In focus

1. Increase of the cap of the child care tax credit - (article 20)

Article 20 of the 2023 Finance Act increases the tax credit cap for child care expenses from EUR 2,300 to EUR 3,500 per dependent child.

As a reminder, French tax residents can benefit from a tax credit equal to 50% of their expenses incurred for child care out of their home for children under the age of six¹.

These expenses were taken into account up to EUR 2,300 per dependent child, corresponding to a maximum tax credit of EUR 1,150 (EUR 2,300 x 50%). Since 1 January 2023, the cap is EUR 3,500, corresponding to a tax saving up to EUR 1,750 per child (EUR 3,500 x 50%).

2. Extension of the 25% rate for the tax reduction for subscription to the capital of Small and Medium-sized Enterprises (SME) - (article 17)

Article 17 of the Finance Law for 2023 extends until the end of 2023 the 25% rate for the tax reduction for share capital subscriptions in SMEs.

As a reminder, taxpayers who are French tax residents can benefit from a reduction of their income tax amounting to 18% of payments made for cash subscriptions to the share capital of SMEs². Some conditions must be met, in particular the obligation to hold the shares until 31 December of the fifth year following the year of the share capital subscription.

In 2020, the tax reduction rate was increased up to 25% to support the creation of companies in France and in the European Union. This increased rate of 25% has again been extended for payments made from a date to be set by decree and until 31 December 2023.

3. Assimilation of sales of individual enterprises or limited liability individual enterprises (EIRL) to sales of shares for the application of registration fees - (article 23)

Article 23 of the 2023 Finance Act amends article 726 of the FTC in order to assimilate sales of individual enterprises or limited liability individual enterprises (EIRL) which have opted to be subject to corporate income tax to transfers of shares for the calculation of registration fees.

As a reminder, the 2022 Finance Law opened the possibility for an individual entrepreneur to opt for the taxation of his/her business activity's profits to corporate income tax. Therefore, this new clarification made by the 2023 Finance Law allows to draw the consequences of this new status in case of sale of the enterprise.

Prior to this amendment, there was uncertainty concerning the registration fees since transfers of individual enterprises that had opted for corporate income tax could be subject to (i) the registration fee regime for sales of business assets provided for in article 719 of the FTC or (ii) the regime for transfers of shares provided for in article 726 of the FTC.

As mentioned in the parliamentary debates, this clarification about the regime for sales of shares has consequences for the taxable basis of the registration fees as well as for the applicable rates to such transfers of individual enterprises:

• The taxable basis from now on will be determined by taking into account the sale price of the enterprise, after deduction of the debts incurred for the activity. Under the regime for transfers of business assets, the taxable basis would have been the sale price, but without taking into account certain items such as operating receivables and debts, cash, real estate or securities, as they are not part of the business assets from a French tax standpoint. The specific regimes applicable to those assets would have been applicable (e.g., real estate, securities, etc.).
• Transfers of individual enterprises that have opted for corporate income tax will be subject to a fixed rate of 3% (like transfers of shares in Limited Liability company (SARL), civil companies, etc.³). The regime for transfers of business assets would have led to the application of the progressive rates of 0%, 3% and 5% on the price of the business, the latter rate being applied above 200,000 euros.

This measure therefore clarifies the applicable regime for registration fees and puts an end to a potential inequality of treatment between individual enterprises having opted for the corporate income tax and companies.

4. Extension of the obligation to justify the origin of the assets for undeclared foreign capitalization contracts - (article 90)

Article 90 of the 2023 Finance Act amends article L. 23 C of the French Tax Procedures code (FTPC) to allow the tax authorities to request additional information on the origin of assets invested in foreign capitalization contracts. Article 755 of the FTC is also amended to allow for automatic taxation at 60% when the information on the origin provided by the taxpayer is not sufficient.

As a reminder, article 1649 AA of the FTC provides that French tax residents must report in their annual tax return information about their capitalization contracts or similar investments, including life insurance contracts, subscribed with financial organizations established outside France. In addition, in compliance with other articles, the taxpayer also has a reporting obligation for foreign bank accounts or digital asset accounts (a reporting obligation also exists for assets placed in trusts, but it is the responsibility of the trustee).

Article L. 23 C of the FTPC already allowed the tax authorities to request information on the origin of assets held in a foreign bank account or life insurance policy for which the reporting obligation had not been complied with at least once in the previous ten years. In order to harmonize the two law provisions, this prerogative of the French tax authorities is extended to foreign capitalization contracts and to investments of the same nature (a category which includes life insurance contracts).

Similarly, article 755 of the FTC already allowed the tax authorities to automatically tax assets held in a bank account or life insurance policy abroad when the information on the origin provided by the taxpayer was not sufficient. This possibility is also extended to capitalization contracts and similar investments. In this case, the highest value during the previous ten years may be subject to transfer tax (gift tax) at a rate of 60%.

As stated in the draft amendment, "this harmonization is likely to strengthen the audit prerogatives of the tax authorities with respect to assets held abroad and thus improve the fight against tax evasion".

During the last few years, reporting obligations relating to foreign assets have indeed tended to expand (life insurance, trusts, crypto assets, etc.) and the tax authorities also benefit from new sources of information, in particular from the automatic exchange of banking information since 2017, enabling them to cross-check items.

In recent years, many individuals have been audited on the basis of bank information, leading to tax reassessments or spontaneous regularizations covering a period of 10 years, given the ten-year statute of limitations applicable in this case. More than ever, taxpayers who are French residents for tax purposes must respect their tax obligations with regards to their foreign assets.

1, 2 and 3 - Reforms relating to wealth management: tax credits for child care, Small and Medium-sized Enterprises (SME) tax reduction, sale of individual enterprises and taxation of foreign capitalization contracts - (Finance Act for 2023)