Summary of draft measures
As has been expected, following the recent change of government in France, the Ministry of Finance this week announced new measures aimed at improving tax revenue for 2012 and 2013. In particular, certain changes would affect the taxation of French companies or French branches of foreign companies.
The Ministry of Finance listed a series of amendments to counter what are identified as abusive corporate income tax optimization strategies—some having transfer pricing consequences. Under the proposals:
- Companies that control subsidiaries located in tax haven jurisdictions would have to demonstrate that the subsidiaries have real substance, with economic activities, to show that the subsidiaries are not solely aimed at tax avoidance. Currently, the French tax authorities on audit must demonstrate a transfer of profits to a foreign affiliate, regardless of where the affiliate is located. With the proposed changes, a transfer of profit would be presumed for transactions involving entities located in tax havens, and the burden of proof would automatically shift to the taxpayer.
- Companies that provide subsidies to subsidiaries—in particular, those located in foreign countries—would no longer be allowed to deduct the subsidy amounts from their taxable profits when the subsidies have only a financial objective (i.e., to reduce the amount of corporate income tax paid in France).
- Enterprises that reduce their production activities, close their production sites, or reduce the number of their employees or assets would not be allowed to carry forward their tax losses.
- Enterprises that takeover or merge with another enterprise would no longer be allowed to use transferred losses unless the level of production activity and employment is maintained. “Abusive” transfers or abusive use of tax losses, therefore, would be restricted.
Tax professionals with Fidal* believe the prospects for enactment of these draft finance bill measures are high, given that the current government of President Hollande has a large majority in the French Parliament.
In practice, reversing the burden of proof in connection with cross-border transactions with affiliates located in tax havens may have little impact on the results of French tax audits; however, it has been noted that there is a real risk that this measure could be extended to other cross-border transactions between affiliated entities, in any location. This would be in line with the initial proposals of the new French government to reinforce the authority of the French tax authorities to address perceived tax avoidance.
Other tax measures expected to be unveiled in the very near future could, for example, include possible restrictions on the deductibility of interest (thin capitalization rules).
For more information, contact a tax professional with the Global Transfer Pricing Services group (Fidal*) in Paris:
Pascal Luquet, Partner
+ 33 1 55 68 15 22
Kate Noakes, Partner
+ 33 1 55 68 16 57E
Olivier Kiet, Director
+ 33 1 55 68 1615
Xavier Sotillos Jaime, DirectorE
+33 1 55 68 14 85
* FIDAL is an independent legal entity that is separate from KPMG International and its member firms.