The 2023 Finance Act calls for the gradual removal of the French CVAE

Executive summary: The 2023 Finance Act calls for gradual removal

Article 55 of the 2023 Finance Act (the Act) provides for the gradual abolition of the contribution on the value added of companies (CVAE) (i.e., the contribution sur la valeur ajoutée des entreprises in French) tax over the next two years. In 2024 the CVAE tax will be completely eliminated. This new local tax reform, coupled with the lowering of the French corporate income tax (CIT) rate to 25%, will support economic activity and industrial recovery.

The CVAE is considered one of the main production taxes in France. The CVAE, along with the Cotisation Foncière des Entreprises (CFE), are the two taxes that comprise the total Contribution Economique Territoriale (CET) tax (i.e., CET = CFE + CVAE). The CVAE is a local tax levied on a company’s added value. The tax is generally considered an income tax under French tax law despite the underlying terminology. The tax rate is determined according to a progressive scale based on the turnover of the company or the group to which it belongs.

The CVAE is based on the difference between operating revenues and deductible purchases and expenses, which is different from the added value for value-added tax (VAT) purposes.

The CVAE is a self-assessed tax, separate from the CIT. The tax must be paid by any company that exercises a business activity in France as of January 1 of the tax year.

U.S. multinationals with operations in France will want to analyze how the gradual abolishment of the CVAE tax impacts their ability to maximize FTCs in 2023 and 2024.

Assessing the CVAE

The CVAE tax is determined by calculating taxable added value and multiplying this amount by the rate of the CVAE tax. A company’s taxable added value is limited to a specified percentage of their turnover. For companies whose turnover is less than or equal to EUR 7.6 million, the percentage is 80%. For companies whose turnover is more than EUR 7.6 million, the percentage is 85%.

A company’s taxable added value is defined as the difference between total retention product revenue (defined below) and the associated chargeable expenses (defined below) for the accounting (or taxable) year. Each economical sector of activity (or industry) has its own unique calculation of taxable added value. For example, the notion of turnover and products to be retained will be different from an industrial products company versus an insurance company.

Retention product revenue generally includes:

• Turnover (sales (e.g., products, services), royalties (e.g., patents, licenses, brands) and capital gains from the disposal of tangible or intangible assets)
• Stored production and locked-in production
• Operating grants
• Other current management products, excluding income assessments on pooled transactions
• Value-added transfers
• Revenue on amortized receivables relating to operating income

Chargeable expenses generally include:

• Purchases of goods, raw materials and supplies
• Inventory change
• Benefits and fees paid
• External services reduced by discounts, discounts and discounts obtained
• Other current management expenses
• Impairment of tangible and intangible assets
• Revenue and related taxes, indirect contributions and domestic consumption tax on energy products
• Depreciation write-offs for tangible property made available under a management lease or lease agreement, or a lease agreement for a term of more than six months

The CVAE rate depends on the company's ‘turnover excluding tax’ (CA) and ranges from 0% to 0.375%.

The CVAE tax is assessed on a taxpayer’s taxable added value multiplied by the rate of the CVAE tax.

Summary

The Act provides for the gradual elimination of the CVAE tax over the next two years as follows:

• In 2023 the CVAE rate is reduced by half, and
• In 2024 the CVAE tax will be completely eliminated.

Approximately 530,000 businesses will benefit through tax savings of roughly EUR 9.3 billion from the elimination of the CVAE. The elimination of the CVAE tax is estimated to cost the French government approximately EUR 4.1 billion. The main beneficiaries of this measure are large groups in industry, trade, business services, finance and insurance, and information and communication technology (ICT).

Implications for U.S. multinationals

Taxpayers planning to take a foreign tax credit (FTC) for foreign income taxes paid or accrued in tax years beginning on or after Dec. 28, 2021 (i.e., 2022 calendar year taxpayers) will need to assess whether a foreign tax is a creditable foreign income tax under the new rules (e.g., the 2022 final FTC regulations, 2022 proposed FTC regulations). In general, the new FTC rules revised the net gain requirement, ensuring that a foreign tax is only a creditable net income tax if the determination of the foreign tax base conforms in essential respects to the determination of taxable income under the Internal Revenue Code. The new rules maintain the long-standing all-or-nothing rule. A foreign tax either is or is not a creditable income tax, in its entirety, for all persons subject to the foreign tax. Historically creditable taxes may no longer be creditable.

The complexity, application and timing of these new rules has sparked harsh criticism by taxpayers and tax professionals alike. In response, the IRS and Treasury have granted taxpayers temporary relief (the relief) under sections 901 and 903 in determining whether a foreign tax qualifies as a creditable tax for purposes of the FTC. Notice 2023-55, issued July 21, 2023, gives taxpayers the option to temporarily apply:

• Former section 1.901-2(a) and (b) (i.e., before T.D. 9959), for the definition of a foreign net income tax and for purposes of satisfying the net gain requirement, but subject to a modified non-confiscatory gross basis tax rule; and
• Existing section 1.903-1 without the jurisdiction to tax excluded income and attribution requirements.

The relief applies to tax years beginning on or after Dec. 28, 2021, and ending on or before Dec. 31, 2023 (e.g., 2022 and 2023 calendar years). In particular, U.S. taxpayers must analyze 1) whether they satisfy certain criteria to be able to rely on this relief and 2) whether they should rely on this relief. Taxpayers who fail to satisfy the relief criteria, along with taxpayers that choose not to rely on the relief, will be required to comply with T.D. 9959 in its entirety and instead analyze the creditability of the French CVAE tax.

For purposes of analyzing the creditability of the French CVAE tax, taxpayers may not necessarily be able to rely on the treaty coordination rule under Reg. section 1.901-2(a)(1)(iii). The French CVAE tax is not specifically stated as a covered tax under Article 2 Taxes Covered of the U.S.-France Income Tax Treaty (the Treaty). Further, the Treaty was entered into force in 1996, which predates the existence of the French CVAE. The good news is that most treaties, including the Treaty, acknowledge that tax law is fluid and changes over time. However, taxpayers will need to analyze French tax law and work with French tax experts to determine if the French CVAE is an identical or substantially similar tax that is imposed to those that are listed in Article 2.

Generally, lower foreign taxes yield a lower FTC (e.g., less foreign tax being paid). U.S. multinationals will want to analyze how this impacts their ability to maximize FTCs in 2023 and 2024.

Taxes calculated for ASC 740 purposes should not be confused with the concept of whether a foreign income tax is a creditable income tax under the new FTC rules. ASC 740 provides guidance for accounting for income taxes and whether a tax should be accounted for as an income tax in the financial statements. Whether the tax qualifies for the FTC is a separate analysis.

Final reminders

Taxpayers that fail to meet the criteria outlined in Notice 2023-55 will be required to comply with T.D. 9959 in its entirety. Satisfying the revamped net gain requirement requires consultation with local country tax experts and an in-depth knowledge of foreign tax law. More often than not, this analysis will take time. U.S. multinationals looking to take advantage of the FTC on 2022 tax returns and beyond should plan accordingly.

Taxpayers interested in additional information on the new FTC rules can view RSM's previous tax alerts (Treasury releases technical corrections to final FTC regulations, Treasury releases much anticipated proposed FTC regulations, Ten quick reminders for FTC and Temporary relief granted for the foreign tax credit). These alerts provide detailed insights on how taxpayers can satisfy the revamped cost recovery requirement, along with the new attribution requirement, which are two key steps in determining whether a foreign income tax is creditable under the new framework should a taxpayer fail to satisfy the criteria outlined in Notice 2023-55.