Global Tax Insights is Morison KSi’s quarterly tax newsletter made up of contributions from member firms. The newsletter includes country focus articles, tax advisory articles, and international tax cases.
Here you can find the focus on France.
The extension of the French list of noncooperative
states and territories:
Overview of restrictive tax measures
To comply with the commitments made in the fight against international tax evasion, France, like other states, introduced the concept of ‘non-cooperative states and territories’ (NCST) into its legislation. NCST are defined by article 238-0-A of the Code General des Impôts (CGI; French Tax Code) as ‘political entities that refuse international standards for the exchange of tax information’.
A Decree of 6 January 2020 amends the NCST list, which now includes 13 states or territories (an increase from seven): American Samoa, Anguilla, Bahamas, British Virgin Islands, Fiji, Guam, Oman, Panama, Samoa, Seychelles, US Virgin Islands, Vanuatu, and Trinidad and Tobago.
In contrast, six states – Botswana, Brunei, Guatemala, Marshall Islands, Nauru, and Niue – were withdrawn, since they entered into an administrative assistance agreement with France to exchange information necessary for the application of tax legislation.
These provisions apply to newly listed states or territories since April 2020. They cease to apply to states or territories removed from the list on the date of publication of the order, namely 7 January 2020.
NCST qualification leads to the application of restrictive tax measures that target transactions carried out by French residents trading with NCST as well as French transactions carried out by residents of NCST.
trading with NCST
Strengthening anti-tax fraud and evasion measures
In general, Articles 209 B and 123 bis of the CGI are intended to deter French tax residents, legal or natural persons, from locating, for tax reasons, a portion of their profits and income in foreign entities subject to a privileged tax regime within the meaning of article 238 A of the CGI.
These anti-abuse schemes are strengthened when the foreign entities concerned are established or domiciled in an NCST.
Article 209 B is intended to discourage companies liable for corporate income tax from locating part of their profits in countries with a privileged tax regime.
More specifically, this article allows the tax administration, under certain conditions, to tax in France the profits made by
foreign subsidiaries or branches of French companies established in countries offering a privileged tax regime.
The specific anti-abuse measure is that a French company can’t deduct taxes withheld on dividends, interest and royalties by a foreign entity located in an NCST from the taxes due on its income.
Article 123 bis establishes the principle of taxation of deemed revenues of assets held by individuals through entities whose assets are mostly financial and set in a country offering a privileged tax regime, when their participation in those entities exceeds 10%.
The specific anti-abuse measures introduced regarding the 10% detention requirement involving taxation in France is presumed to be met when the individual has transferred property or rights to a legal entity located in an NCST; in this case, the deemed revenue is determined by applying a flat rate to the portion of assets held.
Strengthening the prohibition on deduction of expenses
In principle, under article 238 A of the CGI, financial expenses, royalties for the transfer of operating licences, patents of invention, trademarks, or remuneration of services paid or payable by a French individual or legal person to individuals or legal entities domiciled or established in a state where they benefit from a privileged tax, are admitted in deductible charges only if the debtor proves that the expenses correspond to real transactions and that they are not abnormal or exaggerated.
However, under article 238 A al. 3 and 4, expenses mentioned above and any payments made on an account in a financial institution established in an NCST are presumed to be not tax deductible for the establishment of the corporate income tax or individual income tax, unless the debtor can provide proof that the expenses – in addition of being real transactions, not abnormal or exaggerated – have primarily an object and effect other than to allow the location of those expenses in an NCST.
Excluding the parent company scheme for dividends
According to articles 145 and 216 of the CGI, and subject to certain conditions, dividends distributed by a subsidiary to its parent company are exempt from corporate income tax in France (parent company scheme).
However, under section 145, 6-d of the CGI, dividends distributed by subsidiaries established in an NCST are excluded from the scope of the parent company plan, unless the parent company provides evidence that the activity of the subsidiary corresponds to actual transactions that have neither the purpose nor the effect of allowing, for the purpose of tax evasion, the location of profits in an NCST.
Introducing a specific documentary requirement on transfer pricing documentation
Subject to fulfilling certain conditions of article L 13 AA of the Book of Tax Procedures, companies established in France must provide transfer pricing (TP) documentation in connection with transactions of any kind carried out with related legal entities established or incorporated outside France. When transactions of any kind are made with one or more associated companies established or incorporated in an NCST, TP documentation is strengthened.
French-sourced transactions by
Increase in withholding rates on real estate income and capital gains
Article 244 bis and article 244 bis A of the CGI provide, for the usual real estate profits and capital gains, a withholding tax of 28% when they are carried out by taxpayers or by companies (in whatever form) that are not established in France. The tax withholding on capital gains is reduced to 19% for individuals. Finally, article 244 bis B also provides that the sale of shares held in French companies by non-resident shareholders is subject to a tax withholding tax of 30% for individuals and 28% for legal entities.
When profits are made by persons or companies domiciled, established, or incorporated in an NCST, the tax withholding rate is increased to 75%.
Increase in withholding rates on interests and dividends
Article 125 A of the CGI stipulates that fixed interest from bonds, equity, intercompany account of associates, etc. paid to individuals domiciled in France are subject to a withholding tax of 12.8%. As far as dividends are concerned, article 119 bis provides that dividends paid to companies based in the European Union are subject to withholding tax at a rate of 15%. For individuals, this rate is set at 12.8%.
The withholding tax rate is set at 75% when income or dividends are paid to individuals or companies having their tax domicile or being established in an NCST.
Increase in withholding tax on royalties and non-salary incomes
Articles 182 A bis and 182 B of the CGI provide for the payment of a withholding tax on two income categories:
• Salaries or any sums paid for French artistic performances (performers, directors, etc.) by a debtor who operates in France to foreign companies that do not have a permanent professional installation in France. The remunerations that correspond to these artistic performances are subject to a withholding tax of 15% subject to the application of international tax treaties. This rate is increased to 75% when the beneficiary of the sums paid in return for these artistic services provided in France is established in an NCST.
• Service fee paid by a debtor established in France to beneficiaries who do not have a permanent professional facility in France (article 182 B of the CGI) for services (advice, IT, service delivery, research, testing, etc.), sub-processed abroad and used in France, are also subject to withholding tax. The basis for calculating this withholding tax is the gross service revenue before VAT paid to the foreign company. The applicable rate is 28% (15% for sports services provided in France).
This amount is increased to 75% when the beneficiary of the sums paid, in return for these benefits provided in France, is established in an NCST.
Most of the above withholding tax may be exempted from this increase if the debtor provides evidence that these amounts correspond to real transactions that primarily
have an object and effect other than to allow their location in an NCST.
Thus, the inclusion of an NCST on the French list leads to the application of a whole series of restrictive anti-abuse tax measures concerning transactions that are carried out in France. French taxpayers, as well as individuals or companies established or domiciled in an NCST, will therefore have to reassess their French tax obligations according to this new list.