The French government voted to increase taxation in order to increase national income in 2012. The reforms, first introduced in the 2013 Finance Bill, go even further in the new 2014 Finance Bill.
Despite an important increase regarding individual taxation, the French government negotiated a responsibility agreement (pacte de responsabilité) with companies’ directors to reduce social contributions for employers.
French tax lawyers can help find ways to reduce tax burden. This article outlines some of the methods available to French companies in order to prepare and correctly respond to tax increase.
- French tax lawyers can determine whether you are entitled to tax allowances on French investment income:
We remind that investment incomes, such as capital gains on the disposal of shares, are normally subject to:
– French progressive tax rates of up to 45%.
– French social contributions at 15.5%.
2014 French progressive rates are:
- Up to EUR6,011: the rate is 0%.
- From EUR6,011 to EUR11,991: the rate is 5.5%.
- From EUR11,991 to EUR26,631: the rate is 14%.
- From EUR26,631 to EUR71,397: the rate is 30%.
- From EUR71,397 to EUR151,200: the rate is 41%.
Above EUR151,200: the rate is 45%.
However, the 2014 French tax bill has introduced tax allowances:
- 50% tax allowance for holding periods of two years to eight years.
- 65% tax allowance for holding of eight years or longer.
Two specific tax allowances have replaced those of the previous regime. The first is a higher tax allowance of:
- 50% for holding periods of between one year to less than four years.
- 65% for holding periods of four years to eight years.
- 85% for holding periods of eight years or more.
This applies to capital gains on sales of:
shares of SMEs that are:
- subject to corporation income tax;
- less than ten years old at the time of acquisition of the securities by the seller;
- located in a European Economic Area (EEA) member state;
- and have commercial, industrial, professional, artisan or agricultural activities (management of fixed or movable assets are excluded).
Shares of SME owners who are retiring.
Shares sold to family members (the seller’s spouse, brothers and sisters, and their ascendants and descendants), if the following conditions are fulfilled:
- the seller alone or with the family members have held, for more than five years, at least 25% of an EEA company that is subject to corporation income tax;
- the sale is made to a family member (as defined above) during the lifetime of the company;
- and the buyer does not resell the shares to a third party within five years from the acquisition of the shares.
The second new tax allowance applies to retiring SME owners to whom the higher tax allowance is applicable. They also receive a fixed tax allowance of EUR500,000.
The new regime under the 2014 Finance Bill applies retroactively from January 1st, 2013 (except for the higher tax allowance for family share transfers, for retiring SME owners and the new fixed allowance for retiring SME owners, which applies from January 1st 2014).
Capital gains on sale of shares in French-resident companies by non-residents are not subject to progressive taxation. They are subject to a 45% withholding tax since 2013 (previously 19%) if they have a substantial participation (above 25% in capital), subject to tax treaty. However, a long-term holding allowance may apply: again, consult your French tax lawyer to confirm the allowance you may be entitled to.
- French tax lawyers can also advise other methods to reduce tax liability:
This note outlines how businesses have sought to avoid tax liability through business reorganizations and holding company structures.
In recent years French companies and French subsidiaries of foreign companies have, for business reasons (for example, due to the economic crisis, new markets, competition and so on) moved their headquarters, functions, teams or their executives overseas. Some of these reorganizations are still ongoing.
In this context, split-pay contracts (where an employee’s salary is paid by two or more employers and the employee is based between two or more jurisdictions) enables the employer to transfer the employee’s residence and can help contribute to the business’s needs while reducing the employee’s tax and social security contributions burden.
Any reorganization must be for genuine business reasons (rather than being mainly tax driven) or be supported by economics, and duly documented. However, the French tax authorities will carefully examine split-pay contracts and the effectiveness of any change of residence based on family ties, location of assets and income, and the presence test (that is, where the executive is effectively present). Therefore, any reorganization must be carefully structured and documented to be effectively implemented. Again, the involvement of a French tax lawyer is crucial.
Companies may simply terminate the French contracts and enter into new contracts with their employees overseas. However, as French companies are currently finding it difficult to hire foreign executives, new employees may be hired to work for a foreign subsidiary instead of being hired under a French contract. In this situation, it must be borne in mind that activities will be taxable in the jurisdiction in which the duties are exercised (unless a specific treaty provides otherwise).
Investment income may also be received through exempt holding companies which, by limiting its dividend distribution, means it has effective control of the received (and therefore taxable) income. However, the structuring must be examined and the jurisdiction of the holding company carefully chosen by your French tax lawyer to limit the risks of double taxation of income at the level of the holding company and then on distribution of dividends to the shareholder. If the use of this vehicle defers or reduces the tax treatment of the income, the vehicle is not an efficient method for wealth tax planning purposes to reduce the reference income on which the 45% rate is assessed.
If any of these methods are deemed to be exclusively tax driven (among other things), they can be challenged as an abuse of law. Therefore, these steps must be carefully planned by your French tax lawyer to limit the risk of challenge.
Transfers of residence (which are reportedly increasing) may limit exposure to income tax, wealth tax and inheritance/gift tax particularly in relation to non-French source income or French movable assets. However, this implies a change of lifestyle and a certain discipline in order to support the reality of the transfer. The family and personal aspect must not be forgotten, tax being only a tool not a goal.
Sources: Thomson Reuters