Could the replacement of physical board- and shareholders’ meeting by virtual meetings affect the tax residence of the company, or give rise to a permanent establishment in another jurisdiction?
From a French tax perspective, the main issues at stake would be the effective place of management and/or substance of companies, in particular of holding companies.
Indeed, case law has set a list of requirements which have to be met in order to consider that a (holding) company has sufficient substance. In particular, the majority of directors has to be established in the country of the holding company and the management board decisions must be taken in the country of the company.
Accordingly, the replacement of physical board and shareholders’ meeting by virtual meetings, when it comes to foreign companies, could impact the way the French tax authorities would gauge the substance and/or effective place of management of these foreign companies.
Also, if the main decisions relating to foreign companies were to be taken from France, this could give rise to permanent establishment issues in France.
This could also affect the substance and/or effective place of management of French companies if the decisions in French companies were to be taken from abroad due to more lenient corporate management rules. In view of the current situation due to the coronavirus COVID-19 , a French Ordinance no. 2020-321 has indeed been enacted in order to adapt the rules regarding the holding of board of directors and shareholders’ meetings (e.g. physical absence of members during the meeting, videoconference, paper consultation, etc depending on the situation).
Given that the coronavirus COVID-19 situation is exceptional and tends to be temporary, the absence of shareholders and of a board meeting at the registered office or the fact that some of the decisions are taken from France could be acceptable provided this remains exceptional. In practice this would be a matter of facts and circumstances. If the meeting takes place through a call, it would be recommended to have at least one person initiate the conference call from the country where the company is located.
What could be the tax risks in this respect?
In the event that the French tax authorities (FTA) consider that the foreign company has no substance, they could conclude that the structure constitutes an abuse of law and has been created for the sole purpose of benefiting from a more favourable taxation (corporate income tax rate lower than in France). This would give rise to a 80% penalty. In addition, the FTA could consider that dividends paid to the holding company, if any dividend distributions were to be made, could not benefit from the parent subsidiary/participation exemption regime (application of withholding tax). They could also simply refuse tax treaty benefits and apply domestic withholding tax rates.
If a French company was found to be managed from abroad, the FTA could refuse the application of certain domestic tax rules (for example French tax grouping etc.)
In the event that the FTA consider that there is a permanent establishment in France, the latter would be taxed in France as a French company (plus late-interest payment and penalties as the case may be).
If the employer grants an additional compensation to his employees for the additional costs incurred by homeworking, how is this compensation taxed?
In France, the employee is taxed on all income received in relation to her employment contract, subject to a few exceptions.
In the event that the employer grants an additional compensation to his employees for the additional costs incurred by home working, this compensation would be taxed, as a salary at a progressive rate, since it will be treated as a cash benefit.
This compensation could be tax exempt in the following situations:
- The law expressly states that the compensation will be tax exempt.
- The compensation is granted to compensate for certain expenses incurred by the employee that would normally be borne by the employer (i.e. such as the purchase of some materials).
- The compensation is granted as a support to the employee, having the nature of an employee assistance.
These cases are quite rare in practice.
To date, there is no exception for compensations granted with respect to homeworking due to the lock-down.
In the case where the costs are treated as out-of-pocket expenses which will then have to be reimbursed by the employer, this refund will not be taxed.
What could be the impact of homeworking on employees who work in several countries (salary split)?
Other employees working in several countries
Since employees working in several countries can work from home for the companies established in those countries, these employees should still be paid by the different employers under the salary split scheme.
However, depending on the facts and circumstances, this could lead to a change in the employee’s tax residency.
Furthermore, this could trigger a permanent establishment issue for the foreign companies, depending on the employee's duties. This has to be analysed on a case by case basis.
Are there any other wage tax contingencies of potential extended stay of employees abroad or early repatriation?
Cross border employees (Germany, Switzerland, Luxembourg, Italy):
Under French domestic law, employees working abroad are taxed in France. This is however subject to the provisions of the relevant double tax treaty, which often specify that the employee will be taxed in the place where he carries on his activity, subject to certain conditions. Despite this principle, some French employees working on the “border area” may remain taxable in France, under certain tax conventions. Some tax treaties set a threshold whereby the regime applicable to the employee assumes that he will not work outside the border area for a specific number of days.
A press release, dated 19 March 2020, has clarified the situation of cross border employees due to the coronavirus COVID-19 and home working. It specified that days spent at home for work will not be taken into account for the calculation of days worked outside the cross border area. This regime applies to treaties with Belgium, Germany, Luxembourg and Switzerland.
For employees abroad
If an employee stays abroad for a much longer period of time than usual, this could affect the determination of his tax residency. This analysis should be done on a case by case basis. Indeed, some double tax treaties allow, under certain conditions, the State of residence of the employee to tax the compensation. One of these conditions is that the employee does not stay more than 183 days in any twelve-month period in the other state (state where he performs his work). If the current situation compels the employee to stay in that other State, this could affect the calculation of those days.
Moreover, this could also have an impact on the taxation of his work compensation.
For the employee abroad with an early repatriation
In France, there is a specific regime for employees on secondment.
These employees could be fully exempt from tax in France for wages related to the activity carried out abroad, in the following situations:
- more than 183 days spent abroad during the year for these specific activities: construction or assembly work, installation of industrial complexes, research or extraction of natural resources, navigation on board ships.
- more than 120 days spent abroad for commercial prospecting activity.
To date, no specific clarification has been provided for the calculation of these days and the exemption regime if the employee was repatriated early due to the coronavirus COVID-19 situation.
Financial assistance to group companies
How can a (parent) company assist subsidiaries that are in financial difficulties (e.g. parent guarantees, debt waiver; interest free loans,…)?
There are several ways a parent company may assist its subsidiaries; however, owing to the tax consequences of some of them (see below), only some of them may be acceptable in practice.
What are the tax consequences (risks) thereof?
- Debt waivers and interest-free loans could give rise to tax issues. The debt waiver should qualify as a “financial debt waiver” owing to the circumstances and should hence be taxable at the level of the beneficiary (subsidiary) at the normal corporate income tax rate (except if the parent company commits to realise a share capital increase within 2 years), subject to available carry forward tax losses (this waiver may not be deducted at the level of the parent company). An interest free loan could be considered as an act of mismanagement for the parent company.
- A parent company would have to be compensated for its parent guarantee since otherwise this could be an act of mismanagement for her. From a tax perspective, an increase of capital would be tax neutral at the level of the subsidiary. It may entail certain tax consequences (e.g. gain) at the level of the parent company especially in the case of discounted debt that is subsequently capitalized.
How to generate additional cash?
Is it possible to generate additional cash with sale & lease back transactions, and what does that involve?
To generate additional cash, it should be possible to proceed with a sale & lease back transaction. This could notably be done with real estate assets.
From a French tax standpoint, the sale & lease back transaction is not considered as neutral. As a result, the capital gain generated by the sale of the building, if any, will be subject to corporate income tax, without application of favourable tax rules.
However, for real estate sale & lease back transactions a reduced transfer tax applies subject to some conditions (taxation at 0.715% instead of 5.8%).
Thus, even if this transaction will generate cash, it would not be neutral from a French tax standpoint.
Is there the option to apply for VAT / customs deferment schemes? And how does that work?
Under ordinary law, there are no existing measures allowing the VAT to be deferred. However, specific arrangements allow the deferment of customs duties, in particular if certain conditions are met (this applies in particular to arrangements regarding the suspension of customs duties).
The specific measures taken by the government due to the coronavirus COVID-19 situation do not cover indirect taxes, such as VAT and customs duties.
Can ways to mitigate compliance costs be identified (e.g. VAT grouping, corporate income tax fiscal unity)?
VAT grouping or corporate income tax fiscal unity do not allow for significant compliance costs savings.
Note that as from 27 may 2019, the thresholds above which companies must appoint an auditor have been increased. This could be a source of compliance costs savings for qualifying companies. Only companies surpassing two of the following thresholds must appoint a statutory auditor: having a balance sheet exceeding EUR4 million, a turnover exclusive of taxes exceeding EUR8 million, or 50 employees. If these thresholds are not met, the company is no longer required to appoint an auditor. However in practice given these thresholds, this would only concern smaller companies.
How can taxpayers check whether it is possible to enhance the VAT position (i.e. additional VAT recovery, pro rata, etc.)?
If the conditions are met, it is possible for certain companies to set up separate business sectors (e.g. sector with full VAT recovery and sector with low VAT recovery). In this case, the excess VAT due to the setting up of separate business sectors can be requested by filing a claim. This could allow the companies to enhance their VAT recovery position as well as their tax exposure to wage tax (wage tax is applicable, broadly, to companies whose turnover is not fully subject to VAT) .
Besides, owing to the current situation in France, a decree dated 18 March 2020 has simplified the measures for obtaining a VAT credit refund by increasing the amount of delegations of signature under which an agent may process a VAT credit claim without the prior approval of her superior. As a result, the procedure for processing the claim and reimbursing the VAT credit should be shorter.
Which government stimulus packages are out there, and how can taxpayers apply for these benefits?
Given the current situation, the government has taken the following measures :
- Companies may request the deferral for three months, without any penalty, of their next tax payment deadlines, without having to provide any justification. To this end, the company must fill in a form which has to be filed with the French Tax Authorities’ office in charge of the company
- Companies wishing to benefit from a tax rebate (and not just a deferral), must provide details about their financial difficulties and why these difficulties cannot be overcome by a simple deferral of the tax payment (decline in turnover, other outstanding debts etc.).
- Companies which have elected for the payment of the CFE and the property tax in monthly instalments may request the suspension of their monthly payment. This request must be filled online, via the company’s personal web account.
- Companies with a VAT credit may request the refund of their credit (see above);
- Companies having a credit (such a research tax credit and the employment tax credit) may request the refund of their credit before the establishment of the corporate income tax returns. This request must be filled online, via the company’s personal web account.
- Companies may benefit from a deferral of payments for their bank loans and, in case of great financial difficulties, they may call upon the State guarantee so that it will take over the payments.
- BPI (French State-owned investment bank) has also announced that exceptional measures will be taken in order to support companies affected by the Coronavirus’ consequences.
The measures taken by the Government are regularly evolving. It is expected that companies relying on government packages will not be able to distribute dividends or will be restricted in the amounts of distributions to their shareholders (the details of this requirement have not yet been released).
Supply chain management
Can importation be delayed (e.g., via customs warehousing arrangements)?
In view of the current situation, the regime applicable to temporary storage facilities (place previously approved by the customs authorities, where non-EU goods can benefit from a suspension of taxes, duties and commercial measures for 90 days before being placed under a customs procedure) has been amended:
- Goods placed under temporary storage facility and already cleared through customs may remain in the country until their final exit.
- Goods placed under installation of temporary storage but not cleared through customs may remain in the warehouse for 120 days instead of 90 days.
- Goods may remain in the EU in a place not approved by the customs authorities, if the customs authorities have been previously informed of their place of storage.
For goods placed under a customs warehouse, no specific measures have been taken in the light of the coronavirus COVID-19 situation since these goods can benefit from a suspension of VAT and customs duties for an unlimited period of time.
How to best deal with uncollectable receivables (e.g. bad debt relief scheme)?
When a company has uncollectable receivables (i.e. créances douteuses), it may record a provision for doubtful receivables.
This provision could however be deductible if strict conditions are met:
- The provision must be recorded for a loss or an expense that is itself deductible;
- The amount of the loss or the expense must be accurately assessed;
- The loss or the expense must be likely;
- The loss or the expense must result from current events;
- The provision must be recorded in the accounts.
In addition to the conditions described above, for doubtful receivables, the loss or the expense must be assessed with sufficient approximation and must not be determined on the basis of a lump-sum.
Is there a benefit to be gained by revisiting applied customs classification and customs valuation?
Importers have a legal obligation to correctly assess their goods, including the appropriate tariff / customs classification. The information used for determining the customs value of imported goods must also accurately reflect the price paid or payable for the goods, to ensure that the declared customs value is correct.
However, if customs classification and/or valuation have not been properly assessed, and if the error is in favour of the taxpayer, it could modify the customs reporting and as the case may be claim for a refund for the past if it appears that there was an overpayment due to misclassified / misvalued customs.
Note that penalties may apply if incorrect or misleading information (the classification or the value of the goods) is provided in customs declarations.