France - Update on tax legislation; changes to original proposals 

November 7: Tax proposals in legislation currently pending before the French Parliament would generally implement the government’s initial package of the 2014 Finance Bill. However, there are changes to the government’s initial tax proposals.

Included in the pending legislation are measures to:


  • Increase the rate of a corporate income tax surcharge for “large corporate taxpayers”
  • Limit interest deduction on loans between related parties
  • Impose a surcharge on companies paying salary to an individual of an amount over €1 million
  • Repeal a planned reduction of the “reduced VAT rate”
  • Revise a tax credit regime for employers with an apprenticeship program
  • Modify the ability of small and medium size enterprises to claim “temporarily” the tax losses of foreign branches or subsidiaries
  • Amend the individual income taxation of capital gains realized on the sale of shareholdings

Other measures have been removed from the tax package as it is currently moving through the legislative process, including a proposed special tax mechanism that would be triggered when taxpayers attempt to transfer risks and functions to another jurisdiction.

KPMG observation

Tax professionals with Fidal* have observed that the legislation continues to be subject to changes and revisions, as the Assemblée nationale considers these and other tax proposals.


For example, a proposal to impose an “eco-taxe” on trucks using non-toll roads in France has been suspended, and it is possible that an increase to the overall tax treatment of securities income (that would be implemented with a standardization of social contribution surcharges) may not appear in the final version of the law. Yet, given current budgetary constraints, any change to one tax proposal possibly could result in an increase in another type of tax, if additional revenue is needed for budgetary purposes.

Increase in rate of corporate income tax surcharge

To replace the annual flat rate tax (Imposition Forfaitaire Annuelle – IFA), the government initially proposed the imposition of a tax on gross operating income (Excédent Brut d’Exploitation – EBE) at a rate of 1%.


This proposal for a tax on gross operating income was criticized by certain sectors as presenting a disincentive to investment. In response, the National Assembly rejected this proposed tax and instead approved a measure to increase the existing temporary corporate income tax surcharge from 5% to 10.7%.


The increased corporate income tax surcharge would be paid by “large companies” (defined as those companies whose annual turnover exceeds €250 million).


This increased surcharge tax rate measure would apply to fiscal years ending 31 December 2013 until 30 December 2015.

KPMG observation

Companies that would be subject to the increased corporate income tax surcharge would see an increase in their overall corporate income tax, with the maximum effective tax rate being close to 38%.

Intra-group indebtedness (limit on interest deductions)

As initially proposed under the 2014 Finance Bill, interest expenditures on loans between related parties would only be deductible provided that the lender would be taxed, during the same tax year, on the amount of interest income received at a minimum rate of 25% of the standard amount of French income tax due (in other words, the interest expense deduction at the debtor level would be conditioned on “sufficient taxation” of the interest income at the creditor level).


There were concerns about this proposal. For example, how to determine what is the effective rate of taxation of the interest income at the lender level was unclear—especially when the lender is a “transparent” (e.g., passthrough) entity and, as such, not itself subject to tax.


The National Assembly determined that, if the lender is a transparent entity, this proposed “anti-double dip” mechanism would apply only if the French borrower is related to the owners or shareholders of the transparent entity. Also, the minimum tax rate of 25% would be applied at the shareholder level (subject to certain conditions).

KPMG observation

It has been observed that the National Assembly did not provide clarification with respect to numerous outstanding uncertainties—including:


  • What would be the exact nature and content of the justification file?
  • Would the effective rate of taxation be determined on a gross vs. a net basis?
  • Would the 25% tax rate threshold be considered before or after offsetting for tax losses or tax credits?

Specific mechanism on the transfer of risks and functions

The 2014 Finance Bill, as initially proposed by the government, included measures that would take aim at attempts by taxpayers to shift risks or functions to other jurisdictions.


According to this proposal, if a taxpayer’s gross operating income were to decrease by more than 20% over the two financial years following the year of the transfer, the taxpayer would be required to demonstrate that arm’s length compensation had been paid for the transfer of the lost future profits.


This measure was rejected by the National Assembly for procedural reasons.

KPMG observation

Because this proposal was rejected for “procedural reasons,” the National Assembly did not, in fact, discuss it. Nevertheless, observers anticipate that this proposal could be reintroduced and discussed at a later date (within the framework of the discussions on the second part of the Finance Bill). If reintroduced, there are a number of uncertain areas within this proposal, including a legal definition of what are “risks and functions” that would warrant clarification.

Exceptional solidarity contribution on salary payments over €1 million

During the 2012 presidential election campaign, then-candidate François Hollande announced an intention to impose income tax at a rate of 75% on individuals receiving remuneration exceeding €1 million.


After the election, a first legislative attempt (in the frame of the Finance Bill for 2013) to impose this tax was rejected by France’s Constitutional Court in late December 2012 as violating one of the tenets of French tax law.


The 2014 Finance Bill now proposes to shift this tax from the employees onto employers. Thus, companies paying an employee a salary amount exceeding €1 million would be subject in 2013 and 2014 to an exceptional solidarity surcharge equal to 50% of the portion of the salary exceeding €1 million.


The National Assembly approved this measure, and further indicated that the surcharge would not be deductible from the corporate income tax base of the employer / company.

“Reduced VAT rate” to remain at 5.5%

The third corrective Finance Act for 2012 modified, effective 1 January 2014, the rates of the value added tax (VAT). Under that law:


  • The “reduced VAT rate” of 5.5% (applicable to food, energy, etc.) was to decrease to 5%.
  • The “intermediary VAT rate” of 7% (applicable to restaurants, residential repair work, etc.) is increased to 10%.
  • The “standard VAT rate” of 19.6% is increased to 20%.

Within the framework of the discussion of the 2014 Finance Bill, the National Assembly decided to repeal the planned reduction of the “reduced VAT rate” and to maintain that rate at 5.5%.


Therefore, only the intermediary and standard VAT rates would be modified (increased) beginning 1 January 2014.

Apprenticeship tax credit

Companies that employ apprentices can benefit from a tax credit of €1,600 multiplied by the average annual number of apprentices.


The National Assembly proposed to tighten the conditions for taxpayers claiming the benefits of the apprenticeship tax credit. Thus, beginning 2014, this tax credit would only be available to companies employing apprentices who participate and prepare for a baccalaureate (i.e., two-plus years) diploma (or lower). Also, the benefit of this tax credit would be limited to the first year of the training program (instead of the three years as currently available).


For the 2013 corporate income tax, the hiring of a trainee preparing for a baccalaureate diploma (or lower) would provide a €1,600 tax credit for the first year of the training program. For trainees preparing for a diploma at a higher level of education and for those who are in the second or third year of the training program, companies would be entitled only to an €800 credit.

Deductible tax losses of a foreign permanent establishment or subsidiary

French small or medium sized enterprises (SMEs or companies employing less than 2,000 employees) currently can elect to deduct “temporarily” the tax losses generated by a foreign permanent establishment or subsidiary (Article 209 C of the French tax code). These tax losses must be reinstated in the taxable result of the French company as soon as the foreign entity becomes profitable or, at the latest, after a five-year period.


The 2014 Finance Bill proposes to repeal the deduction of such tax losses by a French SME.

Changes to individual taxation of capital gains on shares (retroactively from beginning of 2013)

The 2014 Finance Bill includes a proposal to modify the tax regime as applied to individuals with capital gains deriving from the sale of shares.


While these capital gains would remain taxable under the progressive income tax rates (of up to 45%), they would benefit from a “tax allowance,” which would vary depending on the length of time that the individual held the shares (a holding period rule):


  • 50% if the shares were held between two years and eight years
  • 65% if the shares were held for eight years or longer

An incentive regime would be established with respect to capital gains derived from the sale of shares by managers of small and medium enterprises. The gains on such sales would benefit from an enhanced tax allowance at the following rates:


  • 50% if the shares were held between one year and four years
  • 65% if the shares were held between four years and eight years
  • 85% if the shares were held for eight years or longer

Finally, an existing mechanism that allows for tax deferral of amounts realized on the sale of shares if the sales proceeds are reinvested would be repealed.

KPMG observation

These new “tax allowances” would not apply for the determination of the social surcharges (CSG, CRDS, etc.) which have a combined rate of 15.5%.



For more information, contact a tax professional with Fidal Direction Internationale in Paris or with the French Tax Center of KPMG LLP in New York:


Olivier Ferrari, Tax Partner

+33 (0)1 55 68 14 76


Patrick Seroin, Tax Partner

+33 (0)1 55 68 15 93


Gilles Galinier-Warrain, French Tax Center, KPMG LLP, New York

+1 212-954-8605


*Fidal Direction Internationale is a French law firm that is independent from KPMG and its member firms.




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