FRANCE: An Introduction to Tax

France Tax 2022 

What makes taxation such an exciting topic in the French presidential campaign?

While the pandemic situation in France remains complex in the wake of a new winter COVID-19 wave, the year 2022 could be marked by an “exit” and an “entry”:

- Exit from the pandemic crisis, at last;

- Entry into the presidential campaign.

The vote for the new French president is expected to take place at the end of April 2022 and will be an opportunity, through the choice of a candidate, to decide on a fiscal policy for the next five years. This is an opportunity to ask what makes the tax debate so exciting in the arbitration for the candidate, who will be designated at the Elysée Palace in early May. Surprisingly enough, the French don't like taxes very much but love to talk about them!

First of all, it should be noted that 2021 was a very mixed year economically. Still very much affected by the pandemic, France has nevertheless begun to emerge from the crisis with growth not seen for ten years (around 7%), putting it on par with, or even above, its main economic partners and in the lead among European countries. This boom in activity has of course had an impact on the level of activity of law firms and tax specialists. In particular, the pace of M&A transactions has accelerated considerably, due to an obvious catch-up effect, but also due to the influx of liquidity poured in by the banking system (quantitative easing). Mergers and acquisitions have doubled between 2020 and 2021. The private equity sector has thus been very active. This exceptional economic situation is reflected in the tax activity, which is very linked to deals, in terms of volume and when general activity (tax audits, operational structuring, etc) also remained very dynamic.

The tax environment is still marked this year by the introduction of measures resulting from the OECD's BEPS program and in particular its introduction in the EU tax system with ATAD 2 and ATAD 3 standards and the discussions around the notion of minimum tax for large multinationals, of which France is one of the most active players. France, despite the crisis, has maintained its trajectory of corporate income tax reduction (25%), which allows the current President to present a positive balance of tax reductions during his last mandate. However, the pressure of tax audit remains intense and the fight against so-called tax optimisation remains one of the major objectives of tax administrations. The administration is therefore increasingly using the notion of economic beneficiary to challenge offshore investment structures and the prospect of the introduction of the ATAD III directive should further strengthen the obligations of players operating in France from foreign platforms.

Finally, the presidential political struggle puts future tax reform on the agenda:

• Lowering production taxes: France has many local taxes based on the production of companies, which essentially feed the coffers of local authorities. They are a recognised brake on the competitiveness development of the French production system.
• Maintaining corporate tax rates within the OECD average (25%) and introducing minimal taxation for large international groups.
• Reforming inheritance tax, particularly for the transfer of businesses.
• Introducing measures to support ecological transition.

Clearly, taxation will be one of the major issues of the next election and the outcome of the presidential election will influence France's tax policy for the next five years.

In this context, which raises as many opportunities as concerns, our clients are looking for expertise that is as sharp as it is global. The local approach remains a dominant feature of tax matters, as each country retains its own system and culture. This is the obstacle to planning that is too global; tailor-made solutions have become a key to added-value advice to the detriment of matrix and global solutions.

We noticed that in recent years clients are increasingly challenging the formation of their advisory fees and that many companies have also set up very expert tax departments. This situation constantly raises the question of the value model of advisors and law firms.

At the same time, pressure from tax authorities has become increasingly strong. One of the latest avatars of this development is the issue of professional secrecy, which has been further restricted in tax matters, as lawyers can no longer shelter themselves behind this protective screen in the relationship they develop with their client. It is to be expected that the ability to manage tax litigation, particularly in criminal matters, will become a major challenge for tax lawyers.

Of course, tax aspects remain a major issue in transactions, and often influence the design of operations. Activity levels in 2021 and the outlook for 2022 point to strong growth for all market players. The various measures introduced in France over the past five years by Macron's government are not entirely unrelated to this situation. Indeed, the taxation of entrepreneurs has improved and fosters sales and reinvestment. Wealth tax has been limited to real estate assets (IFI). However, company managers, especially in the LBO phase, remain very uncertain due to the lack of a clear legal framework. Numerous tax audits (either on income tax or on social security contributions) can seriously jeopardise management packages structured several years before a sale takes place. This raises the question of the role of non-owners’ managers into value creation in the company and its recognition by a stable tax regime.

The year 2022 promises to be an exciting one, between the end of the health crisis (finally?) and uncertain political developments. France is more attractive but many tax projects are still a work in progress. The tax lawyer remains a happy Sisyphus!

Arsene