Free revaluation of assets and tax consequences
Newsletter - January 2021
The Finance Act for 2021 introduces a temporary measure offsetting the consequences of free revaluation of assets on taxable income (new Article 238 bis JB of the French Tax Code). The aim is to help businesses impacted by the health and economic crisis to restore their financial health.
The measure is optional and applies to the first free revaluation of assets recognized at the end of a financial year ending on or after 31 December 2020 and up to 31 December 2022.
What is revaluation of assets?
It is an accounting operation, mentioned in Article L 123-18 of the French Commercial Code, whereby the company has the possibility of presenting a truer picture of its situation by discounting the value of certain fixed assets. The operation allows the company to reinforce its shareholders’ equity and thus improve its financing capacity. It can also have the effect of generating additional taxation.
Which companies does it apply to?
All companies that are subject to the rules of commercial accounting are authorised to revalue some of their assets and are eligible for the new measure.
Which assets does it apply to?
The free revaluation must be done on all property, plant and equipment and permanent financial investments, excluding intangible assets, inventories and marketable securities.
How does the revaluation work?
In the accounts, the revaluation creates a difference between the present value of the fixed assets (fair-market value or value in use) and their net book value (value at cost minus any depreciation and provisions). This difference constitutes the revaluation variance which results in a variation in the company’s net assets posted in its liabilities in an equity account.
Regarding taxation, this revaluation variance currently constitutes income that is taxable at the ordinary rate under Article 38, 2 of the Tax Code.
What are the revaluation variance taxation rules?
In principle, the revaluation variance is taxed in the financial year of the revaluation.
The new temporary measure allows the taxation to be deferred depending on the type of assets:
- For non-depreciable fixed assets: taxation of the revaluation surplus is postponed until their subsequent disposal provided that the company undertakes to calculate the capital gain or loss on the disposal of the asset based on its non-revalued value.
- For depreciable fixed assets: taxation of the revaluation variance is averaged. The revaluation variance is therefore added back in equal fractions to the company’s results from the year after the revaluation:
- Over a period of 15 years for constructions and, provided these items are depreciable over a period at least equal to 15 years, plantations and improvements to land.
- Over a period of 5 years for other fixed assets.
If the fixed asset is sold, the fraction still to be added back is taxed immediately. As a result of adding back the variance, subsequent depreciation, provisions and capital gains are calculated based on the revalued values.
What are the obligations for the company if it opts for this measure?
If it opts for this new measure, the company must attach a statement containing all the information necessary to calculate depreciation, provisions and gains or losses relating to the revalued assets to each of its profit/loss declarations for the year in which the revaluation is applied and the following years.
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