The Amended 2011 Finance Act (France)
The French Government has issued a second amended Finance Act 2011, which takes into account the proposals made by the Prime Minister at the end of August.
The reforms entered into force on 19 September 2011. The following are the most significant changes, which are intended to help reduce the country’s financial deficit.
Utilisation of Tax Losses
Inspired by the German tax rules, the use of tax losses by companies has been reduced severely.
The Senate Finance committee reported that these measures lead to reduce the French advantage on the carry back of losses, which was attractive in comparison with other EU states, and very appreciated by industrial companies. For consolidation accounting purposes, companies may register active deferred taxes when realizing tax losses. These new measures may lead companies to take back partly or totally these active deferred taxes. Furthermore, the new provisions may lead to tax the reversal of reserves within the 40% mandatory taxable result.
Carry-Forward of Tax Losses
The limit on tax losses that can be carried forward has been reduced to €1 million plus 60 per cent of the taxable profit over €1 million. There is no time limit on the use of tax losses.
For example, a French company, subject to corporate income tax (CIT) has €10 million in tax losses in 2010 and achieves a taxable profit of €3 million in 2011. Under the new regulations, the total amount of tax losses that can be used in 2011 is €2.2 million (€1 million + (60% x €2 million)).
The €7.8 million in tax losses can still be carried forward to another year.
If the French company achieves a €5 million taxable profit in 2012, the tax losses will be deducted within the limit of €3.4 million (€1 million + (60% x €4 million).
The €4.4 million in tax losses can still be carried forward without any time limit.
Some specific rules will apply to tax-consolidated groups, which are not treated kindly by the amended financial act. The new regulations will apply at group head level.
Carry-Back of Tax Losses
The carry-back of losses is now strictly limited in terms of the amount and the applicable time period, and by a new procedure:
- It is limited to €1 million, as long as the taxable profit is more than €1 million. In other words, if the taxable profit realised in 2011 is more than €1 million, and the tax loss suffered in 2012 totals €1.5 million, only €1 million in tax loss can be carried back to 2011
- It is limited to the year before the tax loss. For example, if a French company has a tax loss in 2012, it can only be carried back on the profit achieved in 2011
- The carry-back option must now be selected before filing the corporate tax return for the current year.
The CIT refund will not be paid until five years after the year in which the company opted to carry back the losses that were realised.
This new provision entered into force on 21 September and will apply to all companies with a financial year ending on 1 December 2011.
Capital Gains Tax on The Sale of Property
At the moment, the taxable gain on the sale of property is reduced by 10 per cent for each full year the property was held, starting at the fifth year. The taxable gain is exempt after 15 years of possession of the property.
As of 1 February 2012, however, capital gains tax exemption on the sale of a property that is not a primary residence will be subject to a revised formula:
- Up until five years of ownership there is no change; no reduction applies
- From the fifth to the 16th year of ownership, the taxable gain is reduced at the rate of 2 per cent per year
- From the 17th year to the 23rd year of ownership, the taxable gain is reduced at the rate of 4 per cent per year
- Beyond the 24th year, the taxable gain is reduced at the rate of 8 per cent per year
- The capital gain is exempt after 30 years of possession.
Furthermore, the tax allowance of €1,000 per tax payer has been removed and the sale of the property must be declared to the tax authorities within one month of completion.
Inheritance Tax and Tax on Investments
Inheritance tax and the tax on investments are fixed currently at 12.3 per cent and apply to gains made through property, life insurance, dividends and stock options, and personal savings.
The Financial Act has raised the rate of tax by 1.2 per cent to 13.5 per cent, applicable from October 1st, concerning investment incomes, and social charges paid by financial establishments. It will be generally applicable for all patrimony revenues perceived retroactively from January 1st, 2011.
The Hotel Industry
A new section (302 bis ZO) on hotels has been introduced in the French tax code.
This 2 per cent tax applies to net room rates of €200 or more. The process of calculation and payment of this new tax follows the rules applicable for VAT and will apply as of 1 November 2011.
Long Term Capital Gains
Capital gains on the sale of relevant assets held for at least two years by companies subject to CIT is currently exempt from taxable income after the deduction of 5 per cent of costs and expenses.
As of 1 January 2012, this deduction will be raised to 10 per cent.
Worldwide Consolidated Regime
The consolidated worldwide tax profit regime—which in reality relates to only five major companies, such as Total and Vivendi—is abolished as of 6 September 2011.
Commercial Real Estate
The amended Act introduces new regulations concerning the sale of shares in commercial real estate located in France, even if the sale takes place outside France and even if the company is not registered in France. The new provisions apply to the sale or purchase of real estate in France by French or foreign companies with assets that consist primarily of real estate in France.
These sales must be certified by a notary and declared to the French tax authorities within one month of completion.
The principal purpose of this measure is to prevent foreign companies from avoiding the 5 per cent tax registration fee and the income tax on the capital gains.