deduct the corresponding withholding tax levied in the source country for French tax purposes, provided that the double tax treaty does not expressly prevent from doing so.

To determine the taxable income of tax periods closed as from 31 December 2017, regardless the wording retained in a tax treaty, withholding taxes paid abroad are no longer tax deductible for CIT purposes in France, even if the company is unable to use the tax credit granted under the treaty, as the only existence of this double taxation treaty forbid the concerned French company from doing so (2017 Amended Finance Law), except in case of mistaken application of the double tax treaty provisions by the foreign country.

5. Abolition of the top payroll tax bracket

A payroll tax applies to corporations that are not subject to VAT, or where at least 90% of an entity’s annual turnover was exempt from VAT in the previous year; the payroll tax mainly affects banks and insurance companies. The tax is assessed on the gross salaries of employees (annual amount) at the following rates:

• 4.25% on salaries up to € 7,721
• 8.5% on the portion of the salary between € 7,721 and € 15,417
• 13.6% on the portion of the salary between € 15,417 and € 152,279
• 20% on gross salaries exceeding € 152,279

The payroll tax is deductible for corporate income tax purposes.

The top payroll tax bracket (i.e. the 20% rate) is abolished for salaries paid as from 1 January 2018. The marginal rate then will become 13.60% on salaries exceeding € 15,417.

6. Limitation to interest tax deductibility : the scope of “Carrez” rule is reduced

The Carrez rule is an anti-abuse rule that limits the tax deductibility of interest expenses relating to the acquisition by a French company of a controlling interest in another company. Under this rule, the deduction of related financing costs is disallowed for an eight-year period if the French acquiring company is unable to demonstrate that it (or a company member of the same group and established in France) effectively made the decisions relating to the participation and that it effectively exercises control over the acquired company.

The rule is modified to bring it in line with EU law (compatibility with the freedom of establishment principle). This anti-abuse rule will no longer be considered at the level of the French company but at the level of its shareholder(s) when established in the EU or the EEA.

Thus, the Carrez rule will continue to apply only when the effective controlling company will be established outside the EU/EEA.

7. Tax deductibility of costs relating to employees “leased”

Companies of a significant size (over 5,000 employees) which provide employees to smaller companies are no longer compelled to invoice to the later 100% of the employment costs born in connection with the employees concerned to avoid a risk of reassessment by the French authorities in the event of an audit.

Under specific conditions, said companies will be entitled to lease, for a maximum period of 2 years, employees to companies being “young” company (under 8 years old) or SMEs, and to invoice them only part of the related employment costs borne, without being challenged with respect to the tax deductibility of 100% of the employment costs they bear.  This tax deduction remains possible in the case of an employee leased in accordance the French Labor Code.

The fraction of the costs not rebilled remains then tax deductible, and the corresponding tax saving is considered as a public subsidy falling in the scope of the “de minimis” regulations (maximum advantage of € 200 000 over three years).

This measure aims at supporting the transmission of know-how and the improvement of skills from major industrial groups to SMEs (in most cases, their sub-contractor).    

8. Alignment of transfer pricing documentation requirement with BEPS

French regulations re. Transfer Pricing (TP) documentation have significantly been modified during the past years, due to BEPS program. French 2018 Finance Law transposes in the French law OECD / BEPS requirements re. the structuring of TP documentations for the French companies of a certain size or belonging to multinational groups of a certain size.

When an audit is initiated by the French tax authorities, beyond the yearly obligation to file an update of their TP documentation and practices, French companies must provide a TP documentation that justifies the transfer pricing policy implemented (local file, master file) when they fall within any of the following categories (Art. L 13 AA of the French Book of Tax Procedures):

• it has turnover or gross assets exceeding € 400 million;
• it holds 50% or more of the share capital or voting rights of subsidiaries that meet either threshold;
• it is 50% or more owned, directly or indirectly, by an entity meeting either threshold; or;
• it is part of a French consolidated tax group that includes one or more companies meeting either threshold;

Under the new regulations, for tax audits starting as from 1^st January 2018, French companies will have to provide the FTA with a TP documentation organized under the plan scheduled by action 13 of the OECD BEPS project (beyond the provision of a country file and of an entity file, the granularity and precision of the information requested is significantly increased). The conditions for the application of this measure will be determined by decree.

9. Cross-border mergers

Several changes are introduced in the rules relating to merger operations, to finalize the implementation of the EU merger directive in French regulations, concerning domestic and cross border operations.

Transfers by French companies of assets to foreign companies established abroad resulting from a spin off or a transfer of branch of activity

As from 1 January 2018, the pre-approval by the French tax authorities to benefit from the favorable tax regime (enabling to postpone the taxation of the capital gain resulting from this transfer, art. 210 A & B of the French tax code)) is no longer required in the case of transfer of a complete branch of activity, provided the transferred assets are recorded in the balance sheet of a French PE of the foreign company. The French transferring company will also have to complete a specific declaration at the time it files its tax return reporting the reasons for and the consequences of the transaction. A fine of € 10,000 will be imposed for failure to submit the declaration, but the applicability of the beneficial tax treatment will not be challenged in such a case.

Conditions to be met for partial transfer of assets

Previously, in the case of a contribution of assets characterizing a complete branch of activity, the contributing company had to undertake to keep the shares received in exchange for at least three years.

This requirement is abolished.

10. Withholding of personal income tax at source

This change is explained in the article relating to “individuals” but have an impact for the employers.

A key issue must be managed by employers as early as possible in the course of 2018, as resulting from the most recent changes introduced.

New regulations (2017 Amended Finance Law) provide indeed that, on a voluntary basis, French companies will have the possibility to test the new system as from September 2018, without any actual withholding, but with an information of employees on their pay-slips.

This “test” phase implies that employees of the companies concerned be placed in a situation complying with the full respect of their private life, meaning that, for those who will prefer electing for a withholding tax rate different from the “standard” rate that will be initially determined by the French tax authorities, they should have the possibility to do so, in due time (having in mind that 3 months are announced by the French tax authorities between the date of election and the date of effective change of the rate).

In practice, this means that employees of companies electing to enter into this “test” phase in September 2018 will have to be informed at the latest end of May 2018 by their employer of its choice to enter in to this “test” phase, to enable them electing, should they wish so, for a specific taxation rate.

11. Default interest rate

The default interest rate for both the French treasury (on unduly paid taxes) and taxpayers (for unpaid taxes) is reduced from 4.8% to 2.4% per year (i.e. 0.2% per month), the new rate applying to interest accruing as from 1 January 2018 until 31 December 2020. The default interest rate will be reviewed again in 2020.