How does the 2023 Finance Act provide clarification on tax-favoured schemes and extend their validity?

The tax system applicable in the overseas public authorities includes a set of investment incentive schemes designed to promote their economic and social development.

One factor to their successful implementation in practice is to provide as much visibility and sustainability for an investor as possible over time. Another key is to have a broad scope of investment that corresponds to needs or opportunities in response to economic and social needs overseas.

The Finance Act for 2023 aims to provide a response on both counts.

Increased tax predictability

Schemes for businesses or for investment in the social rental sector currently apply to investments made until 31 December 2025.

The pro-investment schemes for the overseas territories concerned are as follows:

• Investments by individuals: rehabilitation and improvement work on old housing[1]
• Investments by companies: tax reduction for companies subject to income tax[2]
• Investments in the social rental sector: income tax reduction[3]
• Deduction in favour of companies liable to corporation tax[4]
• Tax credit for productive investments[5]
• Tax credit for investment in social housing[6]
• Tax reduction for companies subject to corporate income tax[7]

The Finance Act for 2023 extends the tax credit for 4 additional years, i.e., until 2029.

Nevertheless, the scheme relating to investment by private individuals in favour of rehabilitation and improvement work on old housing (CGI 199 undecies a) applies to projects carried out until 31 December 2023.

Extension to the fisheries sector in Réunion

These schemes (codified respectively in Articles 199 undecies b, 244 quater w, 244 quater y of the CGI) are thus extended to investments consisting of the acquisition and construction of fishing vessels operated in Réunion[8].

Pending further clarification, possibly directly from the DGFIP, the text does not specify whether the vessels must be acquired new.

Fishing vessels operated in Guadeloupe, Martinique, French Guiana, and Mayotte remain excluded from the tax exemption.

On the other hand, fishing vessels are and remain eligible for the favourable tax reduction scheme for companies subject to corporation tax applied in the overseas collectivities[9], insofar as the fishing sector is generally included in the scope of application of the provisions of Article 244 quater Y of the CGI.

Regarding fishing vessels operating in La Réunion, the rate of the tax reduction provided for in Article 199 undecies B of the CGI is set at 25% for vessels with an overall length greater than 24m <40m, and at 38.25% for vessels with an overall length greater than 12m <24m.

Adjustments for greater flexibility

In an effort to harmonise with other tax relief schemes, the 2023 Finance Act provides that the tax reduction for companies subject to corporate income tax cannot be called into question when assets acquired under this tax scheme are transferred as a result of a major reorganisation (merger, demerger or partial contribution of assets), provided that this reorganisation benefits from the tax neutrality scheme[10].

This is an appreciable change that provides more freedom regarding company mergers or asset reorganisation projects.

This provision reinforces other types of developments that were already neutral on the tax reduction under Article 199 undecies B (certain gratuitous transfers, contributions of a sole proprietorship to a company, or mergers under Article 151 octies A, I of the CGI). Nevertheless, it should be noted that the tax reduction is still under threat of being called into question when certain events occur:

For the record: Saint Barthélemy, Saint-Martin, Saint-Pierre-et-Miquelon, French Polynesia and the Wallis and Futuna Islands transfer, change of allocation of the investment, cessation of the eligible activity or the transfer of shares.

Another modification in favour of more flexibility, the tax reduction scheme for companies subject to IR[11] provided, in the event that it is implemented on the basis of a partnership or a GIE/GEIE, that its partners or members had to retain, “on a flat rate basis”, the shares of the partnership for five years.

The Finance Law for 2023 modifies the retention condition, so that it is adjusted to the life of the investment; thus, the retention period is reduced to the normal period of use of the investment if it is less than five years.

Further adjustments based on certain restrictions

The Finance Law for 2023 establishes certain restrictions, in particular commitments to retain shares in the structures carrying the investments.

Here again, structures based on partnerships are at the heart of the reform introduced by the Finance Act, but this time regarding the tax credit for productive investments[12].

If, until now, the benefit of this tax credit did not require a minimum retention period, the partners or members of these structures must now retain the corresponding shares or stocks for a period of 5 years from the completion of the investment or for the normal period of use of the investment if it is less. If they fail to do so, the tax credit they have deducted will be reversed in the year of sale.

In the interests of harmonisation, the tax reduction system for companies liable for corporation tax has been reformed and now provides for the principle of holding the shares until the end of the rental period, which is set at a minimum of five years.

[1] CGI 199 undecies a; [2] CGI 199 undecies b; [3] CGI 199 undecies c; [4] CGI 217 undecies; [5] CGI 244 quater w; [6] CGI 244 quater x; [7] CGI 244 quater y; [8] I quinquies to Article 199 undecies B of the CGI; [9] For the record: Saint Barthélemy, Saint-Martin, Saint-Pierre-et-Miquelon, French Polynesia and the Wallis and Futuna Islands; [10] Article 210A and following of the CGI; [11] Article 199 undecies B du CGI; [12] 244 quater W of the CGI