France: Tax measures in finance bill for 2022

The French finance bill for 2022 was released Wednesday 22 September 2021. 

Few proposals will affect multinational entities. The principal measures are aimed at small self-run companies. Concerning corporate income tax, the main change would affect the calculation of the taxable basis of certain withholding taxes (i.e., on a net basis versus a gross basis previously—under a special reimbursement procedure as a general rule and a 10% lump-sum allowance immediately applicable for withholding tax on services).

As regards to value added tax (VAT), there are two new provisions—one relates to the payability of VAT on supplies of goods, and the other intends to “soften” significantly the rule governing the scope of option to tax for financial players.

Discussions of the proposals by the French Parliament will take place from mid-October through the end of December 2021, and could add additional proposals or make some amendments.

French-source dividends and so-called “non-salary income” (i.e., mainly income from intellectual and industrial property and sums paid for services of any kind provided or used in France) received by a non-resident company are subject in France to a domestic withholding tax computed on the gross amount of this income. In most instances, such withholding tax is not applicable, or its rate is reduced in accordance with the provisions of the relevant tax treaty.

Conversely, French resident companies are subject to corporate income tax on their net income.

In the last few years, the French Supreme Tax Court (Conseil d'Etat) held in three decisions* that denying non-resident companies the right to deduct from the withholding tax base any professional costs or expenses incurred is contrary to freedom of establishment for services, and contrary to freedom to provide services.

^{*The court decisions are in case n° 423698 (22 November 2019) relating to dividends, and in case n° 434364 (9 September 2020) and case n° 438135 (11 May 2021), relating to services.}

In order to make French rules compliant with EU law, the finance bill for 2022 provides the conditions and procedures under which non-resident entities would finally bear a withholding tax liability assessed on their net income. 

A special reimbursement procedure, as a general rule

A special procedure would be introduced under which non-resident companies would be entitled to claim a refund of the withholding tax paid in excess (i.e., the difference between the withholding tax levied on gross income and the one determined on a net income basis after deduction of all the acquisition and conservation expenses directly related to these revenues).

This new procedure would apply to withholding taxes on dividends, royalties, and services for which the taxable event occurs on or after 1 January 2022. It would benefit non-resident companies that:

• Are established in an EU Member State or an EEA Member State which has concluded a convention (treaty) on mutual administrative assistance with France and which is not regarded as non-cooperative according to French tax law
• Are established in a non-EU or a non-EEA Member State which has concluded a convention on mutual administrative assistance with France and which is not regarded as non-cooperative according the French tax law, and receive French-source dividends
• Are not allowed to set off in their country of residence the amount of the withholding tax paid

In addition, acquisition and conservation expenses incurred would be taken into account for the taxable basis if they are tax deductible when the beneficiary is established in France.

A 10% lump-sum allowance immediately applicable for withholding tax on services

Withholding tax on a French-source “non-salary income” (falling into the scope of the article 182 B of the French tax law) would be levied after a 10% lump sum allowance for expenses. This would be the case when received by a company established in EU or EEA countries that have concluded with France a treaty with an administrative assistance clause and are not regarded as a non-cooperative territory. In that situation, the deduction would apply immediately (when the tax is levied) and if professional expenses were incurred for a higher amount, the new reimbursement procedure would have to be followed.

In principle, the payment of a deposit for a future supply of goods does not trigger the collection of VAT, which occurs at the time of the supply in accordance with the provisions of the French tax law (Article269, 2-a).

Disregarding the previous rule for non-conformity with the VAT Directive, the Nantes Administrative Court of Appeal considered, on the basis of the provisions of the VAT Directive, that VAT could be deducted from the date of payment of the deposit if, on one hand, the goods that are the subject of the future supply are precisely identified and there is no uncertainty as to whether the supply will take place and if, on the other hand, the taxable person holds an invoice for the advance payment (CAA Nantes, 28 May 2021, No. 19NT03579, SAS Technitoit).

The draft budget bill for 2022 includes this rule of payability of VAT on account for the supply of goods and thus would allow businesses to deduct VAT on their purchases earlier, reducing their cash-flow burden. At the same time, businesses making supplies of goods would have to collect VAT earlier in the event of an advance payment by their customers.

The new rule is scheduled to be effective 1 July 2022 to give companies time to update their IT systems.

Article 9 of the 2022 draft finance law would significantly lessen or soften the rule governing the scope of option to tax for financial players.

In a nutshell, it is expected that the option that automatically covers a large scope of financial activities (operations on securities, payments transfers, assets management, etc.) would no longer need to be exercised for all the operations in scope. Taxpayers would be allowed to select freely the operations for which they would like to opt instead.

This proposed modification does not include any indication (at this stage) about the filing of such “revised option” and the way it would fit with the current status of financial institutions which historically maintained such option (note, however, that a large portion of the banking/asset management sector did revoke such option due to its global character).

Driven by EU principles, this measure is supported by the French tax authorities and aligns the situation of financial players with a Conseil d'Etat decision softening another voluntary option (e.g., on real estate rents (Conseil d'Etat) September 9, 2020, SCI Emo).

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

Philippe Breton | +33 (0) 1 55 68 49 33 | philippebreton@kpmgavocats.fr