La Revue Squire

LME Act: Main Tax Law Improvements


Rédigé par Julien VAUCHERET le 31 Mars 2009


A law was enacted in France on 4 August 2008 with a view to boosting the competitiveness of the French economy (hereafter the “LME Act”). It includes numerous tax provisions of which the following are of particularly note:

Improvement of the tax treatment of impatriates

The LME Act includes several tax provisions that aim to reinforce the attraction of France to high-level executives. Most notably, the LME Act improves the temporary tax exemption available to foreign employees and directors who transfer their tax residence to France in order to take on a job (so-called “impatriates”). The same persons benefit from a specific treatment as regards the computation of the ceiling, recently implemented in France, as to the total amount of tax paid by an individual (“tax shield”) and the territoriality rules of French wealth tax.

Providing the requisite criteria are met, the above-mentioned impatriates benefit from a temporary exemption of the so-called “impatriation bonus”, i.e. the additional remuneration that is paid directly in connection with the performance of their duties in France. The exemption applies for approximately five years.

This exemption is available under the new regime to employees and directors who are directly hired by a French company whilst abroad. In contrast, to qualify under the former regime the foreign company that seconded them had to have a capital or commercial relationship with the French company for which they were to perform their duties.

In addition, the amount exempt is now set at a flat rate equal to 30% of the employee’s remuneration. However, employees or directors seconded by a foreign company to France can be exempted from tax on the amount by which their post-secondment remuneration exceeds their pre-secondment remuneration even if such uplift amounts to more than 30% of that post-secondment remuneration. However, as under the former regime, the portion of remuneration that remains taxable cannot be less than the amount of remuneration paid for analogous duties performed in the same company, or in similar companies established in France.

Furthermore, the portion of the income paid in relation to activities not performed in France is exempt, provided that it is paid in connection with trips abroad made for the direct and exclusive benefit of the French employer, which seems to limit the applicability of the exemption to individuals with an employment contract. This specific exemption is capped at 20% of the taxable income for the activity performed in France (excluding the exempt impatriation bonus), unless the employee or director prefers to elect to take advantage of a general limitation on the exempted remuneration for the activity performed both in France and abroad, the latter being set at 50% of the total remuneration.

The LME Act also provides that impatriates are exempt from income tax on 50% of their investment income that originates abroad such as dividends or other income from securities, provided that this income originates from a country with which France has a tax treaty containing an administrative assistance clause.

Moreover, the LME Act now allows the impatriates to benefit from specific measures as regards the computation of the tax shield under which an individual taxpayer is not required to pay an amount of French tax in excess of 50% of his/her income. Impatriates need not include, in a calculation of their total income that is taxable in France, foreign income earned in the year - but prior to the day - of their arrival in France. Further, foreign income earned after the transfer of their residence to France is only taken into account in an amount net of taxes that have already been paid abroad on such income.

Finally, as regards wealth tax, individuals transferring their fiscal residency to France will only be liable with respect to their assets located in France during the first 5 years of their residency in France (whilst French tax residents are, in principle, subject to wealth tax on their worldwide assets).

Reduction of transfer taxes on sales of a business or a company

The LME Act also introduces various measures, which intended to unify and reduce the transfer charges on the sale of a business or a company.

The transfer of shares in a company, that is not a company 50% of whose assets comprise real estate assets, is now subject to registration tax at a flat rate of 3%. It should, however, be noted that the levelling exercise is not entirely complete since the amount of tax chargeable on the transfer of shares in a corporation (S.A., S.A.S., S.C.A.) is capped at €5,000, whilst the transfer of an interest in a partnership or limited liability company (S.A.R.L.) does not benefit from any ceiling but, rather, from a rebate of up to €23,000.

The LME Act also caps, at 3%, the global rate applied to the transfer of a business or goodwill in respect of the first €200,000 of the transfer consideration. That portion of the transfer consideration that exceeds that threshold remains subject to a 5% rate of transfer tax. Finally, the LME Act provides for a rebate of €300,000 on the transfer of a business or shares when the same are transferred to employees of the business, to the company or to relatives of the seller.





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