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France
New Law Revises Transfer Tax on Share, Assets Transfers; New Individual Income Tax Rules for Foreign Workers; Small Corporations Can Elect Passthrough Tax Treatment
In France, the recently enacted “Law on the Modernization of the Economy”—LOI no 2008-776 du 4 août 2008 de modernisation de l’économie which was published in
Le Journal Officiel on August 5, 2008—contains provisions that may affect foreign corporate investors as well as individual taxpayers who enter France to work.
The following discussion provides an overview of certain changes from a tax perspective. For an electronic version of text of the 97-page law (in French):
LOI no 2008-776 de modernisation de l’économie
Harmonization of Registration / Transfer Tax Concerning Share Transactions and Assets Transactions
Registration tax (duty) rates that apply with respect to the sale of shares have been harmonized under the new law. The new transfer tax rates apply to transaction as of August 6, 2008 (i.e., the day following the date of publication of the law in the official journal).
Under prior law (before August 5, 2008), the sale of shares in a French SARL (société à responsabilité limitée—a limited liability company) or in a French partnership (for example,
SNC or SCI) triggered a liability requiring the purchaser to pay a transfer tax at a rate of 5% based on the purchase price or the fair market value, whichever was greater. An allowance of up to € 23,000 was allowed with respect the determination of the base amount for computing the transfer tax (except in the case of real estate companies).
On the other hand under prior law, the disposal of shares held in a joint-stock company (société anonyme—SA), a simplified joint-stock company (société pas actions simplifiée—SAS), or a limited partnership with a share capital (société en commandite par actions—SCA) only triggered a liability for transfer tax at a rate of 1.1%, and the liability was capped at € 4,000.
Under the new law, beginning August 6, 2008, all sales of shares are now subject to a 3% transfer tax. The new law retains the tax allowance of € 23,000 allowed in case of sale of shares held in
SARLs or partnerships, whereas the € 4,000 cap with respect to the sales of shares in
SAs, SASs, or SCAs has been increased to € 5,000.
The transfer tax rate that applies with respect to the sale of shares in real estate companies is unchanged and remains an uncapped rate of 5%. For these purposes, real estate companies are entities the assets of which, considered at fair market value, consist predominantly of real estate properties or real property rights.
Concerning sales of assets, the new law also reduces the rate of registration duty that applies to asset transactions. Under the new law, the registration tax rate for asset transfers is 3%, reduced from the previous rate of 5% provided that the purchase price (or fair market value) of the assets is between € 23,000 and € 200,000. The duty rates however remain unchanged for asset transfer involving amounts under or above these threshold and ceiling values—i.e., there is no transfer tax liability with respect to asset transfers valued below € 23,000, and the registration duty rate of 5% applies to transfers of assets having amounts above € 200,000.
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Measures Intended to Make France an Attractive Tax Location for Foreign Workers
Under prior law, the salary or wages of individuals temporarily working in France (impatriates) were exempt from French individual income tax with respect to the amount of salary or wages directly linked to the conduct of the temporary activity in France. This exemption only applied with respect to individuals who (1) were employed by the same company before their transfer to France, and (2) were not considered to be French residents for tax purposes during the five previous years. In addition, foreign remunerations received by an individual for an activity conducted abroad were exempt from individual income tax, subject to a limit of 20% of the amount of French taxable remuneration.
To encourage qualified workers to come to France to work, the scope of the tax-exemption under the
impatriation premium regime has been broadened under the new French law. The exemption now applies to individuals who began their assignment in France as from January 1, 2008, and the duration of this taxpayer-favourable regime is six years per an individual.
Also, this taxpayer-favourable regime also can apply to benefit workers who are directly recruited in a foreign country (i.e., those who were not previously employed abroad by the company for whom they will work in France). In such cases, these
impatriates can decide either whether to be exempt wholly from French individual income tax on their
impatriate wages (like those workers already employed by the same company) or whether to apply to benefit from a proportional allowance of 30% of their French taxable wages.
Individuals performing their activity both in France and abroad also may benefit under the new law. As under prior law, wages relating to an activity exercised in a foreign country are exempt from French individual income tax. This benefit applies (i.e., is not only optional) when the time abroad is spent in the direct and exclusive interest of the employer.
As a consequence, employees working both in France and abroad may benefit from a double tax advantage on both their French and foreign remunerations. In this respect, a limitation mechanism, based on the following two alternative ceilings, will apply:
- The aggregate tax benefit for individuals working simultaneously in France and abroad cannot exceed 50% of their world-wide work remuneration.
- The fraction of the tax-exempted wages corresponding to the activity conducted outside of France is capped to 20% of the remuneration related to the work performed in France.
Furthermore, the new law provides for an individual income tax exemption of 50% with respect to the following types of income paid by a debtor located in a country which has concluded with France a income tax treaty that includes a clause of administrative assistance:
- Capital gains on the sale of shares
- Dividends
- Interest
- Royalties
- Patent rights
However, the exempt part remains subject to social security contributions in France.
Finally, the value of impatriates’ patrimony (net wealth) located abroad is exempt from the French wealth tax during the five years following the year of transfer to France of their personal tax residence. This measure, applicable with respect to the French wealth tax due for 2009, applies to individuals who were not considered to be French tax residents during the five previous years.
Election by Small Business Corporations to Be Taxed as Passthrough Entities
Unlisted operational corporations (SAs, SASs or SARLs) that have been in existence for less than five years and that have realized an annual turnover or have a total of balance sheet of less than € 10 million and that have less than 50 employees can elect to be subject to taxation as passthrough entities. To qualify for treatment as a passthrough entity, the 50% of the share capital and voting rights of the small business corporation must be held by individuals and 34% of the share capital and voting rights must be held by directors.
To make the election, all shareholders must agree, and the election must be filed with the French tax authorities’ centre for the company in the first three months of the first financial year concerned. The election, once made, is valid for five financial years, unless the election is revoked.
An election to be treated as a passthrough entity would remove the corporation from application of the French corporate income tax. Consequently, tax profits and losses would be attributed to the shareholders in proportion to their participation and would be taxable income / losses in their hands, depending on their own taxpayer status (as either individual income tax or corporate income tax).
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For more information, contact a tax professional with Fidal Direction Internationale* in Paris:
Lionel Rebilly, +33 (0) 1 55 68 15 71,
lrebilly@fidalinternational.com
Patrick Seroin, + 33 (0) 1 55 68 15 93,
pseroin@fidalinternational.com
* FIDAL is an independent legal entity that is separate from KPMG International and its member firms.
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