The French Finance Act for 2016 and Amending Finance Act for 2015 were enacted on December 30, 2015 (the “Acts”). Under the new legislation, the neutralization of the 5% add-backs on dividends within tax-consolidated groups has been cancelled and replaced by a 1% add-back. The Acts have also made changes to the participation exemption regime applicable to dividends. Finally, in response to the OECD’s report on BEPS (Base Erosion and Profit Shifting), a specific provision has been introduced to oblige large companies to carry out country-by-country reporting.

The most important measures are as follows:

Following the “Groupe Steria” decision of the Court of Justice of the European Union (“CJEU”), the neutralization within tax-consolidated groups of the 5% add-back on dividends exempt under the participation exemption regime is replaced by a 1% add-back.

Under French tax law, dividends eligible for the participation exemption regime are exempt from corporate tax, except for a 5% proportion of costs and expenses that is added back to the taxable result. Until now, within a tax-consolidated group, the 5% add-back was neutralized, resulting in a full exemption. However, only French subsidiaries can be part of a French tax-consolidated group. On September 2, 2015, the CJEU decided that this unequal treatment of French and foreign subsidiaries was incompatible with the freedom of establishment.

To comply with this decision, the reform provides that, under the participation exemption regime, dividends are now subject to a 1% add-back when they are distributed to a French company in a tax-consolidated group either by (i) a French subsidiary belonging to the same tax-consolidated group or (ii) an EU or EEA subsidiary that would meet the conditions required for belonging to such group if it were French[1].

Several changes have been made to the participation exemption regime:

• the regime is broadened to include the bare ownership of shares[2];
• the general anti-abuse rule provided by the parent-subsidiary directive is transposed into French domestic law, as a result of which the exemption does not apply to any distributions resulting from abusive tax-saving schemes[3];
• certain distributions made by tax-exempt entities now fall outside the scope of the participation exemption (such as dividends from shares in  SICOMI, SCR, SIIC and their foreign equivalent, SPPICAV)[4];
• a provision is introduced to allow the participation exemption to apply to dividends received by French companies from companies located in so-called Non-Cooperative States and Territories (“NCST”)[5]: the French company must demonstrate that (i) the distributing entity carries on real activities and that (ii) the aim of the entity’s location is not to benefit from a favorable tax regime in the NCST[6].

Others changes impact on the participation exemption regime, in relation to the exemption from withholding tax:

• the exemption from withholding tax on dividends paid to EU parent companies will be applicable to the bare ownership of shares, and be extended to EEA parent companies[7];
• an exemption is introduced for distributions made by French companies to branches or companies located in an EU or EEA state which are in a loss-making position and are subject to winding-up proceedings (liquidation judiciaire)[8];
• the Acts introduce into domestic law the exemption provided by the “Denkavit” case, in which the CJEU stated that the unequal application of the participation exemption regime to French and foreign parent companies is incompatible with the freedom of establishment. As a result thereof dividends paid to EU parent companies that (i) fulfill the conditions required for the exemption of French parent companies (participation between 5% and 10%) and (ii) cannot make use of any tax credit corresponding to the French withholding tax, will be exempt from French withholding tax[9].

The effective corporate tax rate of large companies (with a turnover of at least EUR 250 million) is reduced from 38% to 34.43%[10].
Reporting requirements have been made with regards to transfer pricing:

• to comply with the OECD’s report on BEPS, the Acts introduce a country-by-country reporting requirement for multinational companies. French companies which realize an annual consolidated turnover of at least EUR 750 million will have to report within 12 months after the end of a financial year their activities and profits on a country-by-country basis for each jurisdiction where they are operating businesses. Non-compliant companies may be subject to a penalty of up to EUR 100,000[11].

Notes:

[1] Applicable to financial years commencing on or after January 1, 2016

[2] Applicable to financial years ending on or after December 31, 2015

[3] Applicable to financial years commencing on or after January 1, 2016

[4] Applicable to financial years ending on or after December 31, 2015

[5] Are considered as NCST from January 1, 2016 the following jurisdictions: Nauru, Guatemala, Brunei, Marshall Islands, Botswana, Niue

[6] Applicable to financial years ending on or after December 31, 2015

[7] Applicable to financial years ending on or after December 31, 2015

[8]The new exemption will apply to distributions made on or after January 1, 2016

[9]Applicable to financial years ending on or after December 31, 2015

[10] Applicable to financial years commencing on or after January 1, 2016

[11] Applicable to financial years commencing on or after January 1, 2016