France: Status of 2021 “corrective" Finance bill; loss carryback measures and capital gains, withholding tax

The “corrective" Finance bill is currently pending consideration by both chambers of the French Parliament. At this stage, the legislative text of the bill cannot be amended because of an agreement reached among representatives of both chambers.

Following the European Commission’s recommendation on the tax treatment of losses during the COVID-19 crisis (18 May 2021), the "corrective" Finance bill for 2021 would temporary broaden the mechanism under which companies can decide to “carryback” their tax losses.

The bill also would bring into compliance with EU law the French withholding tax on capital gains derived by nonresident shareholders on substantial participation held in French subsidiaries—thereby, closing a “loophole” recently opened by a court decision. Read TaxNewsFlash

Under current rules, tax losses incurred during a given fiscal year (FY), on election and under certain conditions, can be carried back to reduce the tax liability of the immediately previous fiscal year. This offset creates a loss-carryback receivable against the French Treasury, in principle available up to an amount of €1 million applicable with respect to the tax base. Such receivable is either: 

• Offset against the corporate income tax liability in respect of the five fiscal years following the fiscal year during which the loss carried back was suffered, or
• Refundable if not fully offset within the five-year period.

Temporary extension of the carryback for up to the previous three tax years and removal of the € 1 million ceiling

The provisions in the pending bill would allow tax losses incurred in respect of the first loss-making FY ending on or after 30 June 2020 and at the latest on 30 June 2021 to reduce (on election) the tax liability of the previous three fiscal years, without any ceiling applying (except the profit declared by the company during these years and thus a removal of the €1 million ceiling).

The amount of the subsequent loss-carryback receivable would be determined by using the corporate tax rate of 25%, which would apply as from FY 2022 (the idea behind this treatment being that if the concerned tax losses would be carried forward rather than carried back, it would be expected they would be offset against profits realized as from FY 2022).

Note that the loss-carryback receivables that would result from this derogatory mechanism could not benefit from the special accelerated refund as provided under the standard regime. Read TaxNewsFlash.

Practical implications

For a fiscal year closing on 31 December 2020, losses could reduce the company tax liability for fiscal years ending on 31 December 2017, 2018 or 2019. Tax receivables arising from this derogatory mechanism could be offset against the corporate income tax due in respect of the fiscal years closed during the five years following the fiscal year during which the loss carried back was suffered, with any remaining balance being refunded if not fully offset within this five-year period. 

Under the French participation exemption mechanism, capital gains derived by resident companies on the sale of their qualifying participations are 88% exempt from corporate income tax, subject to certain conditions (notably the compliance with a minimum holding duration for two years).

In application of Article 244 bis B of the French tax code, nonresident companies selling shares in French companies are subject to a French withholding tax (the rate of which is currently 26.5%) if the participation exceeds, or exceeded at any time in the previous five years, a 25% threshold. This domestic withholding tax only applies when allowed by applicable tax treaty provisions.

In order to make French legislation compatible with EU law, French administrative guidelines allowed sellers that are residents in another EU Member State to be subject to the same tax liability as if they were established in France (i.e., under the French participation exemption mechanism, provided certain conditions were met). Specifically, these companies may claim a partial refund of the capital gains tax withheld to limit their effective taxation to the French corporate income tax on the non-exempt portion of 12% of the capital gain.

However, in a 14 October 2020 judgment, the Supreme Administrative Court (Conseil d’Etat) held that because the French domestic withholding tax on capital gains was incompatible with EU law, the French tax authorities could not rely on their own guidance to grant a partial refund (such refunds only being allowed pursuant to legislation). The court further concluded that the taxpayer was therefore entitled to a full refund of the French withholding tax paid.

In order to close the loophole “opened” by this court decision, for shares sold from 30 June 2021, the French tax code would allow nonresident companies a refund of the French withholding tax. The eligibility conditions to such a refund depend on whether the seller is an EU or EEA resident entity. For non-EU/EEA residents, the refund mechanism would be available only when the seller does not effectively manage or control the company, the shares of which are sold.

The refund would be equal to the difference between the domestic withholding tax due and the amount of the French corporate income tax that would have been due under the participation exemption regime had the seller been a French resident entity.

For more information, contact a tax professional with KPMG Avocats in France:

Marie-Pierre Hôo | + 33 (0) 1 55 68 49 09 | mhoo@kpmgavocats.fr

Patrick Seroin Joly | + 33 (0) 1 55 68 48 02 | pseroinjoly@kpmgavocats.fr