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France puts business at ease over mergers

14 December 2017

Josh White

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The changes are expected to improve the state of affairs for taxpayers and tax professionals

The French government has released a second corrective finance bill for 2017, which contains new provisions for cross-border mergers in response to a ruling by the European Court of Justice (ECJ) in March 2017 and complementing Emmanuel Macron's pro-business agenda.

The ECJ ruling found that the provision of the French tax code, which requires a prior tax ruling from the authorities in advance of a cross-border merger, breaks the principle of freedom of establishment under EU law. This provision brought the French tax system into conflict with the EU Merger Directive.

"The European Court of Justice ruled that the obligation to file a ruling request for the merger of a French legal entity into (or the contribution of an activity by a French resident entity to the benefit of) a legal entity resident in another EU member state before the legal completion of the transaction is not compatible with Article 11 of the Merger Directive," Patrick Seroin, partner at KPMG, told International Tax Review.

Under EU law, designed to create a level playing field for businesses whether they operate domestically or cross-border within the European single market, national borders must not impeded trade.

"The ECJ's decision evidenced an infringement to the fundamental principle of freedom of establishment, since the obligation to file a ruling request does not affect purely domestic restructuring operations," Seroin said.

Under the new measure, companies undergoing cross-border mergers would still have to file with the French tax authorities but the reform will do away with the obligation to keep shares in exchange for a partial contribution of assets for three years. Businesses can still request a ruling from the tax authorities on whether the deal meets the conditions necessary to claim the benefits of the special merger regime.

At the same time, the corrective draft bill addresses measures tackling tax evasion and the control of financial information with regard to foreign tax authorities under the common reporting standard (CRS).

According to Seroin, the ECJ found that the provision "created a general presumption of tax evasion or fraud, which goes well beyond the limits of the anti-abuse provision of the Merger Directive".

These changes will free up cross-border restructuring. Seroin believes that this change "should make international legal restructuring operations much more business friendly and of a significantly higher legal certainty".

This is just the latest phase of tax reform introduced by the French government, as President Emmanuel Macron pursues his aim of cutting the corporate tax rate from 33% to 25% and bringing public spending in line with the EU's 3% deficit limit. The French tax system is gradually being reformed for the sake of greater tax harmonisation across the EU.

The National Assembly has already approved a package of tax reforms for 2018, such as a flat rate of 30% for capital gains, dividends and interests, as well as an effective 70% cut to the wealth tax by scrapping its application to everything except property assets. The ultimate aim is to simplify the tax regime and alleviate the burden on enterprise.

These cuts will be made just as the new provisions on cross-border mergers come into effect. Going forward, the combination of these changes is expected to improve the state of affairs for taxpayers and tax professionals.

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