On 24 August 2011, François Fillon, Prime Minister of France, announced a series of austerity measures aiming at reducing the French budget deficit by levying €12 billion of additional tax revenues. These measures were adopted on an emergency basis by the French Parliament on 8 September in the context of a second modified Finance Law for 2011 which was published on 19 September. They are therefore now in force.
In addition to a series of measures concerning individuals, details of which are not provided in this summary (but which include changes to the rules on taxation of capital gains on real estate and an increase in social contribution levies), two measures should be given particular attention given their immediate impact in terms of cash flows and valuation of investments: the modification of the rules relating to loss carry forwards and the changes to the participation exemption regime (capital gains on transfer of substantial shareholdings).
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Austerity measures: provisions concerning businesses
Use of tax loss carry-forwards and carry-back
Prior to the passage of the measures, losses of French companies carried forward for tax purposes could be offset without limitation against profits of a given year. As from 2011, the amount of tax loss carry-forwards available for setoff in any given year will be capped at €1 million plus 60 per cent of the portion of the taxable profits of each fiscal year exceeding €1 million (instead of a complete wipe-out of taxable profits).
For example, a company with €7 million of losses available for tax carry-forward which realises a profit of €5 million in year N, will only be able to use €3.4 million of tax carry-forward for setoff (1 million + 60 per cent of 4 million) against its profits in year N, leaving €1.6 million of year N profits to be taxed. The remaining portion of the tax losses will remain available to be further carried forward in subsequent years (but in each such year subject to the same cap).
This measure is particularly troublesome for businesses which have benefited from certain « incentive » regimes such as accelerated or declining balance depreciation, where they have had the effect of creating losses carried forward. Moreover, there is no specific position for the tax consolidated groups, which is particularly unfair.
In the short term, businesses should therefore focus on any tax planning permitting the ‘”rejuvenation” of tax loss carry-forwarded and an optimised spread of deductible tax charges.
This measure, inspired by German tax law, has the effect in practice of introducing a minimum tax on businesses. If this rapprochement with German tax law were to continue, it should be borne in mind that while German tax law also provides for an unlimited carry-forward loss period, it also mandates a cancellation of tax losses in the event of transfer of 50 per cent or more of the share capital of a company, which does not exist under French tax law, which mandates such cancellation only in the case of companies which undergo a significant change in business activity or in the case of dissolution.
The new measures also reduce the period in which tax losses can be carried back for tax purposes from three years to a single year: thus, losses incurred in year N may only be carried back to and set off against taxable profits in year N-1.
These measures are applicable to all fiscal years closed as from the entry into force of the law.
Participation exemption regime
Capital gains arising from the transfer of participating shares (i.e. shares which qualify as “participating shares” from an accounting viewpoint, or shares acquired in the context of a tender offer or exchange offer made by the acquirer of the shares, or shares benefiting from the parent-subsidiary regime provided there are entered into a specific line in the company’s balance sheet), which have been held for over two years at the time of transfer, are exempt from taxation, except for a fraction of such capital gain known as quote-part de frais et charges which is reincorporated to the tax result and taxed accordingly. This fraction, which was previously 5 per cent, has now been increased to 10 per cent.
The tax rate applicable to capital gains is in practice therefore increased from 1.72 per cent to 3.44 per cent on the basis of a corporation tax rate of 34.43 per cent (i.e. including the 3.3 per cent surtax). This measure does not apply to dividends exempt under the parent-subsidiary exemption (régime mère-filles), in respect of which the taxable fraction of the dividend remains fixed at 5 per cent of the dividend (including any tax credits in respect thereof).
This measure applies to all fiscal years open as from 1rst January 2011.
Abolition of the worldwide consolidation of profits.
This regime, which had been heavily criticised and was used only by a few large French groups, has been abolished (not to be confused with tax consolidation).
Allowance for enterprises operating overseas
The allowance of one third of taxable profits for businesses operated in the French Overseas Departments has been cancelled. However, the “Loi Girardin” regime of tax incentives for companies investing in such departments has not been modified.
The reform of the French Contribution Sociale de Solidarité des Sociétés (known as « CSSS » or « Organic ») for banks, financial institutions and insurance companies that was announced will be adopted in the context of the social security bill for 2012.
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