French Tax Update - 2015 Finance Law, 2014 Amending Finance Law, And Macron Draft Law

The Finance Law for 2015 (Loi de finances pour 2015, 2015 Finance Law) and the Amending Finance Law for 2014 (Loi de finances rectificative pour 2014, 2014 Amending Finance Law) have now been enacted by the French Parliament and reviewed by the Constitutional Court, which has struck down several provisions in its decisions dated December 29, 2014.

In addition to the main provisions of these two laws, this first French Tax Update for 2015 will briefly summarize the main tax measures contained in the draft law for growth and activity (Projet de loi pour la croissance et l'activité or so-called Projet de loi Macron, Macron Draft Law), which was announced on December 10, 2014, and will be discussed before the French Parliament during the first semester of 2015.

2015 FINANCE LAW

INCOMPLETE TRANSFER PRICING DOCUMENTATION

The 2015 Finance Law includes a new provision reinforcing the penalty applicable to certain taxpayers failing to comply with the French transfer pricing documentation requirements.

Prior to this law, the penalty sanctioning failure to provide to the French tax authorities sufficient transfer pricing documentation, was equal to 5 percent of the profits unduly transferred abroad.

Pursuant to the new provision, the penalty can now be equal to the higher amount between (i) 0.5 percent of the amount of the transactions relating to missing or incomplete documentation (Undocumented Transactions) and (ii) 5 percent of the amount of the transfer pricing reassessment pertaining to the Undocumented Transactions.

This provision follows a first unsuccessful attempt of the French government in 2013 to reinforce the penalty, by introducing a penalty equal to 0.5 percent of the taxpayers' turnover. This move was struck down by the French Constitutional Court on the basis that it was unrelated to the Undocumented Transactions and disproportionate to its objective.

The new provision, applicable to tax reassessments initiated as from January 1, 2015, was found Constitution-compliant by the French Constitutional Court.

SPECIFIC FINE FOR ADVISERS

Among the provisions contained in the 2015 Finance Law as enacted by the French Parliament was the introduction of a new fine (Fine) for professionals helping or assisting transactions that were subsequently recharacterized under the Abuse of Law procedure (AoL) with the resulting application of the specific AoL penalty of either 40 percent or 80 percent (AoL Penalty). The Fine was to be 5 percent of the turnover realized through the recharacterized transaction, with a minimum amount of 10,000 euros.

However, the Constitutional Court decided that the above provision would be contrary to the Constitution, violating the principle whereby crimes and offenses must be clearly defined by the relevant legislation. The Constitutional Court thus struck down the Fine, finding that the corresponding provision was not clear in two aspects:

First, it was not clear whether the tax offense consisted of the recharacterization of the transaction under the AoL (where the relevant incriminated person could have challenged the recharacterization independently from the application of the AoL Penalty), or whether the offense consisted of the mere fact that the AoL Penalty was imposed; Second, it was not clear whether the Fine would apply to 5 percent of the turnover generated by the recharacterized transaction, or to 5 percent of the turnover realized by the incriminated adviser. Although the Fine has thus been removed from the 2015 Finance Law, it is possible that a similar provision would be proposed in the coming months or years on the basis of a clarified wording.

2014 AMENDING FINANCE LAW

PARENT/SUBSIDIARY TAX EXEMPTION FOR DIVIDENDS

Implementing the EU Directive 2014/86/UE, the 2014 Amending Finance Law has narrowed the participation-exemption regime for dividends (P-E Exemption) in order to avoid double non-taxation situations.

P-E Exemption Narrowed

The 2014 Amending Finance Law basically excludes from the P-E Exemption any dividend income derived from:

Profits of a subsidiary pertaining to an activity that is not subject to corporation tax or a similar tax (this exclusion has however been struck down by the Constitutional Court as it was not sufficiently specific and could inter alia end up applying to chains of holding companies); Shares held into a company to the extent that such dividend income was deductible from the taxable result of such company (this exclusion mirrors the anti-avoidance regime targeting hybrid instruments (please see our French Tax Updates for January, February and May 2014 for further details regarding such regime)); Shares to which no voting rights are attached (unless the parent company holds shares representing at least 5 percent of both the capital and the voting rights of the relevant subsidiary) (this exclusion was already applicable under a different provision); Shares of a company established in a noncooperative jurisdiction within the meaning of Article 238-0 A the French tax code (FTC) (this exclusion was already applicable under a different provision); and Shares of real estate companies that are booked as current assets under the real estate brokers regime within the meaning of Article 35 of the FTC (this exclusion was already applicable under a different provision). These new provisions apply to fiscal...