French Finance Bill for 2021 and relaunch plan

The French finance bill for 2021 was enacted on 29 December 2020 ("Finance Bill") with most measures entering into force as from 1 January 2021.

In line with the previous announcements of Emmanuel Macron, no tax increase is implemented despite the COVID-19 sanitary crisis and the historical effort conducted by the French government to sustain the economy during this period. On the contrary, the Finance Bill decreases the tax burden and uses this as a tool to start-up the recovery of the French economy in the context of the French EUR 100 billion relaunch plan. 

The Finance Bill goes ahead with the previous steps taken to decrease the corporate income taxation; it implements a new set of measures to reduce taxes on investments; it provides for temporary tax mitigation measures facilitating cash refinancing; it supports the green growth and environmental transition by implementing specific green tax incentives mainly for individuals (not covered in this note); and it simplifies some tax formalities. 

The following note presents the main tax measures of the Finance Bill interesting French companies. 

Direction maintained on current corporate income tax rate reduction

The Finance Bill goes ahead with the previous steps taken to decrease the corporate income taxation.

The French corporate income tax rate will still progressively decrease down to 26.5% in 2021 (except for companies which turnover exceeds EUR 250 million which will bear a 27.5% rate) and to 25% for all companies in 2022. 

In addition, eligibility to the reduced 15% corporate income tax rate applicable to the first EUR 38.120 of taxable result opened to small and medium size companies whose turnover does not exceed EUR 7.63 M is enlarged to entities with a turnover up to EUR 10 M as from 1 January 2021.

Decrease of the tax burden on investments 

Taxes on investment are based on the value of business assets and on the level of the investments realised by the companies and applies regardless of the profit or loss position of the companies. They are viewed as an obstacle to maintaining industry in France. The Finance Bill implements a new set of measures in relation hereto which should decrease the tax burden on investments by EUR 20 billion over the next two years. 

Reduction by half of the CFE and land tax taxable basis for industrial properties 

Companies holding premises used to operate a business are subject to property taxes namely, the CFE (Cotisation Foncière des Entreprises) and the land tax (Taxe foncière).

The taxable basis of industrial facilities is assessed on their cost price contrary to the basis of other properties which is computed on their rental value. This results in practice in significantly higher tax costs for industrial facilities. To mitigate this effect, as from 2021, the taxable basis for industrial facilities is reduced by half.

Extension of the exemption of CFE applicable to new businesses

The exemption of CFE applicable to new businesses during the year of creation also applies to extension of businesses and will be available during three years (instead of one). 

Lower cap for business tax

The French business tax so called CVAE ("Contribution sur la valeur ajoutée des entreprises") is assessed on the added value produced by companies whose turnover exceeds EUR 152,500, irrespective of their profits. The Finance Bill decreases the CVAE rate from 1.5% to 0.75% with a correlative adjustment of the existing allowance benefiting to companies whose turnover does not exceed EUR 50 million. 

Moreover, the aggregate amount payable for the CFE and CVAE previously capped to 3% of the company's value added is reduced to 2%.

Tax mitigation measures facilitating refinancing

Two temporary measures and the adjustment of an existing provision aim at facilitating the refinancing of companies affected by the sanitary crisis and enabling companies to recover a better cash position or strengthen their accounting position.

Sale & lease back operation

The Finance Bill reactivates a pre-existing measure which allows companies to spread the taxation of capital gains realized upon a sale and leaseback over the duration of the financial lease within a limit of 15 years. 

This applies, upon election, to the disposal of real estate assets used by a company for its own operations or for the operations of related entities within a group. On the contrary, properties dedicated to a patrimonial or renting activity with third parties are not eligible to this measure.

The regime applies to sale & lease back operations completed between 1 January 2021 and 30 June 2023 whose financing has been agreed upon by the finance lessee between 28 September 2020 and 31 December 2022.

Free revaluation of assets

The second measures neutralises the tax consequences of a step-up resulting from a free revaluation of assets conducted by companies during a fiscal year closed between 31 December 2020 and 31 December 2022. 

The taxation of the gain is spread over 15 years for constructions and over 5 years for other amortizable assets. The capital gain on non-amortizable assets will be taxed only at the time of a future disposal. 

Capitalisation of discounted receivables

Article 209 VII bis of the French tax code neutralises the taxation on gains triggered upon capitalisation of receivables acquired for a discounted price. 

According to this existing measure, buyers acquiring from third party discounted receivable over a target are not taxed while incorporating the receivable in exchange for shares to the extent the seller (lender) was not related to the target (debtor). The taxation, if any, is limited to the increase in value between the acquisition price of the discounted debt and the actual value of the shares received in counterpart (i.e. increase in value of target between the acquisition of the receivable and the share capital increase). 

To enlarge the benefit of this regime, in accordance to the Finance Bill the condition related to the absence of links between the seller (lender) and target is no longer required if the capitalisation of the discounted receivables occurs in the context of a conciliation, safeguard or legal redress procedure. 

Rental withdrawal

The Finance Bill tends to encourage rental withdrawal granted by landlord.

It confirms that the landlord is not taxed on a rent's waiver granted to an unrelated tenant under a commercial or professional lease, with no need to justify the motives of such waiver until 30 June 2021 (instead of 31 December 2020).

It also grants the landlord with a tax credit on waiver of the rent for November 2020 to the extent the premises were administratively closed to the public or used for hotels or catering activities and the tenant has less than 5.000 employees (unless the tenant has already lost half of its share capital or net equity as of 31 December 2019, or was under a liquidation procedure as at 1 March 2020). 

The tax credit is in principle equal to 50% of the waiver retained within the limit of EUR 0.8 M but is reduced by 1/3 if the tenant has 250 employees or more. 

VAT group

The Finance Bill incorporates under French law the VAT group which is already available in 20 other Member States. In France, the VAT group will be effective as from January 2023 for options exercised in 2022.

The VAT group is optional and can apply between French related VAT tax payers, i.e. entities having between them financial (i.e. a minimum of 50% common stake), economic and organisational links. Related pure holding can also join the VAT group.

The option is available for a minimum of 3 calendar years.

One entity within the VAT group is appointed as single VAT tax payer but each member remains jointly liable to the payment of its VAT due. Each member constitutes a distinct sector of activity and applies the ratio of deduction applicable to the activity for which the service or supply is acquired. 

Within the VAT group, any intragroup operations is neutralised for VAT purposes. 

Lightening of the tax formalities burden

To simplify the management of the tax affairs of companies and fluidify their relationship with the French tax authorities, the Finance Bill also provides for the following measures: 

• Suppression of the formality of a registration of share capital increases / decreases before the tax centre. 
• Progressive suppression of the 1.25 surcharge applicable to self-employed individuals not affiliated to a chartered management centre. 
• Suppression of the obligation to yearly file with the French tax authorities the specific form reporting the symmetrical positions (but the form needs to remain available in case of request from the French tax authorities).

Authors: Emmanuelle Pontnau-Faure, Partner and Solène Guyon, Associate.