The 2019 Finance Act introduced a general anti-abuse corporate tax rule that allows the tax administration to disregard an arrangement or series of arrangements which:
i. Having been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law; and
ii. Are not genuine with respect to all relevant facts and circumstances.
This new general anti-abuse rule, a consequence of the transposition of Article 6 of the ATAD Directive (Council Directive 2016/1164/EU of July 12, 2016), replaced and supplemented the anti-abuse rule that applied previously, specifically to the parent company regime.
In its position published on July 3, 2019, the tax authorities provided a number of clarifications as to the interpretation of this general anti-abuse rule (BOI-IS-BASE-70).
1. Clarification of the arrangements covered by this rule
a. An objective which is primarily tax-oriented, contrary to the object or purpose of the applicable tax law
The analysis of the objective, which is mainly tax-oriented, “is based on a factual assessment, which takes into account, in particular, the assessment of the tax advantage that would be obtained (…) in proportion to all the gains or advantages of any kind obtained by the means of the arrangement in question.”
However, it is unfortunate that the administration does not specify the methods for assessing and comparing such benefits, particularly in the case of benefits that are difficult to quantify by nature, such as those based on, for example, an organizational or personal asset objective.
The notion “object or purpose of the applicable tax law” refers to the objective pursued by the legislator through the enactment of the rules in question.
Since the texts do not specify such objectives, the analysis should take into consideration the discussions held when such rules were put in place.
b. Notion of a “non-genuine” arrangement
An arrangement is considered as non-genuine to the extent that it is not put in place for valid commercial reasons which reflect the economic reality.
Moreover, if these economic reasons are marginal in relation to the tax advantage obtained, the economic reason could be considered invalid.
Finally, the administration has taken a position on arrangements involving asset holding structures, specifying that economic reasons should be considered valid if these companies have “financial activities” or if they meet an “organizational objective” (BOI-IS-BASE-70, n°40).
2. Correlations with other anti-abusive measures
a. Tax law abuse
The general anti-abuse rule is a corporate tax base rule, distinct from the tax law abuse procedure of Article L. 64 of the LPF, which allows the administration to exclude fictitious or exclusively tax-related acts and which provides specific guarantees and sanctions applicable in the event of abusive arrangements.
In practice, these two systems coexist and the administration will be able to choose between one or the other, subject to complying with the terms of their application.
b. “Mini” tax law abuse
The “mini” tax law abuse procedure concerns all taxes, with the exception of corporate income tax.
The “mini” tax law abuse procedure will apply to adjustments notified as from 1 January 2021, relating to prior acts or acts carried out as from 1 January 2020.
c. Anti-abuse rule for mergers, spin-offs or partial asset transfers
The general anti-abuse rule does not apply if the disputed transaction concerns a merger, spin-off or partial contribution of assets and is intended to unreasonably benefit from one of the special regimes mentioned in I of Article 210-0 A of the CGI.
In this case, the administration could challenge the transaction solely on the basis of Article 210-0 A, III of the CGI specifically targeting this type of transaction.
3. Effective date of the anti-abuse rule
These rules are applicable to financial years beginning on or after 1 January 2019 but, according to the tax authorities, the date on which the arrangement was put in place has no bearing on whether the general anti-abuse clause is applicable.
Since January 1, 2016, individuals whose employment income falls within certain brackets are required to pay the “universal healthcare contribution”, also known as the “PUMA tax”.
Prior to January 2019, those required to pay this tax included individuals:
– Whose employment income was less than 10% of the annual French social security cap (or “PASS”) (i.e., €3,973 in 2018, the amount of the PASS in 2018 being €39,372), and
– Who did not receive any replacement income, and
– Whose capital earnings were greater than 25% of the PASS (i.e., €9,843 in 2018).
The PUMA tax was based on capital earnings, and in some cases increased with respect to livelihood and standard of living factors. The tax rate was set at 8%.
The Tax was amended by the 2019 French Social Security Financing Act.
Since January 1, 2019, individuals required to pay the PUMA tax include those whose employment income is less than 20% of the PASS (i.e. €8,104.80 in 2019, the amount of the annual PASS 2019 being €40,524). As such, the threshold for tax liability has doubled.
The PUMA tax base, however, has been reduced by a rebate equal to 50% of the PASS (€20,262 in 2019) and will now be capped at eight times the PASS (€324,192 in 2019).
The new PUMA tax rate has been set at 6.5%.
A linear reduction mechanism for this rate has also been put in place. The rate decreases in proportion to earned income and becomes zero when the liability threshold is reached.
To date, although the number of taxpayers subject to the PUMA tax has increased, both the base and the tax rate of this contribution have been reduced.
After examining a taxpayer’s personal tax situation, the tax administration considered that the transfer of securities at a derisory price, made between members of the same family, constituted a disguised gift.
For that purpose, the Court implemented proceedings for abuse of process in order for the transfers disguised as gifts to be reclassified and to apply the transfer tax on gifts and the corresponding penalties.
For the Committee on tax law abuse, called on for the case, the operation revealed, contrary to what the tax administration claimed, an indirect gift and not a disguised gift.
In a March 18, 2019 decision, the Paris Court of Appeal ended up following the reasoning of the tax administration by qualifying the operation at issue as a disguised gift.
First of all, the Court indicated that “a disguised gift is one that is done under the guise of a contract in return for payment. Although from a legal point of view, the operation is legitimate, the administration has the right to establish the genuine nature of the deed. Among the circumstances making it possible to characterize a disguised gift is the stipulation of a derisory price.”
The Court then considered that “evaluating the securities at a symbolic value, unrelated to the real value of the property, which actually corresponds to a sale at an unusually low price, establishes the gratuitous nature of the agreements and the absence of any counterpart to the deed.”
Although, in this instance, it was an exaggerated case of abuse of process, given the fictional nature of the deed, this legal precedent and the creation of a “mini abuse of tax law” by the most recent Finance law remind taxpayers of the special attention paid by the tax administration to operations of asset restructuring, as well as the necessity for those taxpayers to seek tax advice prior to any restructuring, allowing them to structure their operations as best as possible.
In principle, partnerships such as general partnerships (société en nom collectif), limited partnerships (société en commandite simple), civil partnerships or limited liability companies whose single member is an individual (EURL) are not subject to Corporate Income Tax (CIT).
Nevertheless, the abovementioned companies may opt for payment of the CIT.
To be valid, the option must be filed with the tax authorities no later than the end of the 3rd month of the financial year for which the company wishes to be subject to the CIT for the 1st time.
Such option, once exercised, was, until now, irrevocable.
For the company financial years ending as of December 31, 2018, the 2019 Finance Law creates an exception to this principle of irrevocability.
From now on, companies having opted for CIT liability will have the right to revoke that liability at the latest in the 5th financial year following the year during which the option was exercised.
To be deemed valid, the revocation must be filed with the tax authorities before the end of the month preceding the payment deadline for the first instalment of the corporate tax for the fifth financial year.
If no revocation is filed within that time period, the option for the CIT shall then become irrevocable.
The aim sought by lawmakers is to allow companies, which realize in retrospect that the regime is not the one best suited to their needs, not to be penalized by giving them the right to reconsider their decision.
In terms of taxes, revoking the option for CIT is considered as a cessation of business, which, in principle, leads to the immediate taxation of operating profits and tax-deferred profits made and not taxed, as well as any provisions or capital gains for which taxation had been deferred.
However, in the absence of a new legal entity being created, the consequences of the cessation of business are expected to be attenuated, if no change has been made to the book values of the assets and if taxation remains possible within the framework of the new tax regime to which the company is subject.
Make sure to ask us for advice before making such a decision.
Warm congratulations to the team: Phillippe A. Schmidt, Johanna Segalis and Jean Barrouillet!
Within the framework of the next finance and social security Bill , several reforms are bound to have an impact on taxes in France for non-residents.
Overview of the main measures foreseen:
Exemption of capital gains tax on sale of main residence after departure abroad
As of today, a tax resident in France who sells his main residence is not taxed on the capital gain made on that sale.
However, a non-resident who sells the property that was his main residence before his departure abroad is not exempt from that capital gains tax but can only benefit, under certain conditions, from a one-time tax allowance of €150,000.
The draft Finance Bill for 2019 (PLF 2019) foresees an alignment between the tax systems applicable to residents and non-residents regarding capital gains made on their main residence.
Consequently, a non-resident who sells the property that was his main residence in France at the time of his departure abroad would not be taxed on the capital gains made, subject to the dual condition that:
– The sale was concluded at the latest on December 31st of the year following the year of the tax residence transfer (to another country); and
– The property was not placed at the disposal of a third party, whether for a fee or free of charge, between the transfer of residence and the sale.
Possible exemption of social levies on capital income
Currently, in France, non-residents are subject to social levies (including, in particular, CSG, CRDS and solidarity levy), at the rate of 17.2% on their French-earned income from property and capital gains on real estate.
The draft finance bill on social security for 2019 provides that the people affiliated with a mandatory social security system in another member state of the European Economic Area (EEA) or Switzerland will not be subject to CSG and CRDS in France on capital income but the solidarity levy, whose rate would be increased to 7.5 %, would remain due.
Nevertheless, that exemption would not concern people having established residence outside of the EEA or Switzerland, and who would therefore remain subject to social charges in France on capital income.
Various changes in tax modalities of France-sourced income
The PLF 2019 provides for various measures aimed at bringing the tax system on non-resident income closer in line with the system applied to tax residents in France.
First of all, French-earned salaries, pensions and life annuity rents paid to non-residents are currently subject to a specific deduction at source, partially discharging tax on income, as specified in Article 182A of the French Tax Code (CGI).
As from January 1, 2020, that deduction at source would be eliminated and replaced by a flat, non-discharging deduction at source calculated by applying the tax rate by default used for the withholding tax on resident income.
In addition, starting with taxes on income earned in 2018, the minimum tax rate applicable to France-sourced income of non-residents will rise:
– From 20% to 30% in Metropolitan France; and
– From 14.4% to 25% for income whose source is in the French Overseas Departments (DOM).
Of course, taxpayers can still request the application of the average tax rate to their France-sourced income, resulting from the application of the progressive tax brackets to the whole of their foreign- and France-sourced income, if it is lower than the minimum rate mentioned above.
Lastly, the PLF 2019 provides that, starting with taxes on 2018 income, non-residents can deduct the alimony paid out, on condition that it is taxed in France and that it has not already entitled the taxpayer to a tax break in his Country of residence.
To be continued when voted on in late December…
For the past several months, French legislators (deputies) have sought to implement a tax break on transfers by gift or inheritance.
To this end, last May, legislators introduced a bill mainly aimed at increasing the tax allowance beyond which an inheritance or a gift is taxed, raising it from €100,000 to €159,325.
Those legislators also proposed to apply tax allowances every 10 years instead of every 15 years as is currently the case in effect.
Although the bill has not been voted on, it now seems to have little chance of being passed.
In answering two ministerial questions raised, the French Government expressed its intention of not changing those tax rules.
As per the increase of the current €100,000-allowance, the Ministry of Economy and Finance considers that the amount is “very close to the median net assets of all households, which, according to the INSEE, reached €113,900 per household in early 2015” and “that, on its own, it results in a very large majority of transfers being tax exempt“.
As for the time period related to past gifts, the Ministry considers that the current time period is adequate, and as a reminder points out that “contrary to the sentiment expressed by (public) opinion, over three-fourths of inheritances are exempt from the payment of gift or inheritance tax.”
It is therefore in the best interest of taxpayers with a substantial estate to plan the transfer of their assets to their descendants in advance.
In a ruling dated 13th June 2018 (CE plén. 13-6-2018 n° 395495), the Council of State has finally clarified the notion of an “active holding company,” which it defines as a company: “whose principal activity, in addition to managing a portfolio of investments, is to play an active role in the management of the group’s policy and the running of its subsidiaries and, where relevant and on a strictly internal basis, the provision of specific administrative, legal, accounting, financial and property services.”
Before the 13th June ruling, only the Cour of Cassation have issued a definition of active holding companies. The Council of State’s definition builds on the definition issued by the Cour of Cassation, adding that management must be the company’s “principal” activity.
As such, companies with non-controlling minority shares in businesses may qualify for “active holding company” status.
Furthermore, the Council of State mentions a certain number of factual elements to be used to prove “active holding” status, notably including:
– Minutes from meetings of the company’s board of directors attesting their involvement in the management of their subsidiaries’ policies; or else
– The existence of a contract for administrative and strategy and development support, specifying that the holding company will play an active role in the strategy and development of its subsidiaries, without compromising their respective autonomy as legal entities.
In the terms of article 219, I-a quinquies of the French Tax Code (CGI), the quasi-exemption regime for long-term capital gains is applicable to shares held for at least two years, which:
– Have, in accounting terms, the nature of equity securities, whether they are entitled, or not, to the parent companies’ tax regime; and
– Are entitled to the regime of the parent companies and subsidiaries (CGI, article 145) without having, on the accounting level, the nature of equity securities subject to the shares being recorded in a special subdivision of a balance sheet and subject to representing at least 5% of the distributing company’s capital.
In accounting terms, equity securities are those whose lasting ownership is considered useful to the activities of the company, notably because they enable the company to exercise control or influence over the company issuing the shares.
In principle, the usefulness of lasting ownership of transferred shares can be characterized by the existence of a shareholders’ agreement.
In the case judged by the Council of State, it was considered, quite to the contrary, that such was plainly not the case as the agreement established that the shareholders were solely pursuing the objective of financial returns. In this instance, neither the intent to exercise influence over the issuing company nor the intent to ensure its control was therefore characterized by this agreement.
Moreover, regarding the condition of holding at least 5%, the Council of State specified that the percentage had to be assessed based on the date of the event having generated the tax, i.e. regarding capital gain on transfer, on the date of that transfer, and not in a continuous manner over a 2-year period.