By Patrick Donsimoni, Partner, La Boetie, Geneva
The 2022 French finance law, Law No. 2021-1900, published in the French Official Gazette on December 31, 2021, includes tax measures that may be of interest to multinational groups with entities that have interest ownership in France.
Corporate income tax
In 2022, the last stage of the reform initiated in 2018 on corporation tax takes effect. Also, in 2022, the regular corporate income tax rate will be lowered to 25% for all companies. One should note that SMEs with a turnover of a maximum of €10 million may benefit from a reduced rate of 15% (up to €38,120 of taxable profit).
In regard to carryback of deficits, the taxpayer has the possible option of offsetting the deficit recorded for a given financial year (n) against the taxable profit made during the previous financial year (n-1). This leads to a favorable tax claim for the taxpayer: equal to the difference between the tax the company already paid in the previous financial year and the recalculated amount after the offset.
The offset may not pertain to the total taxable amount, as the imputation base must only include profits that gave rise to an effective payment of corporate tax. Thus, profits subject to a reduced rate of taxation (e.g., long-term capital gains or intellectual property royalties) and profits exempted under specific tax regimes should not be taken into account. Article 15 of the 2022 finance law now also excludes profits having given rise to a tax paid using tax reductions deriving from the carryback of losses.
A temporary amortization regime for going concern, acquired between January 1, 2022, and December 31, 2025, was introduced in Article 23. It allows the tax deduction of the depreciation recorded for accounting purposes. As for acquisitions made outside of this time period, amortization of going concern is never tax-deductible.
Before, if a company subject to the simplified corporate tax regime for small enterprises wished to elect for the common tax regime, the company had to submit an application before February 1 of a given year for an application for that same year. From January 1, 2022, it will be possible to opt for a common regime until the deadline for filing the general income tax return. In practice, this will be May or June of the following year, according to Article 7.
Regarding collaborative research, a tax credit is created for expenses invoiced to companies by public-research and knowledge dissemination organizations under a collaboration contract concluded between January 1, 2022, and December 31, 2025. It is equal to 40% (or 50% for SMEs in the EU sense) of expenses invoiced, retained within the limit of € 6 million, according to Article. 69.
Article 19 of the 2022 finance law doubles the amount of the tax credit granted in respect to the expenditures incurred for the ongoing professional training of managers of small enterprises, i.e. those businesses whose salaried workforce is less than 10 and whose turnover or balance sheet total is less than € 2 million.
Capital gains tax
The exemption of capital gains tax deriving from the sale of a going concern in case of retirement is extended to the sale of an activity put under lease-management to a person other than the lessee, according to Article 19.
There also is a noteworthy change in regard to the transfer of sole proprietorship. Currently, when an entrepreneur sells his business and realizes a capital gain, he can benefit from a tax exemption if the value of the going concern is less than €300,000. Between €300,000 and €500,000, the exemption is partial. Article 19 modifies these two ceilings and brings them respectively to €500,000 and €1,000,000.
Value added tax (VAT)
Currently, two rules exist regarding VAT liability in the event of receipt of installment payments. They depend on the legal nature of the sale. If it is a tangible good, no tax must be paid. Payment occurs when the transfer of ownership occurs (i.e., in most cases, when the invoice is issued). For the supply of services, VAT must be calculated and paid immediately. As of January 1, 2023, VAT will become payable (and correlatively deductible) upon receipt of installment payments prior to the delivery of goods, according to Article 30.
In cases of exchange of goods within the EU, one used to file (for statistical purposes, not for taxation) a monthly Intrastat return (called DEB in France) containing information about the intra-EU operations performed. From January 2022, substantial changes were made to this declaration since the information to be collected must now be divided between a statistical survey and a summary tax declaration.
The French finance law also made a significant change regarding import VAT management. A foreign company (i.e., not established in France) importing goods into Europe from a third country (e.g., USA, China, UK) must pay VAT when clearing the goods through customs. Import VAT may then be reclaimed under specific VAT refund procedures. Thus, there may be a delay between the time the VAT is paid and the time it is actually refunded.
To avoid such pre-financing of VAT, many EU member states have introduced a reverse charge mechanism of import VAT. France notably changed its rules on January 1, 2022. Through this reverse-charge mechanism, the import VAT must now be declared together with its claim for a refund. The pre-financing of the tax is thus eliminated. The new regime is now mandatory and automatic for all taxpayers identified for VAT in France, and all foreign businesses. Companies that do not have a French intra-EU VAT number but wish to carry out import operations in France must first request from the French tax authorities the allocation of a French intra-EU VAT number.
Young innovative companies
The support regime for young innovative companies, created in 2004, consists of exemptions from income tax, business property tax, and property tax on built properties, as well as exemptions from employers’ social security contributions. Article 10 of the finance law for 2022 extends the duration of the status of Young Innovative Company by three years, which therefore increases from seven years to 10 years.
Tax audits and litigation
Article 14 of the 2022 finance law clarifies a point of application of the tax regime for strengthening the fight against so-called hybrid tax systems. This provision was adopted within the framework of Article 45 of the 2020 finance law (which was introducing into France the provisions of the anti-tax avoidance EU Directives ATAD 1 and ATAD 2). This tax regime deals with situations resulting from differences in the legal characterization between States of financial instruments or entities that are parties to transactions leading to situations of base erosion and profit shifting.
Since the 2020 finance law, provision has been made for corrective measures aimed at neutralizing the effects of tax asymmetry observed in the context of payments made under financial instruments or in the context of schemes giving rise to a double deduction. This is the case in transactions that give rise to a deductible charge in the State of the paying party, without the corresponding income constituting taxable income in the State of the beneficiary.
French law states that the taking into consideration of the payment in the beneficiary’s taxable income must take place in a financial year that begins within 24 months following the end of the year in which the charge was initially deducted in the paying party’s State. This delay may be necessary given the differences in legal systems between the state of the paying party and the state of the beneficiary.
Thus, for example, when a payment made under a financial instrument cannot be included in the taxable income of the beneficiary established outside France at the end of the aforementioned 24-months period, the tax deduction made in France must be reintegrated into the result subject to corporate income tax of the French paying entity. This must be carried out by the paying party at the end of the last financial year beginning within 24 months following the end of the financial year in which the charge was initially deducted.
French tax law makes taxable the income earned through entities (whether corporations, partnerships, or trusts) established in states or territories located outside France and subject to a privileged tax regime, if said entity is part of an artificial arrangement, or exist for tax purposes only.
This regime encompasses all individuals domiciled in France for tax purposes who hold— directly or indirectly—a stake or financial rights of at least 10% in such an entity established outside France, benefiting from a privileged tax regime and whose assets consist mainly of financial and monetary assets.
Article 133 of the 2022 finance law now states that this 10% threshold is deemed to be met for trusts stipulated as discretionary and irrevocable, as it is difficult for the French tax authorities to ascertain such level of ownership by themselves. The taxpayer retains the right to provide evidence to the contrary, but such proof to the contrary cannot result solely from the irrevocable nature of the trust and the discretionary management power of its administrator.
The 2022 finance law also makes changes regarding administrative cooperation for tax purposes. Article 134 includes provisions allowing the French tax authorities to better detect income received through digital platforms established inside and outside the EU and to determine their appropriate tax treatment. Such provisions will apply from January 1, 2023.
Digital platforms will also be required to inform their users of their tax and social obligations and to declare to the tax authorities the operation of personal services, transportation, or real estate rentals, as well as the sale of goods. This requirement includes rentals of real estate properties located in the EU made by individuals or legal entities residing in the EU (including France). The French tax administration will exchange this information with its partner EU member states when appropriate.
French financial institutions must (within the framework of FATCA-type agreements) provide French tax authorities with the data collected on taxpayers’ income and financial assets that they need to disclose to other EU member states with which they have an automatic exchange of information obligation.
They also must inform the individuals involved that the data transmitted to the French tax authorities may also be communicated to the tax authorities of the appropriate EU member States.
Article 134 of the 2022 Finance law lays down the rules which allow one or more EU member states to take part in joint tax audits or investigations.
These rules state that the joint audits must be carried out in accordance with the procedures applicable in the EU member states, where the joint audits are carried out, and that the evidence collected must be mutually recognized by the participating member states.
Correlatively, Article 134 implements the mechanisms of Directive 2011/16/EU with regard to the presence of tax administration officials in the territory of another EU member state in which joint audits take place.
The right of communication available to the French tax authorities with telephone and Internet operators makes it possible to obtain the communication of some connection data (such as detailed invoices) likely to detect or prove fraud, particularly in an international context.
Based on the recent evolution of the case law relating to the right of respect for private life, Article 145 of the 2022 finance law limits the scope of the requests for a communication of information to the most serious offenses leading to the initiation of criminal proceedings for the offense of tax evasion.
French enterprises have the obligation to issue invoices to their professional clients. French law sanctions non-compliance with this obligation by a fine equal to 50% of the amount of the transaction for failure to issue an invoice. The fine is reduced to 5% when the supplier provides, within 30 days of a formal notice, proof that the transaction was duly accounted for.
Article 142 of the 2022 finance law states that going forward, a company’s failure to issue an invoice to its professional clients—and failure to record the transaction in the company’s accounting books—will be sanctioned as follows: The (professional) client will be jointly and severally liable for the payment of the fine, which cannot exceed €375,000 per financial year; and when the transaction has been accounted for, the fine will be reduced to 5% and cannot exceed €37,500 per fiscal year.
French overseas territories
Companies subject to corporation tax may benefit from a tax reduction on the basis of new productive investments they make in some French overseas territories.
In regard to VAT exemption, the provisions under which enterprises whose turnover does not exceed €100,000 the previous year or €110,000, when the turnover for year n-2 did not exceed €100,000 may invoice their client without VAT, is extended to January 1, 2023 (Art. 33). Regarding the provision of services, the turnover of the supplier must be €50,000 the previous year or €60,000, when the turnover in n-2 was less than €50,000.
Miscellaneous taxes
Nonresident companies established in the EU or the EEA receiving income from a French source may benefit from a lump sum reduction in charges, according to Article 24.
As a result, eligible nonresident companies that were subject to withholding taxes on some income (e.g. dividends or services) may file a tax refund, up to the amount of the difference between this tax and the tax determined from a basis net of acquisition and custody costs directly attached to these products and sums.
Article 135 of the 2022 French finance law terminates several favorable tax regimes of limited scope or which have become obsolete: This includes, inter alia, the exemption from some withholding tax on the proceeds of loans contracted outside France (see Article 131 of the French tax code).
In regard to tax on real estate, foreign companies owning a building in France must pay a 3% annual tax calculated on the market value of the property. Article 138 of the 2022 Finance law establishes a new obligation to remotely pay this 3% tax.
Other measures
France is generalizing electronic invoicing in transactions between VAT-payers, according to Article 93. The implementation of these measures initially planned for 2023 to 2025, is delayed to the years 2024 to 2026, according to the following schedule: From July 1, 2024, for large companies, from January 1, 2025, for medium-sized companies, and from January 1, 2026, for small- and medium-sized enterprises.
The use of electronic invoicing will be mandatory for transactions between enterprises subject to VAT that are established in France. Transactions with companies not established in France and those carried out by a taxable person with nontaxable persons will only be subject to an obligation to transmit transaction and payment data (known as e-reporting) to the tax authorities.
French law authorizes the tax authorities to compensate individuals who provide it with information leading to the discovery of a breach of certain tax reporting rules and related obligations when the estimated amount of duties evaded is greater than €100,000. Article 144 of the 2022 finance law extends this scheme for two additional years.
From January 1, 2022, the price of a legal announcement of incorporation, dissolution, and closing of liquidation will be reduced to a fixed price. The tariff will depend on the legal form of the entity involved.
To cope with the economic shock linked to the coronavirus crisis, the French government has implemented a system of guarantees to support the bank financing of businesses. Due to end on December 31, 2021, the loan guaranteed mechanism has been extended until June 30, 2022. Other government aid also remains relevant.
The operations of creation, registration, modification, termination, declaration, payment, etc., which companies currently carry out on a multitude of Internet sites, will now be centralized on the three following sites to be launched in 2022: – formalites.entreprises.gouv.fr, entrepreneur.service-public.fr and portalpro.gouv.fr.
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