France: French 2014 budget increases companies, tax burden and targets transfers of functions and hybrid financing

Helene Rives		Fabien Cotte

On September 25 2013, the French government released its 2014 draft Finance Bill now in Parliament discussion. If voted for, the proposed measures would apply retroactively to year end. French and foreign companies operating in France are thus encouraged to review their position in the light of the new provisions described hereafter.

Under the proposed rule, interest deductions for related party financing would be allowed only if the French borrower demonstrates that the lender is subject to a corporate tax on the interest income that equals 25% or more of the corporate tax that would be due under French tax rules (that is when the lender is established outside of France, the tax liability that it would have owed had it been resident in France). The new measure would apply to ?nancial years ending on or after September 25 2013 and would apply to existing financing.

The Bill would amend the transfer pricing rules to include a new provision applicable to business restructuring in the case where a company would cumulatively:

• Transfer one or more risks or functions to a related party;

• Discontinue, either partially or fully, performing such functions or bearing such risks; and

• The transferor's EBE accounted for during one of the two financial years following the transfer is less than 20% of the average of the EBEs accounted for during the last three financial years.

Enterprises fulfilling the above tests must (i) demonstrate that they received an arm's-length compensation, and (ii) provide all documents and information needed to compute the income realised before and after the transfer.

These new rules would not apply to isolated asset transfers or licensing, provided such transfers or licensing are independent from any transfer of risks and functions.

The contemplated set up of a new tax on gross operating margin (EBE tax) is withdrawn and replaced by an exceptional increase of the corporate income tax rate for companies with turnover exceeding €250 million ($341 million). As a result, it is expected that the French corporate income tax rate will be around 38%.

Under the Bill, entities operating in France would be subject to a temporary tax on high remunerations owed in 2013 and 2014 that exceed €1 million to each individual. The new tax rate should be equalled to 50% but the latter cannot exceed 5% of the French company's gross revenue realised for the year during which the tax is due.

Helene Rives (helene.rives@fr.landwellglobal.com)

Landwell & Associés, Paris

Tel: +33 (0) 1 56 57 42 20

Fabien Cotte (fabien.cotte@fr.landwellglobal.com)

Landwell & Associés, Paris

Tel: +33 (0) 1 56 57 47 72