France’s 2019 draft Finance Bill adds new rules for patent boxes, interest deductions, tax consolidation

By Terence Wilhelm, CARA Avocats, Lyon

The French government of the Macron era never hid its pro-business intentions and its appetite for deeply revisiting the French taxation in a way to make it more competitive and fairer.

It is no wonder, therefore, that tax practitioners, along with taxpayers, had been eager for the release of the 2019 draft Finance Bill.

The suspense is now over, as the French government issued the draft September 24 and it is now in the hands of the Parliament.  

Although there might still be some slight changes in the final version, to be adopted late December this year, the draft provides an exhaustive overview of the modifications to be expected in the French tax legislation.

In a nutshell: the draft Finance Bill may, to some extent, lack of ambition; however, to its credit, it clarifies some confusing or redundant tax features of the French regulatory environment and eliminates some small and burdensome taxes.

The below presents the key features, specifically addressing MNEs and cross-border operations that caught our eye.

French tax consolidation regime

Article 12 of the draft Finance Bill proposes to revisit the tax consolidation regime. Under the draft, taxpayers shall no longer neutralize the subsidies and write-offs granted between the members of a group when calculating the consolidated result.

The same will apply to the fixed portion of costs currently liable for 0% corporate income tax when shares are sold and a capital gain is correlatively derived. At the same time, the draft proposes to reduce the rate of this fixed portion of costs from 12% to 5% for all companies.

In addition, the tax treatment of intragroup distributions of dividends that are ineligible for the parent-subsidiary regime would be equal to the treatment applicable to intra-group dividends eligible for such regime. In other words, those dividends distributed among a consolidated group that normally would fall outside the ambit of the parent-subsidiary regime will, going forward, be neutralized at 99% of their amount.

At last, Article 12 also proposes to extend certain benefits of the group tax regime to situations involving distributions to or received from another EU affiliated company. At this stage, the text is, however, not crystal clear and further amendments are expected in this regard.

The deductibility of financial charges will be limited . . . again

As tax practitioners, we sometimes have the feeling that the French government is constantly focusing on specific topics.

This holds true for the deductibility of financial expenses, which obviously was a nemesis of the past government for quite a few years.

The deduction for such charges has been modified a couple times, ending up with French rules that are divergent with what the EU and OECD recommended.

Article 13 of the draft Finance Bill now implements the EU so-called “ATAD 1” directive in line with BEPS Action 4. As such, the bill suggests limiting the possibility to deduct net financial charges to 30% of the EBITDA, or euro 3 million, whichever is higher. But even if the 30% test exceeds the euro 3 million threshold, a safe harbor would apply, based on equity-to-asset ratio. The 30%/3 million threshold would however be reduced to a 10%/1 million is the company is considered to be thinly capitalized.

Excess interests will be however carried forward indefinitely.

There will be no grandfathering rules, and no exceptions for financial institutions. At last, the bill will abolish several existing interest limitation rules. This shall be applicable starting January 1^st, 2019.

The currently applicable thin-capitalization rules would be abolished. So would rules that limit the deductibility of financial charges in case of the acquisition of shares of a thinly capitalized company.

French patent box

Let’s be honest: France never was famous for its tax attractiveness. Its patent box regime, though quite modern when first enacted in the 1960’s, grew a bit rusty and rigid as compared to those adopted by our EU partners.

It turned out to be non-compliant with the latest OECD recommendations and, more specifically, with its conclusions under Action 8 of the BEPS action plan.

The latter advocated for the implementation of the so-called “nexus” approach, which correlates the benefit of the reduced tax rate applicable to profits derived from licensing, sublicensing, or selling patents and like assets to R&D expenses borne to create them. Surprisingly, such approach was absent from the French regime.

We, together with other tax practitioners and companies, strongly advocated for a thorough revision of the patent box regime. The current draft, unfortunately, suggests rather prudent changes and amendments.

First (and without much surprise), the draft bill proposes to adopt the nexus approach. Direct references to the OECD talks are made in the preparatory work of the bill. Going forward, the reduced rate will be directly correlated to the amount of R&D expenses borne by French taxpayers.

Luckily this regime will continue to coexist with the French R&D tax credit. In addition, the French government suggests expanding the scope of the regime to profits derived from the license or sale of IT software.

Up to now, these flows touching upon software fell out of the ambit of the French patent box regime (which, as its name suggests, was limited to patents and similar intangible property). Yet, patentable inventions would now be excluded from such regime.

One will regret that this regime was not modernized, notably by lowering the rate. The regime will quite certainly remain at 15%, whereas most EU countries have adopted IP tax regimes subject to 10% rates or lower.

Implementation of the EU anti-abuse clause

Article 48 of the draft bill transposes the general anti-abuse clause provided for in Article 6 of Council Directive (EU) 2016/1164 of 12 July 2016, laying down rules for combating tax evasion practices which have a direct impact on the functioning of the internal market (so-called “ATAD 1” for anti-tax avoidance directive).

The wording of this anti-abuse clause is similar to that provided for in the French tax code.

Elimination of double taxation

Article 54 transposes EU Directive 2017/1852 of 10 October 2017 on mechanisms for the settlement of tax disputes in the European Union.

 It aims to resolve situations of double taxation that may arise, for companies and individuals, from the application by Member States of existing tax treaties.

To this end, the proposal provides for the establishment of a settlement procedure and, where discussions between tax administrations prove to be unsuccessful, the setting up of an arbitration commission to arbitrate between Member States.

These provisions must be transposed by the Member States by 30 June 2019 at the latest.