Consequences of the Brexit on direct tax in France

On 11 March 2021, the FTA published their comments on the effects of the United Kingdom’s withdrawal from the European Union on the tax benefits granted to individuals and legal entities in respect of investments made in the EU or the European Economic Area.

Temporary relaxing measures

As the tax benefits are generally subject to the condition that the investments are made within the EU or another EEA State, investments in the United Kingdom are no longer eligible. However, France adopted temporary measures to mitigate the effects of Brexit. These relaxing national measures are planned for a period of generally nine months, with few exceptions, from 1 January 2021 until 30 September 2021.

Impact on tax consolidation regime

Tax consolidation consists of consolidating, upon election, the tax results of member companies of a same group. Under French law, it allows those companies to form a group in which the parent company (holding at least 95% of the capital of the subsidiaries) is solely liable for French corporate income tax (CIT) on all the results of the companies within the consolidation scope.

This regime has been extended to groups that have sites in the EU / EEA:

• vertical tax consolidation: possibility for a French company to join a French tax group where said company is indirectly held through a company located in the EU or EEA (intermediary company). The intermediary company must itself be at least 95% held by the parent company (CJEU’s Papillon decision of 27 November 2008).
• horizontal tax consolidation: possibility, under certain conditions, to form a French tax group between French sister companies whose common parent company (non-resident parent entity) is established in the EU or the EEA (also possible in case of indirect holding via a foreign company). The non-resident parent company and the foreign company are not part of the tax consolidation group.

As a mitigating measure, such entities are deemed to satisfy the conditions of eligibility for the consolidation scope for fiscal years opened before 31 December 2020. After the close of those fiscal years, the condition of residence in the EU or the EEA will no longer be satisfied, triggering the following implications:

• if the non-resident parent entity is established in the United Kingdom: termination of the group, unless a foreign company takes its place as the new non-resident parent entity;
• if the foreign company or intermediary company is established in the United Kingdom: exit from the group of all its subsidiaries and sub-subsidiaries, entailing all the tax consequences of a group member’s exit.

Intragroup distributions

Dividends from subsidiaries established in the EU or EEA – satisfying all the conditions for tax consolidation as if they had been French – benefit from a 99% exemption from French CIT. This measure continues to apply to dividends received from UK companies until the close of the beneficiary company’s last fiscal year opened before 31 December 2020.

As from 1 January 2021 (or from the start of the fiscal year following the one in progress as at 31 December 2020), these distributions will be subject to the parent-subsidiary regime. The dividends distributed by the UK subsidiary will be 95% exempt from CIT. Only a 5% portion (versus 1%) of the dividends received will be subject to French CIT.

Dividends paid by a French company to its UK parent company are exempt from WHT, provided that the parent company’s stake in the French company is at least equal to 5%. This exemption applies to all distributions paid during a fiscal year opened before 31 December 2020. Thereafter, the French-UK DTT will still apply, which provides for an exemption from WHT on dividends paid to companies holding at least 10% of the distributing company’s capital. If the ownership interest is smaller, 15% WHT apply.

Equity savings plans of individuals

The French equity savings plan (plan d’épargne en actions or PEA) is a savings product that allows to acquire and manage a portfolio of shares in French or European companies while benefiting from a tax exemption, subject to certain conditions. It is reserved for shares in companies whose head office is in the EU or EEA and for shares or units in collective investment undertakings (Sicavs, FCPs and European UCITS) whose assets are more than 75% invested in securities of European companies. As from 1 January 2021, British UCITS and securities are no longer eligible for PEAs.

As a mitigating measure, UK securities registered in PEA plans as at 31 December 2020 will remain eligible until 30 September 2021. If, at the end of this transitional period, the UK securities still appear in the PEA, the PEA will be closed and the resulting tax contributions will be immediately due.

Regarding French undertakings for collective investment (organismes de placement collectif or OPCs) holding UK securities, the securities acquired or subscribed before or after 31 December 2020 may continue to be taken into account in the investment quota until 30 September 2021. During this period, the OPC must modify its portfolio in order to comply with the 75% quota by the end of September 2021.

Impact on life insurance and capitalization contracts or bonds

Life insurance contracts and capitalization contracts invested mainly in shares for a certain period (“DSK” or “NSK” contracts) enjoy an exemption from French personal income tax if they are composed of a quota of securities in European companies.

Until 30 September 2021, securities in UK companies and UCIs and units in UCIs remain eligible. During this period, insurers must modify the composition of the portfolio.

Since 1 January 2021, capitalization contracts issued by a UK insurer no longer give entitle[1]ment to the tax advantages. However, the French tax administration will treat these contracts as contracts issued by EU or EEA insurers for a period of nine months as from:

• 31 December 2020, if the contract has reached the age of eight years as at that date, or
• the date on which the contract reaches the age of eight years in other cases.

Other measures have also been implemented regarding:

• subscriptions to the capital of certain SMEs: the tax reduction is maintained provided that the investor holds the securities or shares in UK companies subscribed before 1 January 2021 for 5 years.
• life insurance contracts: contracts comprising investments made before 1 January 2021 in undertakings in the UK remain eligible for the favorable tax regime until 30 September 2021.
• subscriptions of units in French innovation mutual funds (fonds communs de placement dans l’innovation or FCPI) or proximity investment funds (fonds d’investissement de proximité or FIP): securities in UK companies acquired or subscribed before 1 January 2021 remain eligible within the quota, making it possible to maintain the tax reduction (5-year holding period).
• distributions and gains relating to securities in certain venture capital entities: the personal income tax exemption is maintained until 31 December 2021, provided that the investor holds the securities or units subscribed before 1 January 2021 for 5 years.
• carried interest: units acquired or subscribed until 31 December 2020 and issued by UK venture capital companies remain eligible without time limitation.

If you wish to discuss these topics, please contact: Fidal, Paris

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