France - Tax provisions in draft Finance Bill (2014) 

September 26: The French government on 25 September 2013 presented a draft Finance Bill for 2014. Among the tax provisions contained in the draft legislation are measures that generally are in line with the OECD’s base erosion / profit shifting (BEPS) initiative.

According to expected legislative schedule, parliamentary discussions are to begin later this autumn, with an anticipated date of enactment in late December.

The following report includes discussions of certain tax provisions in the draft legislation.

Introduction of specific 1% tax on gross operating income

A new tax on gross operating income would be imposed at a rate of 1% and would be intended to replace the “annual flat-rate tax” (Imposition Forfaitaire Annuelle or IFA) and would be a liability of any company subject to French corporate income tax (and real estate entities) having a sales turnover over €50 million (for tax consolidation groups, the threshold amount would be determined on a consolidated basis).

While the tax base for the annual flat-rate tax (IFA) was to be determined only with respect to sales turnover, the new gross operating tax would be based on the “gross operating income” (Excédent Brut d’Exploitation or EBE) that is the difference of:

  • The “value added” (determined based on specific company value-added contribution rules)
  • Employee costs and operating taxes

The applicable rate would be 1%.

This tax would not be deductible for corporate income tax purposes.

This new tax would effectively apply for tax years / fiscal years ending as from 31 December 2013. Thus, for companies closing FY 2013 on 31 December 2013, this tax would be a liability for
FY 2013.

KPMG observation

As explained by tax professionals with Fidal* this new tax had previously been presented to generate revenue to finance a potential suppression of the “C3S” or Contribution sociale de solidarité des enterprises—also known as the “Organic” assessment (i.e., equal to 0.16% of the sales turnover). Read TaxNewsFlash- Europe: France - Proposal for new tax on gross operating income

It is still unclear whether this proposed provision could be enacted this year or in later years. Additional information is expected with the publication of the draft bill for financing social security, expected later in the year).

It has been observed that as drafted, this measure could have a major impact on the industrial sector, since depreciation and similar provisions would not be deductible from the tax base.

Anti-abuse measure on indebtedness involving related parties

Currently, the deduction of interest accrued by a French borrowing entity is not subject to a condition that the interest income received by the lender is subject to taxation.

Under the proposed legislation (i.e., the draft Finance Bill for 2014), interest related to loans that are obtained from related parties would only be deductible provided that the lender is subject, during the same tax year, to income tax on the amount of interest received, of at least 25% of the standard income tax due (note that if the lender is a foreign tax resident, the comparison would be made with the theoretical income tax that would have been due in France, had the lender been a French tax resident).

The factors to prove a “sufficient taxation” in the hands of the related-party lender would have to be performed by the French borrower when requested by the tax authorities. This new mechanism would apply to tax years closed as from 25 September 2013—i.e., a retroactive effect.

KPMG observation

This measure would primarily address what are perceived to be all types of “hybrid” financing arrangements, in accordance with the OECD’s BEPS action plan, but would also affect every type of inter-company financing.

The exact language of the law changes would require clarifications, notably with respect to the nature and content of the justification file and the modalities for determination of the effective tax of the interest income at lender’s level. In particular, it is uncertain whether the effective taxation would be appraised on a net basis, after deduction of other expenses, or whether the 25% threshold would be considered before or after the offset of tax losses or tax credits. Another unresolved topic is what if the lender is a transparent entity and, as such, is not per se subject to tax?

More generally, this measure would require multinationals to anticipate requests from the tax authorities in tax audit situations and to prepare, each year, a file documenting and justifying that the conditions of deduction of the interest are met.

Specific mechanism on the transfer of risks and functions

Unlike other countries (e.g., Germany), French tax law does not include any provision specifically addressing a shift of risks or functions from France. Cross-border business restructurings are therefore difficult to apprehend by the French tax authorities.

The draft legislation includes a new measure aiming at reversing the burden of proof, and shifting it onto the taxpayer for transfers of risks or functions to a related entity (or to any entity, if located in a tax haven jurisdiction). It would even apply when the activity is ceased (or the risk is no longer borne).

In such situations, if the gross operating income (Excédent Brut d’Exploitation or EBE) decreases by at least 20% over the two tax years (financial years) following the transfer (compared to the average gross operating income of the three tax years preceding the transfer), then the taxpayer would have to demonstrate (at the request of the French tax authorities) that an arm’s length compensation was received in consideration of the risks / functions transferred. In this respect, all useful data relating to both the transferor and the transferee would need to be provided.

If, however, this could not be satisfactorily justified, any profit transferred would be added back into the French transferor’s tax result.

The documentation requirement would not apply in instances of transfer or licensing of an isolated asset when such transfer or licensing is not linked with any other transfer of risk or function.

This measure would apply to transfers performed during tax years closed as from 31 December 2013 (hence, retroactivity).

KPMG observation

This new draft provision (which reflects what has been observed to be the practice of the tax authorities during tax audits) raises many questions that hopefully will be answered during the legislative discussions—such as:


  • How would the variation of the EBE be appraised? Would other elements, not linked to the transfer of risks or functions, also be taken into account?
  • Would the potential add-back to taxation also trigger collateral consequences, (e.g., in terms of VAT or transfer taxes)?
  • How long would the mechanism last (a “one-shot” indemnification of the transferor versus compensation over several tax years as if the risks or functions had remained in France)?

Exceptional solidarity contribution on high remunerations

During the 2012 presidential election campaign, then-candidate François Hollande announced an intention to impose tax at a rate of 75% on those individuals who receive remuneration exceeding €1 million. After the election, a first legislative attempt of the French government (in the frame of the Finance Bill for 2013) to impose this tax was rejected by France’s Constitutional Court. Read TaxNewsFlash-Europe: France - Review of tax changes enacted for 2013

The Draft Finance Bill for 2014 now proposes to shift this tax from employees onto the employers. Companies / corporations that conduct activities in France (including French permanent establishments of foreign entities) and that grant remuneration to an employee exceeding €1 million in 2013 and in 2014 would be subject to a 50% tax related to this salary payment.

The tax base would be a fraction based on gross remunerations (salaries, golden parachutes, free shares / options, etc.) above €1 million (adjustments to consider for certain types of income).

The 50% tax would be capped at 5% of the employer’s sales turnover, and would be payable by 30 April 2014 and 2015 for remunerations granted for 2013 and 2014, respectively.

KPMG observation

The cap equals 5% of the turnover of the tax year and apparently is intended to assist professional sports organizations (e.g., football clubs).

Environmental aspects

The 2014 Draft Finance Bill proposes to modify certain taxes with a view to encourage environment-friendly activities:

  • Increase of the tax on polluting cars (malus automobile)
  • Extension of the tax on polluting activities (TGAP) to certain polluting substances (chromium, zinc, lead, etc.)
  • Revision of the rates of the tax on energy / oil products, based on the CO2 emissions.


For more information, contact a tax professional with KPMG’s France tax center or a a tax professional with FIDAL* in Paris:

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

+1 212-954-8605

Olivier Ferrari, Tax Partner

+33 (0)1 55 68 14 76

Patrick Seroin, Tax Partner

+33 (0)1 55 68 15 93

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

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