FRANCE: An Introduction to Tax

2022 will unquestionably be remembered as the year which contained the most impacting economic and geostrategic upheavals of the recent decades.

In the economic field, despite an expected growth that should remain relatively satisfactory (beyond 2.5% according to the Banque de France), inflation is now the focal point of attention. All players faced over 2022 - and will likely continue facing in 2023 – (i) major challenges on the cost of raw material and energies, and (ii) a significant increase of their financing costs. Despite this, and even if no liquidity crisis is expected in the short-term, even just the countdown of the climate change and the sustained digitalisation process will make major short-term investments necessary.

To overcome these challenges, economic players and public bodies will have to activate all the available powerful levers, and there can be no doubt that taxation is one of them.

In the political field, the French government, despite having a relative majority in the Parliament, has decided to uphold the global trend of reduction of the tax burden of companies. However, we observe in parallel a growing pressure of tax audits, as well as a very strong pressure of the public on so-called tax optimisation accompanied by a growing concern for their image from important groups. All this notably led to the European Union validating a principle of “super profit” taxation last October.

In the M&A field, the first 2022 semester has been quite dynamic with the largest portion of transactions performed by PE players. Due to the very fast and significant increase of the cost of financing, the numbers of transactions slowed down as from June, expecting more favourable windows especially in terms of financing conditions in September. More and more questions also kept arising about the multiple use of target companies. If the forecast for the first quarter of 2023 remains uncertain, the coming months should mainly offer good opportunities for strengthening market positions through external growth.

The economic terms of transaction have also been adapted to this new environment favouring non-cash consideration or consideration paid on deferred terms (eg, earn-out) which implies close monitoring of the structuring to align the timing of payment of tax with the one of the effective cash-out, request for higher warranty and indemnity insurance, indemnity cap, deals taking longer to reach closure, more stop-and-go processes… The recurring uncertainties surrounding the tax qualification of the investment of the management alongside the financial investor are still very much debated in the frame of the transactions, with usually a challenging compromise to be found between commercial expectations and tax security.

In the pure tax field, 2023 should be marked by the appearance of additional multinational mechanisms to fight against fraud or tax dumping. As an example, the European Directive “ATAD III” aiming at preventing the use of shell companies by introducing a "minimum substance test" and reporting requirements to identify shell companies may come into force in 2025.

Another supranational initiative from the European Commission can also be noted with a proposal for a directive providing for a debt-equity bias reduction allowance (DEBRA) to incentivise the reinforcement of the net equity position of companies compared to a financing with debt by authorising a tax deduction of a notional interest computed on the increase of the company net equity. Such a mechanism is scrutinised by French players as - beyond the fact that it appears consistent with the global economic environment - it would also allow an alignment with other European countries having already implemented similar systems (eg, Italy and Portugal). Economic players and their advisers will also pay attention to potential new stringencies governing the tax deductibility of interest, which could involve a new deductibility threshold of up to 85% of the net financial expenses suffered during a tax period, thus increasing the counter cycling effect of the existing limitation based in the tax EBITDA. Such a mechanism, together with the increase of financing costs and a potential stagnation of EBITDA, could lead to a counterproductive double tax punishment.

Finally, as has often been the case in similar periods, some tax measures supporting distressed companies could be expected, especially in order to ease debt restructuring.

As a conclusion, in this global context characterised by a lack of visibility, our clients are more than ever looking for strong expertise for tailor-made solutions that include, beyond the theory, a global vision of all technical, operational, and reputational drivers rather than standard schemes.

This situation also raises the question of how artificial intelligence will impact the value model of advisers to deliver added value to clients’ tax departments staffed with tax experts who more and more are former lawyers as well.

2023 promises to be rife with challenges that will force all players to be increasingly inventive, agile and responsible. Tax advisers are there to overcome them!