Limited interest deductions for corporations
Under France's proposal, only 85% of the net interest expense (i.e., interest expense less interest income) of companies would be deductible for financial years ended December 31, 2013, and the restriction would be increased so that only 75% interest expenses incurred after January 1, 2014 would be deductible. This limit would apply after application of the other rules limiting interest deductions, such as the French thin capitalization rules and the limitations on the deductibility of interest that arises in connection with the acquisition of shares. The limit would also apply to the interest portion of financial leases (e.g., the rents paid decreased by the portion of such rents which represents the amortization of the asset) or a lease with a duration of more than three months.
This measure would not apply when the total net amount of interest expense is lower than €3 million. For French tax groups, the limit would apply but only to the net financial charges resulting from transactions realized with companies outside of the tax group.
Capital gain on securities qualifying as participation shares
Currently, long-term gains on qualifying shareholdings are exempt from tax, but the expenses incurred in connection with the shareholdings are not deductible. The current rules deem such expenses to be 10% of the gain and, therefore, the exemption really only applies to 90% of the gain. Whenever gains and losses of the same nature are realized, the 10% portion is computed on the net amount of the gains (i.e., after setoff of the losses).
France's proposals would change the computation so that the 10% deemed non-deductible expense portion would no longer be computed on a net basis, but on the gross gains.
France recently introduced a limit on the yearly utilization of tax losses. Under this law, the yearly use of tax losses was limited to €1 million plus 60% of the taxable profit of the year exceeding €1 million (i.e., 40% of the taxable profit exceeding €1 million could not be sheltered by tax losses). The proposals reduces the cap to 50% (from 60%).
Corporate income tax instalment payments
France proposes to modify its corporate tax instalments regime for companies whose revenues exceed €250 million. The new regime would apply to financial years beginning on January 1, 2013.
"Exit tax" on insurance companies' capitalization reserves
France proposes to raise the "exit tax" on insurance companies' capitalization reserves to 17% (from 10%).
Individual tax proposals
France also proposed the following personal tax changes:
- A new individual income tax rate of 45% on income exceeding €150,000 per "household coefficient" share
- A temporary "exceptional" tax rate of 75% on income exceeding €1 million per person for income earned in 2012 and 2013
- Amounts of interest income, dividends, capital gains on securities, profits on stock options and free shares, and carried interests income would be subject to tax at the general progressive rate (up to 45% plus potential surcharges) rather than a flat rate
- An exceptional tax allowance of 20% would be allowed for capital gains related to real estate sales made in 2013
- Reinstatement of the wealth tax subject to a cap of 75% of annual income.
For more information, contact your KPMG adviser.
Information is current to October 9, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.