21 November 2016
Global Tax Alert
France includes proposed
diverted profits tax
in draft Finance Bill
for 2017 and releases
draft Amending Finance
Bill for 2016
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Executive summary
A diverted profits tax (DPT) has been proposed by the French Assemblee
Nationale in the course of discussions on the draft Finance Bill for 2017.1
Also, on 18 November 2016, the French Government presented the draft
Amending Finance Bill (AFB) for 2016. This draft will be discussed by the French
Parliament over the following weeks.
Detailed discussion
Draft Finance Bill for 2017: Adoption of a DPT
A newly created DPT would apply to the portion of profits realized by a legal entity
domiciled or established outside of France and related to an activity (sales of goods
or provisions of services) carried out either:
•Through a permanent establishment in France (for the purpose of the DPT,
a legal entity, domiciled or established outside of France, would be deemed
to have a permanent establishment when an enterprise, established or not
in France, carries out in France, an activity consisting of the sale of goods or
provision of services belonging to the above mentioned legal entity and the
latter controls that enterprise or holds more than 50% of its shares, financial
or voting rights).
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Global Tax Alert
Or
•By a legal person or individual, when it can be “reasonably”
considered that the activity of such legal person or
individual aims at avoiding or reducing the tax burden
that should be due in France, by not declaring therein
a permanent establishment (this would encompass
situations such as: (i) persons acting on behalf of the
legal entity domiciled or established outside of France and
concluding habitually contracts in the name of that legal
entity, or contracts pertaining to the transfer of title on,
or concession of the right to use, goods that belong to the
legal entity, or on which that legal entity has a right to use,
or contracts related to the sale of goods or provision of
services by the above mentioned legal entity (an exemption
would apply if the legal person or individual exercises its
activity in an independent way); (ii) a site located in France
where goods, that the legal entity sells, or either has title
or a right to use on, are received, stored or delivered; or
(iii) an internet website, hosted or not in France, carrying
out, to the benefit of persons domiciled in France, an
activity of sale of goods or provision of services sold or
provided by the legal entity).
The DPT would also apply to enterprises exploiting electronic
platforms through which persons can be connected with
a view to contracting for the sale, exchange or sharing of
goods or services.
An escape clause is also provided (for both European Union
(EU)-based and non EU-based legal entities).
The proposed DPT, which compatibility with French double
tax treaties may be challenged, still needs to go through
the final stages of the parliamentary discussion before
potentially being enacted by the end of December 2016, and
may well be referred to the review of the FCC. In its current
drafting, it would be levied at the same rate (33.1/3%) as the
standard corporate income tax rate, and would apply to fiscal
years starting on or after 1 January 2018.
Draft of the AFB for 2016
Extension of the 3% distribution tax exemption to French
subsidiaries held at 95% or more by foreign groups
On 30 September 2016, the FCC ruled that the legal provisions
providing a 3% dividend tax exemption for distributions made
only within a French tax consolidation violates the French
Constitution, especially the principles of equality before the law
and equality before public expenditure.2
Further to this decision, the draft 2016 AFB extends the
3% dividend tax exemption applicable for distribution
of dividends made within a French tax consolidation,
to distributions made to qualifying companies subject
to a corporate tax equivalent to the French corporate
income tax in an EU Member State or a in another State
having concluded with France a tax treaty including an
administrative assistance clause, fulfilling the criteria for tax
consolidation, had the beneficiaries been located in France
(in particular, holding, directly or indirectly, at least 95%
of the share capital of the French distributing entity). The
exemption would also apply to distributions made between
French resident entities qualifying for the tax consolidation
regime, but which have not elected for it.
The 3% distribution tax exemption would not apply to
distributions made to entities located in a Non-Cooperative
State or Territory (NCST3), unless the French entity can
demonstrate that the activities run by the NCST entities relate
to genuine operations that do not have, as an object or purpose,
the localization of profits in an NCST, with a tax fraud intention.
This proposal would apply for distributions made as from
1 January 2017.
Additional contribution to the Social Solidarity
Contribution (Contribution Sociale de Solidarite des
societes or C3S tax)
As from 1 January 2017, entities having revenue higher
than €1 billion would be subject to an additional contribution
to the C3S tax amounting to 0.04% of the revenue realized
during the civil year.
This additional contribution would be subject to a 90%
installment payment due on 15 December of the year during
which the estimated revenue is realized. This additional
contribution to the C3S would be deductible from the C3S
due on 1 April of the civil year following the one during which
the revenue was realized.
Amendment to the French dividend and capital gain
participation exemption regimes
The current French dividend participation exemption regime,
which limits the taxable basis of qualifying dividends to 5% of
the dividend amount,4 applies if the qualifying parent entity
fulfills in particular a 5% holding requirement of the share
capital of the distributing entity during a two-year period.
However, per the current drafting of the law, the French
dividend participation exemption is not applicable if the
qualifying parent entity does not hold at least 5% of; (i) the
share capital; and (ii) the voting rights of the distributing entity.
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In order to comply with a decision rendered by the FCC,5
the 2016 draft AFB proposes to eliminate the 5% voting
rights holding requirement to benefit from such participation
exemption regime on dividend distributions.
In case of non-communication of the AEF, the taxpayer would
be subject to: (i) a fine amounting to €5,000 or 10% of the
amounts triggered by a tax reassessment; and (ii) an on-site
tax audit (Verification de comptabilite).
Yet, the minimal 5% voting rights holding requirement is
maintained for the capital gain participation exemption to
apply to capital gains derived from the sale of qualifying
participations that have been held at least two years.
Strengthening of the fight against international
tax avoidance
These provisions would be applicable for fiscal years starting
on or after 1 January 2017.
In addition, the draft 2016 AFB introduces a safe harbor
clause for French entities realizing capital gains upon the
transfer of shares related to entities located in an NCST,
entitling them to the benefits of the French capital gain
exemption provided they can establish that the activities run
by the NCST entities relate to genuine operations that do not
have, as an object and purpose, the localization of profits in
an NCST, with a tax fraud intention.
In order to evidence tax avoidance and fraud, the draft
AFB for 2016 provides the French tax authorities with the
possibility to hear any person (i.e., clients, suppliers, related
professionals), except for the taxpayer itself, that may have
relevant information.
Specific tax procedure rules would be applicable. In
particular, the convening notice would have to be delivered
at least eight days prior the hearing by the French tax
authorities and the convened person would have the
possibility to be assisted by an interpreter.
New remote simplified tax audit
The draft AFB for 2016 introduces a new remote tax audit
procedure (Examen de comptabilite) which would consist in
the audit of the Account Entry File6 (AEF), to be sent within
10 days following the receipt of the Examen de comptabilite
notice by the audited taxpayer. This new remote simplified
tax audit would be limited to a maximum six-month period.
Endnotes
1. See EY Global Tax Alert, French Government releases draft Finance Bill for 2017, dated 30 September 2016.
2. Conseil Constitutionnel, 30 September, 2016, 2016-571, Layher. For additional information, see EY Global Tax Alert, France’s
3% distribution tax exemption applicable within tax consolidated groups violates French Constitution, dated 3 October 2016.
3. An NCST is defined as a State or territory which is not a Member State of the European Union, is listed on the OECD’s
“black” or “grey” list and has not signed a tax information exchange agreement with France. The list of NCST is updated
each year in order to take into account the actual cooperation provided by such jurisdictions. As at 1 January 2016,
Botswana, Brunei, Guatemala, Iles Marshall, Nauru, Niue and Panama are characterized as NCST.
4. The 5% taxable portion is deemed to reflect expenses in relation to the exempt dividends, triggering a 1.72% effective taxation.
5. Conseil Constitutionnel, 8 July 2016, 2016-553, Natixis.
6. For further information regarding the AEF, see EY Global Tax Alert, French Government publishes decree on obligation to
provide electronic accounting records upon a tax audit, dated 1 August 2013.
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Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young Société d’Avocats, International Tax Services, Paris
• Claire Acard +33 1 55 61 10 85 Ernst & Young LLP, French Tax Desk, New York
• Frédéric Vallat • Alexandre Peron • Elie Boccara +1 212 773 5889 +1 212 773 9164 +1 212 773 0224 Ernst & Young LLP, Financial Services Desk, New York
• Sarah Belin-Zerbib +1 212 773 9835 [email protected]
[email protected]
[email protected]
[email protected]
[email protected]
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