Impact of the ISOC reforms on the Tax Shelter: the Tax Shift effect

Rolled out in several waves, the ISOC (corporation tax) reforms bring corporation tax down to below 30%.

Rolled out in several waves, the ISOC (corporation tax) reforms bring corporation tax down to below 30%. We made a provisional evaluation of the impact of these reforms on the Tax Shelter in a previous note. Admittedly, adaptations had been provided for by the legislators to guarantee a similar tax yield for the investor. But what about the health of the market today? Early funding figures for 2018 are now in and there is evidence of a slowdown. A draft bill aimed at introducing additional adjustments has now been tabled. The sector awaits any modifications to come with impatience.


2018 funding: signs of a slowdown

While investors can still benefit from a potential gain of nearly 10% via a tax yield and the payment of interest, funding for 2018 was down by approximately 15% compared with the previous year (SCOPE figures).  The question is: what will the impact of the extension of the TS be on the performing arts and the enthusiasm that this has created to the detriment of the audiovisual sector – i.e. 25% of the funds raised? But also, and especially, what will the fallout be from the ISOC reforms? Indeed, these reforms have resulted in a loss of the tax incentive involved with a transaction in TS for SMEs subject to the reduced rate, below a certain profit threshold, as well as a 13% reduction in the investment capacity of large companies. It should be remembered that the measures taken in 2017, aimed at adjusting the percentage of exemption, were not accompanied by a revision of the ceiling of the amounts that can be exempt, i.e. a maximum of 750,000 euros. As a result, a new draft bill tabled on 6th February 2019 introduces a series of amendments needed before the second phase of the ISOC reforms, which may have made the Tax Shelter system more fragile.

Modifications expected: the new draft Bill in brief

In order to “provide consistency” with the mechanism “as designed before the ISOC  reforms”, the ceiling of 750,000 euros is being revised upwards, as are the amounts that can be carried forward as exemption.

Hence, to ensure levels of investment equivalent to the previous period, the maximum amounts to be exempt will rise to 850,000 euros and 1,000,000 euros, depending on the tax rate in effect for the taxable period for which the exemption is scheduled (29 and 25% respectively). As a result, the modification should enable the investment capacity per company per year of approximately 240,000 euros to be maintained (compared with 210,000 euros in the previous configuration, i.e. 750,000/3.56). This provision will also have retroactive effect from the 2019 tax year.

For those investors with too little in the way of taxable profits to be able to apply the exemption to the whole of their investment and who would therefore be required to carry it forward to subsequent tax periods at a lower rate, adaptations are also proposed in order to avoid a fall in yield. In practical terms, it will be possible to apply a multiplying coefficient to the total amounts not eligible for exemption. The calculation will therefore be made based on the tax rate in effect during the tax period when the investor signed the framework agreement and the rate in effect for the period in which the transfer is made.

Let’s hope that these modifications will encourage companies to invest equivalent amounts as before, even in the context of a fall in the ordinary tax rate.


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