The current economic crisis, coupled with the urgent need to reduce its budgetary deficit, has forced the French government to adopt a number of new tax policies in recent months, several of which have direct implications for non-residents.
23rd September 2013
Change of Ownership Rules
In general, pre-existing business tax losses can be utilized by a French company following a change of ownership. However, the losses may be disallowed in several cases including: (i) a change in the actual business activity or corporate purpose (i.e., the addition or wind-up of an activity generating a 50 percent increase or decrease in sales or in the fixed assets and in the headcount); (ii) an election is made for an alternate tax treatment; and (iii) in certain entity conversions, material divestments, and certain other situations. Notably, a massive transfer of ownership rights and a contemporaneous modification of the by-laws, standing alone, generally will not impact the utilization of tax losses.
A debt push-down is generally permitted under French tax law, subject to several limitations. In the case of third-party acquisition debt, interest is generally deductible if the debt instrument has a valid business purpose and was contracted by the acquirer in the acquirer’s own interest. However, where the acquiring company has no autonomy to manage the acquired shares constituting a controlling interest and does not have the ability to participate in the decision process, the financial expenses attributable to the acquisition are generally not deductible. This restriction does not apply to controlling interests below € 1 million, when interest is paid by an unrelated third-party, or when the company group’s debt-to-equity ratio is greater than or equal to that of the acquirer. With regard to related company debt, the deductibility of interest may be limited if the buyer is under-capitalized according to one of the following three ratios: (i) the debt ratio; (ii) the interest coverage ratio; and (iii) the related company’s interests served ratio. In addition, when a domestic entity within a French consolidated group acquires shares in an entity that is controlled by shareholders who also control directly or indirectly the consolidated group, and that new entity joins the consolidated group, a portion of the interest paid by the consolidated tax group may not be deductible for nine years. Lastly, all companies with a net yearly interest expense that is greater than or equal to € 3 millions must add back 15 percent of the interest expense to their taxable income (25 percent in 2014).
Step-up for Target Company
In general, companies may freely reevaluate their fixed assets. Any capital gain generated by the reevaluation is generally taxable income.
Transaction costs are generally deductible from the calculation of capital gains/losses. Pre-acquisition costs are generally considered operating expenses.
Exit scenario: capital gains tax on sale of shares by a nonresident
Nonresidents are not subject to French income tax on gain from the sale of shares. However, and subject to an applicable double tax treaty, capital gains on the sale of the shares of a company headquartered in France and subject to corporate income tax, by a company domiciled abroad is taxable in France when the seller holds more than 25 percent of the financial rights in the company at any given time during the five year period preceding the transfer. Capital gains are taxable at a rate of 45 percent or 75 percent when the shareholder is a resident of a non-treaty country.
Other special taxes or issues to be Considered
Share transfers are subject to a registration duty of 0.1 percent. The rate is five percent
for real estate companies and three percent for other companies where capital is
not divided in shares.
Reference: International WTS Journal