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Management of the new procedure by the Public Finances General Directorate when France is the Member State of refund

IMPLEMENTATION OF THE PROCEDURE

As provided for in Directive 2008/9/EC, the new procedure has come into force since 1 January 2010 for refund applications submitted by businesses established in another Member State.

The Directive will be transposed into French law by the end of 2009 and will be accompanied by publication of an administrative circular specifying the arrangements for processing of refund applications by the Public Finances General Directorate (DGFiP).

ARRANGEMENTS FOR SUBMITTING AN APPLICATION FOR REFUND OF FRENCH VAT

> What are the formalities?

To receive a French VAT refund, taxable persons established in another Member State must submit their applications via the electronic portal provided by their Member State of establishment. The information to be entered in the electronic form has been standardised at EU level and agrees with the information specified in Directive 2008/9/EC:

- Identification of applicant and bank account details (Art. 8.1);

- List of purchases/imports (Art. 8.2) using codes to describe the nature of the goods/services acquired (Art. 9).

The Member State of establishment will check that the applicant is a taxable person before forwarding the electronic application to the Member State of refund pursuant to Article 18 of the directive.

> For further information on how to access the portal and its features, applicants are invited to contact the administration of their Member State of establishment. Moreover, France has asked the Commission to promote the pooling of information on each Member State's planned arrangements so that this information can be made available to applicants on the tax portal.

> May a foreign applicant appoint an agent?

The refund application is generally submitted by the applicant, but it may also legitimately be submitted on behalf of the taxable person by a third party appointed for this purpose. The electronic portals set up by Member States are usually designed to allow applicants to delegate submission of an application to a third party.

In addition to information about the applicant, an agent must enter his own identification data on the electronic form (name, postal address and e-mail address). If the agent has also been nominated as the payee, he must enter his bank account details in the field provided for this purpose.

> For further information on how an agent appointed by the applicant can access electronic procedures, the businesses concerned are invited to contact the administration of their Member State of establishment.

* What specific information does France require?

> Currency (Directive 2008/9/EC, Art. 8.2(e) and (f))

The taxable amount and the amount of VAT must be expressed in euros, the currency that is legal tender in France.

> Secondary codes for nature of goods/services acquired (Directive 2008/9/EC, Art 9.2)

In the refund application the nature of the goods and services acquired must be indicated by a secondary code in addition to the classification set out in Article 9.1. A definitive list of the secondary codes used by France is made available through publication of an official decision by the Commission.

> Copies of invoices and importation documents (Directive 2008/9/EC, Art. 10)

Applicants must attach to their electronic refund applications scanned copies of invoices or importation documents if the taxable amount is €1000 or more, or €250 or more where fuel is concerned. At this stage the Commission recommends that file size be limited to 5 MB, and discussions are still in progress to determine alternative methods of submitting the full number of invoice copies required.

> Description of activities (Directive 2008/9/EC, Art. 11)

in addition to the information required by Article 8 of the directive, applicants must provide a description of their business activities using NACE codes.

> Language preferences (Directive 2008/9/EC, Art. 12)

‘Free text' fields in the refund application must be completed in French or English. Replies to information requests from the administration (Directive 2008/9/EC, Art. 20) must also be written in one of these languages.

> Applications submitted by an agent

The arrangements for handling refund applications submitted by an agent on behalf of a taxable person established in another Member State will not be affected by the new procedure. The nature of the authority required, as currently defined in Circular 3 D-2-99, should remain the same. An agent submitting applications for refund of French VAT via the portal provided by the applicant's Member State of establishment must supply proof that he is authorised to do so in the form of a letter of appointment that will serve as legal authority and which must be sent by post to the DGFiP's VAT

> Refund Department (Service de Remboursement de la TVA). This document must be in French.

The nature of the authority required for receiving a VAT refund on behalf of a foreign applicant will be specified in an administrative circular to be issued by the end of the year.

In order not to delay the processing of refund applications, the applicant (or his agent) must ensure that the authority required by the French administration is sent to the DGFiP's VAT Refund Department at the same time as the application is submitted electronically through the portal provided by the Member State of establishment. It should be noted that the authority cannot be forwarded electronically within the framework of the IT arrangements implemented by the various Member States.

FRANCE'S ARRANGEMENTS FOR PROCESSING REFUND APPLICATIONS

> How will a foreign applicant be notified that his application has been received by France?

Upon receiving the refund application files forwarded by other Member States, the DGFiP will check the message syntax with a view to issuing confirmation of receipt (Directive 2008/9/EC, Art. 19.1).

Confirmation of receipt of the application by France will be notified to the applicant electronically via the Member State of establishment. Depending on the arrangements of the Member State of establishment, confirmation of receipt will be sent to the applicant either by e-mail (with a copy to the agent, where appropriate) or by posting the information on the electronic portal.

> Who processes the applications?

The contact details of the department responsible for processing applications sent to France will remain the same:

Service de Remboursement de la TVA

10, rue du Centre

TSA 60015

93465 NOISY-LE-GRAND CEDEX

Tel: +33 (0)1 57 33 84 00

Fax: +33 (0)1 57 33 84 85

E-mail: sr-tva.dresg@dgfip.finances.gouv.fr

When processing applications, the DGFiP's VAT Refund Department may, if it considers that it does not have all the relevant information to make a decision on part or all of the refund application, request additional information by e-mail or by post from the applicant, the competent authorities of the Member State of establishment, or a third party such as the agent (Directive 2008/9/EC, Art. 20).

The applicant will be kept informed by the VAT Refund Department of any extension to the time-limit for processing the application following a request for further information or any request sent to a third party (an agent or supplier, for example) or the Member State of establishment.

> How will an applicant be notified of the decision?

The procedure for notification of the decision is set out in Article 19.2 of Directive 2008/9/EC.

With the computerised system proposed by the Commission, the DGFiP will send an electronic decisionnotification message, for information. This notification will contain the main elements of the decision:

date, nature, amount claimed, amount refunded and, where appropriate, the main grounds for refusal.

Depending on the provisions made by the Member State of establishment, the decision will be notified either by e-mail (with a copy to the agent, where appropriate) or by posting the information on the electronic portal.

For decisions adversely affecting applicants (part approval or outright refusal), the e-mail will be supplemented by postal notification of the official decision specifying the grounds for refusal.

The refund of the amount approved will be paid by bank transfer to the account specified on the form within ten days of the date of the decision (Directive 2008/9/EC, Art. 22).

J2M-online - tax services

Taxpayers who have not opted for the monthly installment plan must pay their first installment of French Income Tax on or before Monday, February 15. This payment will be equal to one third of the tax for the previous year. A review from the tax collection service will inform you of the amount to be paid. A second installment is scheduled in May (the balance will be collected between September and November)third will be provisionally paid by those taxpayers in the 15 later

Make a simulation of your French Income Tax for 2010 and check your installement computation

WHO IS REQUIRED TO PAY THE INSTALLMENT OF February 15th ?

Taxpayers living in France who have not opted for the monthly installment plan must pay the first installement if their income tax for the previous year was higher than 337 €.

Notes: No deposit is payable if, for any reason, the taxpayer was not included in the roles of income tax under the previous year. However, a taxpayer whose income tax related to income from the previous year will be was assessed between 1er January and April 15 this year and will have to make a payment by May 15 equal to 60% of the contribution of reference.

INSTALLMENT AMOUNT

Subject to the waiver or reduction of payments, the amount of each installment is equal to one third of contributions charged to the taxpayer in the role of the previous year.

The provisional payments made to the current year are calculated on the basis of taxation for the previous year, including tax adjusments (if any).

WAIVER OR REDUCTION OF INSTALLMENT

Taxpayers who believe their French Income tax to be paid during the current year will be lower than the one of the previous year can recalculate their payments based on the presumed amount they have assessed.

This includes all taxpayers whose income decreased or whose family quotient increased.

The taxpayer may reduce his payments in order to pay only the 2 / 3 of future income taxe. In this regard, it may limit the amount of each installment in 1 / 3 of the income taxa assessed.

FAILURE OF PAYMENT

In cas of reduction installments, the payment shortfalls are sanctioned by a penalty of 10% by the mechanism outlined below.

To determine if the additional 10% is applicable, the administration recalculated the amount the taxpayer would have paid for each installment. If payments are actually made less than this amount, the surcharge is applied, the administration tolerates however margin of error of 1/10.

Where the taxpayer reduces the amount of each of its installments to 1/3 of future income taxe and that the margin of 1/10 is exceeded, the surcharge will be calculated for each installment, the difference between the third of the actual Income Tax will be effectively assessed and the amounts paid under the installment regarded within the legal deadline. It follows that, given the margin of error allowed, the additional 10% is not liquidated if the taxpayer has paid in legal time limits under each installment, an amount at least equal to 3/10 of the tax assessed.

PAYMENT OF DEPOSIT

The first payment of income tax must be paid on Monday, February 15 at the latest.

The deposit must be paid to the tax collector in charge i.e. the one who holds the roles of the previous year. This is so even if the taxpayer has moved to a different address.

When the amount of the deposit exceeds € 50 000, payment must necessarily be made by bank transfer made directly to the deadline for payment on the Treasury's current account at the Bank of France. Using another method of payment results in the application of an increase of 0.2% of amounts due. When the amount of deposit does not exceed this threshold 50 000 €, taxpayers can make their own rules:

- Either by traditional means of payment (cash, check, credit card, tip ...);

- By direct debit option exercised on or before February 15;

- Either on line payment option exercised on or before February 20.

In the last two cases (debit and online payment), the deposit will be charged on February 25.

The French Corporate Tax is an annual tax affecting all profits made in France by corporations and other entities. It covers about a third of French companies. Legal persons may be subject to corporation tax at the following tax rates:

· The standard rate of 33.1 / 3% for all of their activities;

· Rates reduced by 15% for the first EUR 38 120 of taxable income;

· Reduced rates of 0% for capital gains in the long term from the sale of equity securities.

SCOPE OF FRENCH CORPORATION TAX

CORPORATE TAX ASSESSED AT STANDARD TAX RATE

The corporate tax is levied on certain corporations because of their legal form. Therefore are taxable to CT whatever their purpose, the limited companies (SA and SAS), the limited liability companies (LLC), companies limited by shares and, in some cases, cooperatives.

French CT also applies to other legal persons in consideration of the nature of their activity. Such is the case of civil societies that engage in trade or business and, more generally, other legal persons engaged in an operation or operations for profit.

In addition, partnerships, whose results are normally included in income associated with their due share of profit, may opt in some cases for their subjection to CT.

CORPORATE TAX ASSESSED AT REDUCED TAX RATE

The reduced tax rate of 15% applies to the first 38,120 euros of annual profits. Any corporation taxable to CT in France can benefit each year from the reduced rate of 15% subject to the following conditions:

- The company's capital must be fully paid and held continuously for at least 75% by individuals or a company meeting the same conditions;

- The company must have achieved a turnover excluding taxes less than 7 630 000 euro; during the year or the tax period.

TAX CONSOLIDATION

An optional system, referred to as Tax Consolidation or Group Tax Consolidation, allows a French parent company to incorporate in its fiscal benefits, the results of the French subsidiaries which it controls for at least 95%. The parent company thenfore pays the corporate tax for all group companies.

RULES OF TERRITORIAL

Unlike the rules in force in all other countries of the European Union applying a system of worldwide profits, French entities are only liable to the CT in respect of their profits in businesses operating in France. It follows that the profits made by a French company in companies operating abroad are not subject to the French CT. On the other hand, a foreign company is liable to French CT on profits from businesses it operates in France.

Therefore, companies which are taxable in France may not deduct from their taxable income losses incurred by companies that operate abroad.

The concept of "company operated in France" involves the ordinary course of business in France, which may be exercised within the framework of an autonomous or, in the absence of establishment, through representatives without personality, independent professional or result from the execution of operations forming a complete business cycle.

DETERMINATION OF TAXABLE INCOME

A / GENERAL RULES FOR DETERMINATION OF EARNINGS

Companies subject to corporate tax must take into account when determining their taxable income, all debts and liabilities existing at year-end closing.

Pretax profit is determined by the overall results of operations of any kind made by the Company including transfers of assets.

The tax base is typically deemed to be equal to the difference of net assets between the closing balance sheet and the opening balance sheet. In principle, the taxable income is the accounting profit, but it is subject to adjustments to reflect tax rules that depart from accounting rules.

B: COMPUTATION OF TAXABLE INCOME

The taxable income is equal to the difference between gross profit and operating accessory products on the one hand, and costs and expenses deductible on the other.

Under accounting rules, the gross operating profit is formed by the difference between:

- Sales and benefits of exercise and the existing inventory at year end and

- The cost of sales and services and the existing inventory of the previous year.

In addition to the gross operating profit, all income or profits accessories made by a company are generally taxable. This includes income from rental property, interest receivables, deposits, bonds and income securities.

French parent companies may exclude from their taxable income, dividends received from their French or foreign subsidiaries, subjecto to a share equal to 5% of total income.

The fees and expenses are deductible under the following conditions:

- They must be exposed in the direct interest of the operation or be linked to the normal management of the company;

- They must correspond to an effective charge and be supported by sufficient evidence;

- They must be included in expenses for the year in which they were incurred and result in a decrease in net assets of the company;

- Their deductibility should not be undermined by a particular provision of the law. Certain expenses are specifically excluded as allowable expenses do not conform to the purpose of the business: expenses related to hunting or fishing, expenses incurred for the provision of yachts and pleasure boats ( Expenditure classified as luxuries).

Meanwhile, more long-term capital gains are taxed separately to reduced rates of 0%, 15%, or 16.5%, possibly plus the social contribution paid by companies whose turnover exceeds € 7,600,000.

LIQUIDATION AND PAYMENT OF FRENCH CORPORATION TAX

The result of these various adjustments may occur:

- A positive result, the earnings on which French CT is calculated;

- A negative result, the deficit, which may count against an unlimited duration on the benefit of years following the year in deficit (carry forward) or, optionally, under certain conditions, the benefit of the three previous years ( carry back or "carry-back) and give birth in the latter situation, a claim chargeable to tax of five years and repayable at the end of this period.

The tax is calculated and paid voluntarily by the company as a system of installment that is subject to adjustments when the results of the exercise are set permanently.

The amended Finance Act for 2009 changes the restrictive rules originally established to bring the regulations into line with the decision of the European Court of Justice. This reform is the logical continuation of the Papillon Case (ECJ 27 November 2008 n° 418/07).

The French tax group consolidation scheme will be developed in order to include the integration of French subsidiaries held through a foreign company. Several adjustments were made to the overall result so that the integrated income will not be subject to a double deduction or double taxation.

For the years ended between 1er January 2005 and December 30, 2009, groups may claim back the overpayment of French corporate tax by entering tax litigation. Do not hesitate to get in touch with us for that purpose. You must file a tax claim as soon as possible.

The French Consolidated Group Tax scheme will be amended, mainly to take into account the effect on French domestic tax law of the ECJ decision ("Papillon") which held the French non-compliant with EU law. This section also provides various facilities to the tax consolidation regime.

It points out that, under section 223 A of the Tax Code, a tax group can be formed by a parent company and companies subject to corporation tax of which it holds at least 95% of capital directly or indirectly through group companies. This rule prohibits therefore integrating a French subsidiary held through a non-resident company.

But the Court of Justice ruled that these provisions constitute a restriction on the principle of freedom of establishment which are not justified by the distribution of taxation powers between member states or by the need to ensure coherence of the tax (ECJ Case 27-11-2008. 418/07, Papillon).

This article accordingly adjusts the tax consolidation regime for the determination of results for years ending after December 31, 2009.

For years ended between 1er January 2005 and December 30, 2009, groups may claim back the overpayment of Corporation Tax through contentious claim.

COMPOSITION OF FRENCH CONSOLIDATED GROUP

Section 223 A of the Tax Code will be amended to allow the integration of a French company subject to corporation tax whose at least 95% of the shares are held by a French parent company through a foreign subsidiary called "intermediate company”. This intermediary company, which could not itself be part of the tax group, should meet the following conditions:

- Be resident in a State of the European Community or of a State party to the Agreement on the European Economic Area which has concluded with France a tax treaty providing administrative assistance to tackle tax fraud or tax evasion;

- Be held, directly or indirectly, for 95% at least by the head of Group Company;

- Be subject to a tax equivalent to the French corporate tax.

In addition, the Agreement This company will be required to include the sub-subsidiary in the French group's business.

It should normally be made not later than the deadline for filing the declaration of result of the previous year. For the application of the group and changed to the period beginning before 1er December 2009 and ending after December 31, 2009, the agreement of the intermediary company may however be filed on or before February 28, 2010.

DETERMINATION OF CONSOLIDATED GROUP NET INCOME

The net Income Results of French sub-subsidiary member of the group through a non-resident company will be taken into account in determining the overall result. Under the new Article 223 B of the CGI, several adjustments will then be made to prevent the double deduction of losses from the sub-branch or the double taxation of profits.

Generally, these adjustments will be subject to substantial formalism, integral to the company providing the evidence of the feeds within the group. In addition, the corrections made to the overall result should be referred to in a schedule attached by the parent company to the declaration of results, otherwise the fine prescribed by section 1763 of CGI will be applicable (fine equal to 5% of sums omitted in respect of which the offense is highlighted, reduced to 1% when the corresponding amounts are deductible).

> Waivers and subsidies within the group

The waivers of direct or indirect subsidies made between group companies are not taken into account in determining the overall result. The amounts deducted from individual result of a company that made the abandonment are disallowed for the determination of the group overall result while the amounts included in the profits of the company that received the benefits are deducted from the group net income.

Similarly, this article establishes the principle that waivers or grants made by a group company to an intermediary company should be neutralized. Subsidies to the interposed company should be reported to the overall outcome if they were deducted from the individual result of the company paying. No reprocessing will however be made to the overall result if such aid were donated to another group company during a subsequent period, provided that the parent company provides evidence that no link between these subsidies and losses of companies in the area.

> Financial charges

This section will extend the application of "Amendment Charasse" if a member company acquires shares of a sub-French subsidiary, Already a member group through a foreign company, with the same company.

It recalls that under the current regime, "the amendment Charasse" applies when a group company has bought a controlling shareholder outside the group or with a company that controls the shareholder within the meaning of Article L 233-3 of the Commercial Code, the securities of a company joins the same group.

Moreover, when a company member status underfunding pays interest to a related company of the same perimeter, the fraction of the interest which is related to the individual result of the borrowing company under section 212 of the CGI is offset to establish the overall result. This rule will be extended to cases where a sub-subsidiary group member pays interest to a foreign intermediary company provided that the parent provides evidence that the interests in question are returned in the same year a group company.

> Capital gains on intergroup sale

The neutralization of plus or minus capital gains under section 223 F of CGI will be applicable in the case where a group company sells securities of another company member to a foreign intermediary. The sale of securities by that company to a company outside the perimeter will end this circumvention, as well as the release of the group of companies whose securities have been sold.

> Deficits prior to integration

Section 223 I, 4 of the Code provides for a measure to cap the offset of profits or long-term capita gains against deficits incurred by the member companies before entering the group. Should also be deducted from earnings imputation subsidies and waivers of debt made to a member firm by a foreign intermediary, as well as capital gains arising on sale of securities in such a society, since these aid and these profits are neutralized at the overall result.

> Other amendments

In addition to changes to the tax consolidation regime in conformity with Community law, various adjustments are made to current arrangements.

In particular we note that the solution that a permanent establishment may include a group as a subsidiary will be legalized.

Furthermore, attendance fees and royalties distributed by the subsidiaries of the group will be added to the overall result that they were deducted from the individual output of these companies. It will be terminated, with respect to attendance fees that give rise to any deduction for the subsidiary to, a double taxation.

Finally, when a group has the mechanism of allocation to a broad-based under Article 223 I, 5, CGI, part of the loss suffered by a company that had contributed to the deficit due on that basis continue to be deferred if leaving group resulting from its merger with another company group as part of an operation under the concession system.

These arrangements will apply in determining the outcome of periods beginning on or after 1er January 2010.

JJ Michallon - French Tax Attorney - Former Tax Inspector

SCOPE OF FRENCH CORPORATION TAX

Post written by:

J.Jacques Michallon

French Tax Attorney

Former Tax Inspector

J2M - tax & legal

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A/ TAXABLE PERSONS

1 - CORPORATION TAX AT THE STANDARD RATE (ARTICLE 206-1 OF THE FRENCH TAX CODE)

Certain corporate bodies are compulsorily subject to corporation tax by virtue of their legal form. Thus, regardless of their purpose, the sociétés anonymes or SA (public limited companies), the sociétés par actions simplifiées or SAS (simplified joint stock companies), the sociétés à responsabilité limitée or SARL (limited liability companies), sociétés en commandite par actions (limited partnerships with share capital) and, in certain cases, co-operatives are subject to corporation tax.

Corporation tax also applies to other corporate bodies according to the nature of their business. Such is the case with the sociétés civiles (civil law or non-trading companies) engaging in industrial or commercial activities and more generally with the other corporate bodies engaged in for-profit operations. Moreover, sociétés de personnes (partnerships), whose profits (and losses) are normally included in the income of the partners in respect of their shares in the profits, may in certain cases elect liability to corporation tax.

2 - CORPORATION TAX AT THE REDUCED RATES (ARTICLE 206-5 OF THE FRENCH TAX CODE)

The public communities (public establishments, corporations under local government control, etc) or non for profit private communities (associations, foundations, etc) are not subject to the standard-rate corporation tax as long as they carry out nonprofit activities. Such communities are subject to corporation tax pursuant to special rules, with respect to certain income derived from their property (income from real property, agricultural profits, certain investment income). The corporation tax rate applicable is then 24 %, or 10 % for certain investment income such as income from bonds. In that case, temporary contributions do not apply. Finally, public utility foundations shall not be subject to corporation tax for incomes derived from their own property.

B/ RULES OF TERRITORIALITY

Unlike all other countries of the European Union which apply world-wide taxation to profits, France assesses corporation tax only on profits made by enterprises operated in France, regardless of their nationality. Consequently, profits made by enterprises operated abroad are not subject to corporation tax, while foreign companies pay corporation tax on the profits made by enterprises which they operate in France.

Accordingly, companies taxable in France cannot report losses incurred by enterprises operated abroad.

The term "enterprise operated in France" means an enterprise which carries on business regularly in France, whether as part of an autonomous organisation or, in the absence of an organisation, through representatives without independent professional status, or as part of transactions forming a complete commercial cycle.

By exception to the rule of territoriality, certain French companies are allowed, by approval from the Finance Minister, to apply for the regime of consolidated profits. This regime consists, for the approved companies, in computing their corporation tax by considering, in addition to their own profits or losses or the profits or losses of the group for tax purposes which they have formed, the profits or losses of all their direct operating concerns located abroad, as well as the share accruing to them in the profits or losses of their French subsidiaries (or of the group for tax purposes they have formed) and foreign subsidiaries of which they hold at least 50% of the voting rights