• EU Commission to examine French Tax Shield

Jouanjan & Partners has asked the European Commission to consider that the French Tax Shield system in its current version was not entirely compatible with the European freedoms of establishment and free movement of capital.

In a situation where a French resident receives dividend income from an EU country and where the dividend suffers a withholding tax under the applicable treaty, the French Revenue Authorities consider that the withholding tax is not to be comprised in the overall amount of tax paid.

For example, a French resident who receives 1m€ of dividend from Sweden suffers a 15% withholding tax (150k€). That person is then taxed on 1m€ in France, less 40% abatement on dividend income (as if the dividend were received from France). The taxable dividend amounts to 600k€. This taxpayer's total taxes paid directly to the French Treasury (wealth tax, income tax, social contributions and local property taxes) amount to, say, 600k€ per annum (+150k€ of withholding tax).

A fair implementation of the Tax Shield should limit the overall amount of tax paid by this taxpayer to 300k€ (50% of 600k€), whether the dividend is received from Sweden, from France, or from any EU country.

Now, France refuses this analysis and considers that 150k€ have not been “paid in France”. The French Revenue Authorities are of the opinion that the taxpayer in question may claim tax shield protection only based on 600k€, not 750k€.

Jouanjan & Partners has drawn the attention of the EU Commission on this situation as being contrary to freedom of establishment and free movement of capital. The EU Commission has expressed an informal view that there are “serious reasons why the French position was questionable in respect of the EU legislation”. It will start an investigation and consider whether it should start appropriate proceedings against France in this respect.

• Arnaud Jouanjan now a full STEP member

Arnaud Jouanjan TEP, the managing partner of Jouanjan & Partners, is now a full member of the Society of Trust and Estate Practitioners.

• R&D credits: immediate repayment scheme in place

The research and development credit system was made simpler and more attractive by the Finance Act 2008: businesses that carry out research and development activities may apply for a credit which is now equal to 30% of their total qualifying expenses up to 100m€, and 5% for expenses exceeding 100m€. For businesses who started research and development in 2008 (or had not benefited from a credit for the last 5 years) the rates are increased to 50% (year 1) and 40% (year 2).

Some additional expenses now qualify as R&D creditable, like premiums paid for patent insurance, for example. The list of expenses that qualify with an overhead mark-up has also been extended.

Businesses engaging in R&D activities may also file an immediate repayment claim for expenses engaged in 2005, 2006 and 2007 on a separate form.

It is important to note that the immediate repayment claim may be filed as early as 2 January 2009, based on estimated expenses for 2008. If the estimated figures do not exceed actual figures by more than 20%, no penalties will be applied when the excess credit is paid back by the company.

Otherwise, repayment may be obtained immediately upon filing of the tax return or deducted from the last corporate tax payment of the year.

In groups of tax-consolidated companies, the parent company would normally file a consolidated claim for the group.

Businesses may ask the French revenue authorities if their expenses qualify for a credit; no reply for 3 months is a deemed consent. In the near future, and latest on 1 January 2010, businesses will be allowed to apply for such a ruling directly from the ministry of research or from the French research agency (Oséo).

Research expenses borne by a French company and recharged to another company (in or outside of France) qualify as creditable expenses in certain conditions. 

• Tax Treaty News

France- Denmark : As from 1 January 2009, the Tax treaty with Denmark was terminated unilaterally by the Danish Tax Authorities. Both countries had diverging views on the taxation of pensions received by Danish taxpayers moving to France, and on a loophole allowing double exemption of certain capital gains on French real estate realized via Danish corporations. The Danish authorities have indicated that the existing EU fundamental freedoms provided enough protection against double taxation. No new treaty has been prepared for signature, according to the information in our possession.

France-Switzerland: An amendment was signed on 12 January 2009 (still to be ratified) with a view to amending certain clauses and to ease exchange on information between the two countries.

France-USA: An amendment was signed on 13 January 2009 (still to be ratified) to eliminate withholding taxes on royalties and, under certain conditions, on intercompany dividends.

• New inward expatriate system allows 5 year exemption of non-French assets

France recently implemented new legislation designed to improve the tax situation of high net worth individuals who decide to establish their tax residence in France. Such individuals are referred to as "inward expatriates" by the new law.

Where the individual is sent by an employer to work in France for a designated period of time, that person may qualify for other additional 5 year exemptions, and in particular a 50% exemption on passive income from non-French sourcesmost interest, dividends and capital gains).

That person may also be exempt on a significant portion of his or her salary. The exempt salary may represent up to 50% of the total salary, depending on certain factors.

• New Tax Shield in force 

France recently implemented a new Tax Shield system which ideally combines with capitalization bonds, life insurance and tax deferral schemes to form the fundamental basis of efficient tax planning. 

Under the new Tax Shield system, an individual's direct taxes (i.e.: income tax, wealth tax, social contributions, and local property taxes for main residence) may not exceed 50% of his or her taxable income.

Now, for example:

• dividends are taxable on 60% of gross distribution only
• drawdowns from qualifying bonds are taxed on the income element only

The appropriate combination of the above two schemes makes it possible to ensure that an individual's effective tax rate will be below 30%, including all social contribution, where income is composed of dividends exclusively. This rate can be brought down significantly by an appropriate use of bonds.

For non-residents moving to France, it is possible to ensure minimal taxation if proper steps are taken prior to the person's arrival in France.

• New Research & Development Credit in force 

The new system applies starting 1 January 2008.

All companies engaged in R&D schemes may obtain a credit equal to 30% of their qualifying R&D expenses that up to expenses of 100m€ (personnel, depreciation of assets, subcontracting expenses, etc). The rate is 5% for the portion of expenses exceeding 100m€. There is no maximum any longer (the maximum absolute credit used to be 16m€).

For companies that apply for a R&D credit for the first time in 2008 or later, the 30% rate is increased to 50% for the first calendar year, and to 40% for the second calendar year.

The credit is used to pay corporate tax and any excess credit is refunded after three years.