France: Draft Finance Bill for 2021

The French government has presented the draft Finance Bill for 2021. This article considers a range of the main measures proposed by the draft Finance Bill affecting companies. Additional measures will certainly be adopted during the parliamentary process.

Decrease in Corporate Local Taxes

As a follow-up to the intense debate which took place recently in France regarding the relevance of high taxes bearing down on the means of production, Article 3 of the draft Finance Bill proposes lowering the CVAE (company value-added contribution) by 50%, from 2021. The ordinary tax rate would be lowered from 1.5 % to 0.75%.

Since this tax is a major source of revenue for the regions, an alternative source of funding is set up for them, based on the allocation of a fraction of value-added tax (VAT).

Another important aspect of the reform relates to the valuation rules for buildings which are assigned to industrial use. The ceiling on the CET (territorial economic contribution) based on added value would be also lowered from 3% to 2%.

Tax Measures Designed to Improve Corporations’ Cash Situation

One of the key priorities of the French government is to enable corporations to restore their cash position. While deadlines for the payment of certain taxes have already been postponed, two new measures are worth mentioning.

• Possible neutralization of the taxation of unrealized capital gains resulting from a revaluation of assets

Article 5 of the draft Finance Bill introduces a temporary measure which would allow companies conducting a revaluation of their tangible and financial assets to opt for the exclusion of the unrealized capital gain from the taxable income of the fiscal year of the revaluation.

For amortizable fixed assets, the taxation of the unrealized capital gain would be spread over 15 years for constructions, or 5 years for other amortizable fixed assets. Amortization and provisions booked during subsequent fiscal years would be calculated on the basis of the revalued values.

For non-amortizable fixed assets, the taxation of the unrealized capital gain would be deferred until disposal of the assets. Provisions for depreciation booked during subsequent fiscal years would be calculated based on non-revalued values.

This temporary measure would apply to the first revaluation incurred during a fiscal year ended between December 31, 2020 and December 31, 2022.

• Possible spread of the taxation of capital gains made upon realization of a sale and leaseback operation

Article 6 of the draft Finance Bill would restore and modify the possibility to spread the taxation on the capital gain made upon realization of a sale and leaseback operation. The spread would be possible for a maximum period of 15 years and would only be applicable to sales of buildings preceded by a sale agreement dated between September 28, 2020 and December 31, 2022. The temporary measure would be limited to buildings allocated to the lessee’s business activity. As an exception, the scheme would apply in the event that a building is leased by the lessee to a related company within the meaning of point 12 of Article 39 of the French General Tax Code and which allocates said building to a business activity.

Adjustments to Research and Innovation Tax Credits

Several adjustments to the CIR (research tax credit) and CII (innovation tax credit) rules are proposed by Article 8 of the draft Finance Bill.

Among several measures, it is worth mentioning that the rule whereby the expenses taken into account for the purpose of the CIR are doubled when eligible operations are entrusted to public or similar bodies would be abolished.

Clarification of VAT Rules Applicable to Composite Supplies

Article 9 of the draft Finance Bill proposes to adopt at a legislative level the principles established by the Court of Justice of the European Union (CJEU) concerning the VAT treatment of single global transactions, i.e. those comprising several elements that, by themselves, would be covered by different VAT rules.

Postponement of New VAT Regime for E-Commerce

In view of the health crisis, Article 10 of the draft Finance Bill proposes postponing the date for entry into force of provisions transposing the e-commerce VAT package, adopted as part of the 2020 Finance Law, to July 1, 2021.

Creation of Optional VAT Group Regime and Review of Scope of Rules for “Autonomous Group of Persons”

Article 11 of the EU VAT Directive (Council Directive 2006/112/EC), allowing each member state to consider as a single taxable entity persons established in the territory of that state who are independent from a legal perspective, but who are closely linked to one another from a financial, economic and organizational perspective, would be transposed into domestic law.

This optional regime would come into force on January 1, 2023 and would be accompanied by a review of the scope of the VAT exemption applicable to “autonomous groups of persons” under Article 261 B of the French General Tax Code, in order to take account of CJEU case law which has restricted its scope to activities that are exempt on the basis of the general interest. This would exclude companies in the banking, financial and insurance sectors whose operations are exempt under Article 261 C of the French General Tax Code.

Extension of Rate of Interest on Late Payments and Arrears

Article 20 of the draft Finance Bill proposes to make permanent the reduction of the interest rate on late payments and arrears, from 0.40% to 0.20% per month, which was initially supposed to apply until December 31, 2020.

Planning Points

• The major reform of local taxes should drive companies to significantly re-assess their local tax burden, especially those businesses which conduct industrial activities.
• Revaluation of assets is rarely conducted by businesses because of the immediate tax impact. The draft Finance Bill will drive companies to reconsider their traditional position in this respect, but they will have to make up their minds rapidly; the same applies to sale and leaseback transactions.
• For companies which entrust part of their research to public bodies, the unfavorable evolution of the research tax credit should prompt them to revisit their research policy.
• Companies should identify the operations whose VAT treatment could be changed by the application of the new methodology on composite supplies established by the Bill.
• Companies should get prepared for the VAT group regime.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Daniel Gutmann is a Partner and Anaïs Okouda is a Professional Support Lawyer with CMS Francis Lefebvre Avocats.

The authors may be contacted at: daniel.gutmann@cms-fl.com;anais.okouda@cms-fl.com