France’s draft Finance Bill for 2024 was presented by the government on 27 September 2023, with the parliament expected to discuss and potentially amend the bill and vote on a final version by the end of December 2023. The most important proposals affecting businesses are implementation of the EU minimum taxation directive into domestic law, the introduction of a new tax credit for investment in the green industry, the gradual elimination of the contribution on the value added of companies (CVAE), a strengthening transfer pricing controls and the introduction of new offences and penalties.
Under-taxation is assessed at the state or territory level (rather than an entity-by-entity level) when the effective tax rate falls below 15%. The directive allows EU member states to introduce a national top-up tax to capture additional revenue from low-taxed entities. The additional tax is independent of the corporate tax, is not deductible from the latter and is payable by an ultimate parent entity in respect of under-taxed constituent entities.
Where the IIR does not apply, the undertaxed payments rule (UTPR) provides that the additional tax is paid by all entities making up the group, which share this tax on the basis of an allocation key defined in the text. France has also opted to introduce a national top-up tax so that it can benefit from additional revenues generated by the top-up tax levied on low-taxed entities located in its territory where the IIR or the UTPR do not apply.
The minimum annual tax applies to multinational groups operating in France with consolidated annual turnover of EUR 750 million or more in at least two of the previous four financial years, as well as to national groups meeting the same turnover threshold.
Companies experiencing financial difficulty within the meaning of article 2 of EU Regulation 651/2014 of 17 June 2014 would be excluded from this scheme, as would companies that fail to meet their tax, social security and annual accounts filing obligations for each of the years in which the scheme applies.
To qualify for the tax credit, companies must submit an application to the minister responsible for the budget (the application can be emailed to c3iv@dgfip.finances.gouv.fr), even though the law has not yet been passed.
CVAE is self-assessed and is separate from the corporate income tax.
Based on the 2023 Finance Bill, the CVAE would be phased out over a two-year period, i.e., reduced by 50% on 1 January 2023 and abolished on 1 January 2024. However, except for those liable for the minimum levy, under the measures in the 2024 Finance Bill, the abolition of the CVAE would be postponed until 2027. Between now and then, the CVAE tax rate and the value-added-based territorial economic tax (CET) capping rate would be gradually reduced (for prior coverage, see the article in the November 2022 issue of Corporate Tax News). (The CET consists of the company land contribution and the CVAE, and under the capping mechanism, a company’s CET burden cannot exceed 2% of the annual added value of the company.)
For the majority of companies, the CVAE will remain in effect until 2027. For the 2023 tax year, the maximum rate stands at 0.375% for companies with pre-tax sales exceeding EUR 50 million.
Under France’s transfer pricing regime, certain legal entities established in France are required to keep documentation justifying their transfer pricing policy. Legal entities that meet one of the following four alternative conditions fall within the scope of the documentation obligation:
Transfer pricing documentation must be made available to the tax authorities in electronic format as soon as an accounting audit is initiated. In the event of total or partial non-compliance with this obligation after receiving a formal notice from the tax authorities, the defaulting company will be liable to a fine, the minimum amount of which would be increased from the current EUR 10,000 to EUR 50,000. The increased fine would apply to offences committed on or after 1 January 2024.
Under article 57 of the French Tax Code (FTC), an indirect transfer of profits abroad is presumed when the tax authorities establish the existence of de jure or de facto links of dependence between a French company and foreign companies, and the granting of abnormal advantages. These profits are then included in the company's profits, unless the company can demonstrate that the advantages are justified by the existence of at least equivalent and favourable consideration. The draft Finance Bill for 2024 would introduce a simple presumption of an indirect transfer of a profit by a legal entity when the implemented transfer pricing the method differs from the description in the transfer pricing documentation. The amount of the presumed indirect transfer of profit would be equal to the difference between (i) the transfer price determined according to the method actually used by the company and (ii) the amount that would have been reached if the method described in the documentation made available to the tax authorities had been followed. The audited legal entity may then prove, by any means, that there is no transfer of profit. This provision would apply to financial years beginning on or after 1 January 2024.
In addition, an adjustment should not be possible in the following cases:
The measures on hard-to-value intangibles would apply to financial years beginning on or after 1 January 2024.
Sacha Boksenbaum
BDO in France
Transposition of the Pillar Two directive
Probably the most significant measures in the Finance Bill are those relating to the implementation of the EU Pillar Two directive into French domestic law. In line with the directive, article 4 of the draft law would establish a minimum global tax rate of 15% for multinational corporate groups within the EU. It would also introduce an income inclusion rule (IIR) that imposes an additional tax independently of corporate tax and that would apply to under-taxed constituent entities.Under-taxation is assessed at the state or territory level (rather than an entity-by-entity level) when the effective tax rate falls below 15%. The directive allows EU member states to introduce a national top-up tax to capture additional revenue from low-taxed entities. The additional tax is independent of the corporate tax, is not deductible from the latter and is payable by an ultimate parent entity in respect of under-taxed constituent entities.
Where the IIR does not apply, the undertaxed payments rule (UTPR) provides that the additional tax is paid by all entities making up the group, which share this tax on the basis of an allocation key defined in the text. France has also opted to introduce a national top-up tax so that it can benefit from additional revenues generated by the top-up tax levied on low-taxed entities located in its territory where the IIR or the UTPR do not apply.
The minimum annual tax applies to multinational groups operating in France with consolidated annual turnover of EUR 750 million or more in at least two of the previous four financial years, as well as to national groups meeting the same turnover threshold.
Tax credit for investment in green industry
A "green industries investment" tax credit (CI3V) would be introduced to enable industries to benefit from a tax credit of between 20% and 60% of their investment in specific activities linked to the production of batteries, solar panels, wind turbines and heat pumps.Companies experiencing financial difficulty within the meaning of article 2 of EU Regulation 651/2014 of 17 June 2014 would be excluded from this scheme, as would companies that fail to meet their tax, social security and annual accounts filing obligations for each of the years in which the scheme applies.
To qualify for the tax credit, companies must submit an application to the minister responsible for the budget (the application can be emailed to c3iv@dgfip.finances.gouv.fr), even though the law has not yet been passed.
Local taxes
The CVAE is based on the added value produced by a company during a fiscal year and is charged at progressive rates that depend on the company’s turnover. The tax is due by all companies exercising business activities in France as of the beginning of the calendar year.CVAE is self-assessed and is separate from the corporate income tax.
Based on the 2023 Finance Bill, the CVAE would be phased out over a two-year period, i.e., reduced by 50% on 1 January 2023 and abolished on 1 January 2024. However, except for those liable for the minimum levy, under the measures in the 2024 Finance Bill, the abolition of the CVAE would be postponed until 2027. Between now and then, the CVAE tax rate and the value-added-based territorial economic tax (CET) capping rate would be gradually reduced (for prior coverage, see the article in the November 2022 issue of Corporate Tax News). (The CET consists of the company land contribution and the CVAE, and under the capping mechanism, a company’s CET burden cannot exceed 2% of the annual added value of the company.)
For the majority of companies, the CVAE will remain in effect until 2027. For the 2023 tax year, the maximum rate stands at 0.375% for companies with pre-tax sales exceeding EUR 50 million.
Transfer pricing documentation and audits
The Finance Bill for 2024 includes several measures designed to enhance the tax authorities’ ability to identify and address transfer pricing anomalies and fraudulent practices and ensure compliance.Under France’s transfer pricing regime, certain legal entities established in France are required to keep documentation justifying their transfer pricing policy. Legal entities that meet one of the following four alternative conditions fall within the scope of the documentation obligation:
- The company has EUR 400 million in net turnover or gross assets (based on statutory accounts);
- More than 50% of the company’s share capital or voting rights is directly or indirectly owned by a company meeting the threshold in 1;
- The company directly or indirectly owns more than 50% of the share capital or voting rights in another company meeting the threshold in 1); or
- The company is a member of a French tax consolidated group, including an entity that satisfies the condition in 1, 2 or 3.
Transfer pricing documentation must be made available to the tax authorities in electronic format as soon as an accounting audit is initiated. In the event of total or partial non-compliance with this obligation after receiving a formal notice from the tax authorities, the defaulting company will be liable to a fine, the minimum amount of which would be increased from the current EUR 10,000 to EUR 50,000. The increased fine would apply to offences committed on or after 1 January 2024.
Under article 57 of the French Tax Code (FTC), an indirect transfer of profits abroad is presumed when the tax authorities establish the existence of de jure or de facto links of dependence between a French company and foreign companies, and the granting of abnormal advantages. These profits are then included in the company's profits, unless the company can demonstrate that the advantages are justified by the existence of at least equivalent and favourable consideration. The draft Finance Bill for 2024 would introduce a simple presumption of an indirect transfer of a profit by a legal entity when the implemented transfer pricing the method differs from the description in the transfer pricing documentation. The amount of the presumed indirect transfer of profit would be equal to the difference between (i) the transfer price determined according to the method actually used by the company and (ii) the amount that would have been reached if the method described in the documentation made available to the tax authorities had been followed. The audited legal entity may then prove, by any means, that there is no transfer of profit. This provision would apply to financial years beginning on or after 1 January 2024.
Transfer of hard-to-value intangibles
Changes also are proposed to the rules governing hard-to-value intangibles. The Finance Bill for 2024 provides that the value of a transferred intangible asset or right that is hard to value may be adjusted based on profits subsequent to the financial year in which the transaction took place, except in certain limited circumstances. However, the taxpayer may counter this presumption by providing detailed information on the forecasts used at the time of the transfer to determine the prices and establishing that the significant difference between these forecasts and the actual results is due to the occurrence of unforeseeable events at the time of the price determination or to the realisation of foreseeable events, provided their probability was not significantly under- or over-estimated at the time of the transaction.In addition, an adjustment should not be possible in the following cases:
- The transfer of the intangible asset or right in question is covered by an advance pricing agreement (bilateral or multilateral) in force for the period concerned between the jurisdictions of the transferee and the transferor;
- The difference between the valuation resulting from the forecasts drawn up at the time of the transaction and the valuation based on actual profits is less than 20%; and
- A marketing period of five years has elapsed after the year in which the asset or right first generated income from an entity unrelated to the transferee and, during this period, the difference between the forecasts made at the time of the transaction and actual results is less than 20%.
The measures on hard-to-value intangibles would apply to financial years beginning on or after 1 January 2024.
New offence and enhanced penalties
The draft Finance Bill for 2024 provides for the creation of an independent offence where a person (an individual or a legal entity) makes instruments, services or acts that consist of the following available to third parties to facilitate tax fraud:- Opening accounts or concluding contracts with organisations established abroad;
- Interposition of individuals or legal persons or any comparable body, trust or institution established abroad;
- Providing a false identity or false documents, or any other falsification;
- Providing or justifying a fictitious or artificial tax domicile abroad; and
- Any other practice designed to mislead the tax authorities.
- Individuals: Three years' imprisonment and a EUR 250,000 fine, increased to five years' imprisonment and a EUR 500,000 fine when the “making available” is committed using an online public communication service; and
- Legal entities: Those held criminally liable for the offences would be subject to a fine equal to five times that set for individuals, as well as the additional penalties in the Criminal Code, i.e., dissolution; prohibition from carrying on the activity in the context of which the offence was committed; placement under judicial supervision; closure of establishments; exclusion from public markets; prohibition from making a public offer of financial securities or having its financial securities admitted to trading on a regulated market; posting and dissemination of the decision; prohibition from receiving public aid.
Aggravated tax fraud penalties
The Finance Bill for 2024 provides for the introduction of an additional penalty in the form of a temporary deprivation of rights to tax reductions and credits in cases involving aggravated tax fraud. This penalty would be imposed only on individuals convicted of a tax fraud offense (or concealment of this offence or money laundering) under aggravated circumstances. However, the additional penalty would specifically exclude treaty-based tax credits aimed at eliminating double taxation. This deprivation would be temporary, i.e., it would apply for a maximum of three years from the income tax assessment for the year following the year of conviction.Sacha Boksenbaum
BDO in France