The standard corporate income tax rate fixed at 33.33% will progressively be decreased to 28%.
In 2017, only the SMEs which have less than 250 employees, and less than EUR 50 million turnover or balance sheet of under EUR 43 million benefit from the 28% on their profit first EUR 75,000 of taxable income.
In 2018, the 28% rate will apply to all companies on their profit up to EUR 500,000. As from 2019, the 28% rate will apply to all companies that generate a turnover below EUR 1 billion. Lastly, in 2020, the 28% rate will apply to all companies irrespective of their turnover, size or profits.
This measure aims at decreasing the French corporate income tax rate at a level comparable to the rate applicable in comparable countries such as Germany (29.72%) or Italy (27.5% excluding additional taxes).
The French tax code has not yet specified whether specific thresholds will apply for companies which are members of a tax unity.
Recent developments in the field of transfer pricing
As in most countries, France has recently increased the documentation obligation relating to transfer pricing.
In particular, companies have now the obligation the file a simplified transfer pricing documentation form if they have a turnover or gross assets of more than EUR 50 million (this threshold was formerly set at EUR 400 million). The form needs to be filed electronically every year, and at the latest, six months after the tax return.
The form includes both general information on the group (general description of the activities, list of the main intangibles assets owned, and general description of the group’s transfer pricing policy) and specific information on the French taxpayer (description of the activity, summary of intragroup transactions including the nature and the amount when the aggregate amount per transactions type exceeds EUR 100,000), as well as a presentation of the transfer pricing methods.
Despite this strengthening of the monitoring powers of the French tax authorities in the field of transfer pricing, French courts generally adopt a position favourable to the taxpayers. This trend has been clear in the decision of the Supreme Court (Conseil d’Etat) of 16 March 2016.
In this decision, the French tax authorities had considered that the transfer pricing policy of a company was irregular since it was selling its products at a lower price to its affiliated foreign distributors than to non-affiliated end-consumers. The Supreme Court ruled however that a transfer of benefits could not be characterised since distributors and end-consumers were not placed in a similar economic position. Therefore, a difference in the price of the goods sold to these two distinct sets of clients did not, in itself, demonstrate a transfer of profits.
More generally, French Courts have been adamant as to the burden of the proof of the alleged transfer of profits abroad. The French tax authorities must demonstrate that the taxpayer generates a lower profit than comparable companies carrying out similar transactions. Failing that, no reassessment of the taxpayer’s transfer pricing can be carried out.
Notion of “place of management” for the identification of a permanent establishment
The French Supreme Court ruled that a company is considered to have a permanent establishment in a country if it has a “place of management” there (Article 5-2 of the OECD Model Tax Convention) i.e. a place where the most senior officers take the strategic decisions which determine the running of the company’s business.
In this context, the place where the members of the board of directors meet and hold their meetings can give a hint for the identification of a place of management. But this factor is not sufficient in itself to characterize a place of management and should be confronted to other factors. Those additional factors can be, for example, the fact that the preparation of these strategic decisions is carried out elsewhere, the fact that the place where the services required for the holding activity are located in another country (global accounting services, the holding accounting services and the services of a convention on administrative assistance take place in France), the fact that the building housing the holding was sold.
By this court decision, a permanent establishment of a holding can be identified in another country which can lead to the attribution of profits and losses attached to the holding activity in this second country.
This definition of a permanent establishment (Article 5-2 of the OECD Model Tax Convention) used by the French Supreme Court is the same that the one used to determine the place of effective management (Article 4-3 of the OECD Model Tax Convention), which allows unlimited tax liability of a company in case of residence.
However, those two notions are different because of the difference of power intensity it implies.
Limitation on the French 3% contribution on distributed profits
As a reminder, since 2012, the companies subject to French corporate income tax are subject to an additional contribution of 3% on the distribute profits (Article 235 ter ZCA of the French tax Code). This contribution applies cumulatively to each distribution between companies subject to corporate income tax.
This contribution does not apply to profits distributed between companies which are members of the same tax-consolidated group.
This exemption has been ruled contrary to the French Constitution (Conseil constitutionnel, September 30th 2016, n° 2016-571 QPC, société Layher) because of the unjustified difference in the treatment between the companies which have opted to form a tax-consolidated group and those which did not opt for it (although they fulfil the 95% detention condition).
Then, the French legislator, in the amending Finance Act for 2016, has extend the contribution exemption (i) to the profits distributed between companies which meet the requirements to be members of a tax-consolidated group and (ii) to the profits distributed between companies subject to corporate tax in a Member State of the European Union or in a State which has concluded with France a convention on administrative assistance to combat tax evasion and avoidance. These foreign companies, if they were established in France, should fulfil certain conditions with the distributing company to be members of a tax-consolidated group.
Also, the distributions made to a company established in a non-cooperative State or territory (within the meaning of the French tax Code, for example: Panama) can benefit from the exemption if the evidence is provided that there are actual market transactions which do not have the object or the effect to allow, in a tax evasion purpose, the location of profits in this State of territory.
The 3% contribution is controversial in France and it is actually subject to preliminary questions referred to the European Court of Justice, in order to know if this contribution is a taxation prohibited by the Parent-Subsidiary Directive. If the contribution is ruled contrary to the Directive, the Conseil constitutionnel should consider that there is a breach of equality between (ii) the distributions between French companies and (ii) the distributions between a French company and a company established in a Member State of the European Union.
The French prior approval for cross-border mergers is incompatible with Community law
The European Court of Justice (ECJ) ruled that the prior approval procedure (Article 210 B of the French tax code) in case of cross-border mergers or transfers of assets to a foreign company are incompatible with Community law (Case C-14/16, Euro Park Service).
For the ECJ, Article 49 TFEU (freedom of establishment) and Article 11(1)(a ) of Directive 90/434 (merger directive) must be interpreted as precluding national legislation, such as the French one, which, in the case of a cross-border merger, makes the granting of the tax advantages applicable to such an operation under that directive, in the present case the deferral of the taxation of the capital gains relating to the assets transferred by a French company to a company established in another Member State, subject to a process of prior approval under which, in order to obtain that approval, the taxpayer must show that the operation concerned is justified for commercial reasons, that it does not have as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance and that its terms make it possible for the capital gains deferred for tax purposes to be taxed in the future, whereas in the case of a national merger such a deferral is granted without the taxpayer being made subject to such a process.