This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
The French parliament on 15 December 2021 adopted the 2022 finance law. The bill is final and, except for a constitutionality review by the French Constitutional Council, it is expected to be published without modification by 31 December 2021, and therefore enacted on that date.
This article summarizes some of the law’s key provisions, some of which are the same as those included in the draft bill released in September.
Corporate income tax measures
CIT rate reduced to 25% for fiscal years (FYs) beginning on or after 1 January 2022
The 2022 finance law confirms (implicitly, by not changing article 219 of the French tax code (FTC)) the corporate income tax (CIT) rate reduction started in 2019. As a result, for FYs beginning on or after 1 January 2022, the CIT rate is 25%, unless provided otherwise.
The withholding tax rate on certain income received by nonresidents (e.g., dividends, substantial participation capital gains, or real estate capital gains), which generally is in line with the corporate income tax rate, is also 25% as long as the triggering event occurs on or after 1 January 2022.
Temporary tax depreciation of goodwill (amortissement du fonds commercial)
According to French accounting rules, an enterprise’s goodwill (fonds commercial) is deemed to be a non-depreciable asset unless the enterprise can justify a foreseeable period of use. In such a case, goodwill can be depreciated over the period of use or 10 years if the use period cannot be reliably estimated. Another exception allows small enterprises to depreciate goodwill over 10 years even if there is no foreseeable use period (small enterprises are those that do not meet two of the following three minimum thresholds: EUR 6 million balance sheet, EUR 12 million in net revenue, and/or 50 employees).
The 2022 finance law confirms that, as a principle, depreciation of goodwill is not deductible; however, it allows an exception for goodwill acquired between 1 January 2022 and 31 December 2025.
Compliance with EU law regarding nonresident withholding taxes
Several recent decisions (11 May 2021, n°438135; 22 November 2019, n°423698; 9 September 2020, n°434364) by the French Supreme Court (Conseil d’Etat) found that the FTC violates EU law as some withholding taxes imposed on nonresident European Union (EU)/European Economic Area (EEA) companies are contrary to EU principles provided for in the Treaty on the Functioning of the European Union. This is because the withholding taxes apply to gross income whereas a French company in the same situation would be taxed on the gain after deducting the expenses incurred for the acquisition and conservation of the income.
Therefore, to ensure compliance with EU law going forward, the finance law changes article 182 B of the FTC (withholding tax on royalties, non-commercial profits, remuneration for any kind of services, including sports services) by allowing a 10% withholding tax basis reduction on payments made to nonresident companies located in an EU/EEA country that receive French-source income within the scope of the article (the 10% is deemed to reflect the expenses associated with the income).
The law also grants taxpayers the right to claim a refund for the difference between the withholding tax amount paid and the withholding tax amount computed on a net basis, i.e., after subtracting the expenses incurred for the acquisition and conservation of the income. This applies to entities receiving income subject to withholding tax under FTC article 182 B but also under articles 182 A bis (sums related to artistic services provided or used in France and paid by a debtor who carries out an activity in France to individuals/companies without a permanent business establishment in France) and 119 bis (income from movable property).
To qualify for a refund, the beneficiary of the income has to:
- Be an entity whose profits are not taxed in the hands of its shareholders;
- Have a head office (or permanent establishment whose profits include the income) that is located:
- In an EU or EEA country that has concluded an agreement with France (tax treaty) that provides for administrative assistance against tax evasion and fraud and that is not a non-cooperative state, as defined in FTC article 238-0 A; or
- If the income is from movable property falling within the scope of FTC article 119 bis, 2, in a non-EU/EEA country and (i) this country is not a non-cooperative state, as defined in FTC article 238-0 A, and (ii) the entity does not have a sufficient participation in the distributing company to allow it to have an effective role in the distributing company’s management or control;
- Be able to deduct the expenses incurred for the acquisition and conservation of the income if it were located in France; and
- Not be allowed to offset the withholding tax under the taxation rules of the country of its residence.
Finally, the finance law adjusts the terms and conditions for the implementation of the temporary withholding tax refund mechanism for nonresident companies in a tax loss position. Notably, the deadline for loss companies to file tax returns to benefit from the temporary refund is extended from three to six months.
These provisions apply to withholding taxes whose triggering event occurs on or after 1 January 2022.
Carryback mechanism: Clarification regarding the allocation profit
As a reminder, under current law, losses incurred during a given fiscal year can be used to offset the taxable income realized during the immediately preceding fiscal year, giving rise to a receivable equal to the surplus tax previously paid. The carryback mechanism is subject to strict rules: tax losses may only be carried back to the immediately preceding fiscal year, and offsetting is capped at EUR 1 million.
The allocation profit corresponds to the reported taxable income that was subjected to CIT, minus the portion of this income that was distributed and the portion that gave rise to a tax paid by using tax credits.
The 2022 finance law expressly states that the allocation profit must also be reduced by the portion of income that gave rise to a tax on which a “tax reduction” was charged. This clarification applies to the carryback of losses incurred during tax years ending on or after 31 December 2021.
Innovation tax incentives
Introduction of Collaborative Research Tax Credit (CICO)
To compensate for the end of the policy allowing the doubling of the research tax credit (CIR) for R&D outsourced to public bodies as from 1 January 2022, the finance law introduces a new tax credit for companies that conclude collaboration contracts with certain research organizations between 1 January 2022 and 31 December 2025 and that finance these organizations’ contract-related research expenses.
The amount of the tax credit is equal to 40% (50% for companies that meet the EU definition of small and medium-sized enterprises (SMEs)) of the expenses invoiced by the research organizations, capped at EUR 6 million per year.
The tax credit applies to collaboration agreements that differ from simple subcontracting in that it is aimed at research projects conducted jointly by a company and one or more research organizations, which are based on a sharing of related risks and results. A number of conditions that have to be met to benefit from the tax credit are listed in the finance law (e.g., the organizations cannot be associated with the company receiving the tax credit, the contract must provide for the invoicing of research expenses by the research organizations at their production cost, the expenses invoiced by the organizations cannot exceed 90% of the total expenses incurred for the realization of the operations provided for in the contract; etc.).
The sums concerned cannot be taken into account for CIR purposes. However, they count toward the EUR 100 million threshold in research expenditures above which the CIR is calculated at the rate of 5%.
Finally, the conditions of use and reimbursement are modelled on those of the CIR, namely, deduction from corporate income tax for the year the contract is entered into and the following three years, then reimbursement in the absence of use at the end of a period of three years, except for SMEs benefiting from an immediate refund.
Extension of duration of Young Innovative Enterprises (JEI) status
The “young innovative companies” (JEI) scheme supports SMEs with high potential for innovation and growth. To benefit from tax advantages and social contribution exemptions under this scheme, a company must be less than eight years old and R&D expenses must make up at least 15% of its tax deductible expenses.
The 2022 finance law extends the duration of a company’s JEI status from seven to 10 years, i.e., until the JEI’s eleventh anniversary.
Modifications to the innovation tax credit (CII)
A 20% innovation tax credit (CII) is available for SMEs in the industrial, commercial, or agricultural sector that incur certain innovation expenses (to develop prototypes in particular), capped at EUR 400,000 per SME.
The 2022 finance law extends this credit until 31 December 2024. In addition, as from 1 January 2023, (i) the G&A expenses within the CII base are abolished, and (ii) in return, the CII rate is increased: from 20% to 30% for the common law rate and from 40% to 60% for the overseas territory rate.
Individual income tax measures to support the transfer of small businesses
Transfer of SME upon retirement (FTC article 151 septies A)
Capital gains realized on the sale of an SME subject to individual income tax (as opposed to corporate income tax) due to the retirement of its owner may be tax exempt, provided certain conditions are met. In certain cases, this capital gains tax exemption may also apply to the sale of an activity that is subject to a business lease agreement, provided that the SME is sold to the lessee.
However, the 2022 finance law allows for a more flexible mechanism. When an SME subject to a business lease is transferred, the capital gains can be exempted from tax, even if the SME is transferred to a person other than the lessee, provided that the contract is respected and that the sale includes all items contributing to the activity covered by the business lease agreement.
This measure first applies to the taxation of 2021 income.
Increase in value limit for tax exemption on business transfers (FTC article 238 quindecies)
Capital gains realized on the sale of an individual company or full branch of activity can be exempt from individual income tax provided certain conditions are met. Under current law, one of these conditions is that the value of the items transferred cannot exceed EUR 500,000. In addition, the amount of the tax exemption depends on the value of the items transferred, as follows:
- Full tax exemption if the value of the items does not exceed EUR 300,000; and
- Partial and degressive tax exemption if the value of the items ranges between EUR 300,000 and EUR 500,000.
The finance law provides for a limit increase to EUR 1 million, as follows:
- Full tax exemption if the value of the items does not exceed EUR 500,000; and
- Partial and degressive tax exemption if the value of the items ranges between EUR 500,000 and EUR 1 million.
The mechanism is also more flexible if the business transferred is subject to a business lease agreement as the tax exemption can be granted even if the business is transferred to a person other than the lessee, provided that the contract is respected and that the sale includes all items contributing to the activity covered by the business lease agreement.
This measure first applies to the taxation of 2021 income.
Confirmation of the application of FTC article 123 bis to trusts
French taxpayers who directly own 10% or more of the income rights (or voting rights) in a foreign entity located in a low-tax jurisdiction (i.e., a jurisdiction whose tax rate is less than 40% of the French tax rate on the same income) and conducting principally passive investment activities are taxed in France on a pro rata share of the income realized by the foreign entity
The 10% participation requirement is deemed to be met if the foreign entity is located in a non-cooperative jurisdiction (as defined in FTC article 238-0 A).
The 2022 finance law confirms that article 123 bis of the FTC is applicable to trusts. Furthermore, the settlor or the beneficiary of the trust (deemed settlor according to FTC article 792-0 bis) will be presumed to hold 10% of the entity (rebuttable presumption)
The measure is applicable as from 1 January 2022.
Obstructing access to computerized data: Fine reinforced
According to French law, obstructing access to, reading, or seizing digitalized documents results in the application of a fine equal to:
- EUR 10,000 or 5% of tax assessments, whichever is higher, when the obstruction is observed in the premises of the individual suspected of fraud;
- EUR 10,000 when the obstruction is observed in the premises of the taxpayer’s representative; and
- EUR 1,500 in all other cases (obstruction observed in the premises of a third party).
As from 1 January 2022, the fine is substantially increased as it is raised to:
- EUR 50,000 when the obstruction is observed in the premises occupied by the taxpayer suspected of fraud or by their representative; and
- EUR 10,000 in all other cases.
Transposition of DAC 7 directive into French law
As a reminder, EU member states are required to transpose Council Directive (EU) 2021/514 on administrative cooperation in the field of taxation, which introduces new reporting obligations for digital platforms (also known as “DAC7”), into their national law by 31 December 2022.
To comply with this obligation, the 2022 finance law transposes DAC 7 into French law. In line with the directive’s date of entry into force, the reporting obligation will apply to platform operators as from 1 January 2023.