Supreme Court Ratifies French Budget

by Arvind Ashta, Groupe ESC Dijon-Bourgogne, for Tax-News.com

10 January 2003

The French Supreme Court, which rules on constitutional questions, last week approved most of the provisions of the French budget (loi de finances pour 2003), despite protests from the opposition that the budget is based on unreasonable growth assumptions. The budget, which reduced personal tax rates by about 6%, assumes that the French economy would attain a growth rate of 2.5% in the second half of 2002 and would maintain this growth rate in 2003, considered wildly optimistic by most agencies. The Court, however, warned the Raffarin government that a revised budget would have to be presented if the budget assumptions deteriorate significantly.

This report on the Court's decision has been provided to Tax-News.com by Arvind Ashta, Professor of Finance, Groupe ESC Dijon-Bourgogne.

According to the Organic Financial Law of 2001, French budgets need to be realistic, based on available information and forecasts which can reasonably be made from this information. The opposition had based their appeal on this provision, stating that the law was really not realistic because growth rates expected for the second semester of 2002 were barely 1.5%, according to the French Statistical office, INSEE.

The nine sages, guardians of French constitutionality, ruled that the growth assumptions were not too wild, considering that a lot of subjectivity is inherent in adopting assumptions. Moreover, the receipts forecasted would not be significantly altered with mildly more conservative growth assumptions. Moreover, the government had communicated that certain budgeted expenses would be cut out, if the receipts fall considerably. This shows the genuine intention of the government to manage the economy prudently. However, the Court insisted that the government should be careful to revise the budget as soon as it became necessary.

The Supreme Court did, however, consider unconstitutional a proposed tax on the distribution of advertisement tracts either on the streets or in letter-boxes. The tax was meant to finance garbage removal operations and to discourage such advertising. However, the provision allowed free journals containing advertisements to be distributed without such a tax. The Court considered that there was an absence of equality between those who advertise alone and those who advertise collectively.

Most of the original tax proposals have already been voted in by the French legislature. In addition, some new provisions have been picked up by way of amendment either in the National Assembly or even in the Senate. The Constitutional Supreme Court has accepted this as normal procedure.

A significant amendment is that large real estate investment companies quoted in French regulated markets, with a capital greater than 15 million Euros, are now allowed a new optional pass-through status regime, if their primary objective is purchase or construction of buildings for renting. The rental income of such companies is now exempt from taxation in their hands, as long as at least 85% of it is distributed as dividends within the next financial year. Capital gains of such companies may also be tax exempt if they are distributed as dividends within two financial years. This benefit is also available to their subsidiaries if the ownership is more than 95% of the capital. All these companies would therefore have a pass-through status, encouraging their creation and use for managing real estate. The scheme is similar perhaps to REITs in the USA. We can probably expect a huge increase in sale and leaseback transactions as large businesses transfer their buildings to real estate investment companies in a bid to improve profitability ratios such as return on assets.

In another bid to boost financial markets, the carry forward of capital losses on sale of securities and on forward operations in French markets has been extended to ten years (as opposed to five years earlier). This will help ease the pain of all those who registered huge losses in the crash of the stock markets.

In a similar vein, the capital gains on the sale of these securities were to have been taxed only if the value of ceded securities exceeds 7,650 Euros. This limit has now been increased to 15,000 Euros.

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