Draft of French Finance Act for 2013 – Focus on capital gains tax treatment

Julien Monsenego, Tax Partner, Olswang

Adopted by the ‘Assemblée Nationale’ on 23 October 2012

Article 6 of the draft French Finance Act for 2013, which amends the taxation of capital gains, has been radically changed by the lower court of the French Parliament which voted the draft earlier this week.

The new draft proposes (1) to maintain the favourable regime applicable to entrepreneurs, (2) to ease the deferral mechanism, and (3) to soften the application of the progressive scale.

(1)                Maintenance of the favourable regime for entrepreneurs

Capital gains realised by entrepreneurs remain taxable, under election, to a flat rate up to 19% (34.5%, social contributions included).  This is provided certain conditions are met.

First, the company whose shares are sold must lead, constantly for ten years before the sale, an effective business activity; thus holdings are excluded from this favourable regime.

Second, the sold shares must have been held constantly for five years before the sale, directly or indirectly, by the seller or members of the seller’s family. In addition, the sold shares should have represented 10% of the capital of the said company at least during two years before the sale and also represent 2% of the capital at the time of the sale.

Finally, the seller should be a manager or an employee of the company, constantly for five years before the sale.

(2)                An easier deferral mechanism

The deferral mechanism remains applicable and eased, provided the seller undertakes to contribute back at least 50% of the amount of the net capital gain into the share capital of the relevant company within two years from the sale.

The former conditions remain applicable – sold shares must have been held for eight years and represent at least 10% of the capital of a company, which is located in the EU and subject to corporate tax.

If those conditions are met, only the amount which has not been reinvested within two years is subject to taxation.

(3)                The mitigated progressive scale

The new draft maintains the progressive scale on capital gains (up to 45%, possibly higher with the exceptional contribution), but its effect is softened.

First, the progressive scale will be applicable as from 2013 and not from 2012 as the initial draft proposed. However, the flat rate applicable on capital gains realised in 2012 would increase from 19% to 24% (social contributions up to 15.5% remaining applicable).

Second, the tax allowance for holding periods applicable from 2013 are reinforced: 20% for shares held for two years, 30% when held for four years and 40% when held for six years. Finally, the holding period is to be calculated as from the effective acquisition date and not from 2013 as the former draft stated.

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