Executive summary

On 22 September 2021, the French Government presented the draft Finance Bill for 2022 (the draft Bill). This draft will be discussed by the French Parliament over the coming weeks and may be subject to amendments; the final version will be enacted by the end of December 2021.

As a preliminary remark, the draft Bill does not affect the already enacted decrease of the French corporate income tax (CIT) rate from 26.5%, for fiscal years (FYs) starting on or after 1 January 2021, to 25%, for FYs starting on or after 1 January 2022.

This Alert summarizes some of the main direct tax reforms included in this draft that may affect corporations.

Detailed discussion

Adjustment of certain French withholding taxes

In order to comply with European Union (EU) law and the case law of the French Supreme Administrative Court (Conseil d’Etat),¹ the draft Bill provides for an adjustment of certain withholding taxes, in particular: (i) those of Article 182 B of the French Tax Code (FTC) applicable to payments made for royalties and the provision of certain services; and (ii) those of Article 119 bis 2 of the FTC applicable to dividends.

Withholding taxes imposed under Article 182 B of the FTC

• The withholding tax should now be computed based on the gross amount of the sums paid, minus a 10% allowance, when the eligible beneficiary is subject to local CIT outside of France and established either in an EU Member State or in a Member State of the European Economic Area (EEA), other than a Non-Cooperative State or Territory (NCST), that has concluded a treaty with France that includes an administrative assistance provision aimed at combating tax fraud and tax evasion.
• The eligible beneficiary could also claim, provided that it cannot offset the French withholding tax on its local CIT liability, a refund of the portion exceeding the taxation that would have been due in France on said income, taking into account the corresponding expenses directly incurred to generate that revenue which would have been tax deductible if the beneficiary had been located in France.
• The draft Bill also extends such a claim to withholding taxes under Article 182 A Bis of the FTC applicable to payments made for the provision of artistic services provided or used in France.

Withholding taxes imposed under Article 119 bis 2 of the FTC

The above-mentioned claim would also apply to withholding taxes applicable to French-source dividends provided that the beneficiary is established:

• Either in an EU Member State or a Member State of the EEA, other than an NCST, that has concluded a treaty with France that includes an administrative assistance provision aimed at combating tax fraud and tax evasion.
• Or in a third State, other than an NCST, that has concluded a treaty with France that includes an administrative assistance provision aimed at combating tax fraud and tax evasion, but only if the beneficiary is not effectively involved in the management or the control of the distributing entity.

Finally, this draft Bill also provides for a slight adjustment of the procedure for obtaining a refund of French withholding taxes borne by non-French resident loss-making companies.

Tax deduction for goodwill amortization for small businesses

Article 214-3 of the French General Chart of Accounts allows small businesses within the meaning of Article L. 123-16 of the French Commercial Code² to amortize their goodwill over a 10-year period, for French GAAP purposes. However, such amortization is not deductible for tax purposes.

As a derogatory and temporary measure, the draft Bill provides for the possibility to deduct for tax purposes the amortization of goodwill acquired between 1 January 2022 and 31 December 2023. Although the wording of the draft Bill may be debatable as to the actual scope of this measure, it seems that the intention of the lawmaker, at this stage, is to limit the benefit of that temporary tax deduction to small businesses, only.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Société d’Avocats, Paris

• Eric Verron | eric.verron@ey-avocats.com
• Xavier Dange | xavier.dange@ey-avocats.com

Ernst & Young LLP (United States), French Tax Desk, New York

• Frédéric Vallat | frederic.vallat@ey.com
• Mathieu Pinon | mathieu.pinon1@ey.com
• Nicolas Menard | nicolas.menard1@ey.com

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Endnotes

1. CE, 22 November 2019, #423698, SAEM de gestion du Port Vauban, CE, 9 September 2020, #434364, Sté Damolin Etrechy for Article 182 B; CE, 11 May 2021, #438135, UBS Asset Management Life Ltd for Article 119 bis 2.
2. Businesses that do not exceed two of the three following thresholds during a given financial year: (i) total balance sheet of €6 million; (ii) revenue of €12 million; and (iii) average number of employees of 50.