Capital gains on business assets normally form an integral part of business profits and are assessed to regular corporate tax. In a number of cases, however, capital gains benefit from tax relief whether in the form of a lower tax rate or a reduced tax base.

Capital gains are generally classified into long-term and short-term gains. Generally, long-term gains are those derived on business assets held for 2 years or more and short-term gains are those derived on business assets held for less than 2 years. The general rationale of the system is that short-term gains are essentially treated as ordinary business income, whilst long-term gains are eligible for tax relief. The categories of long-term gains eligible for tax relief have, however, been restricted and currently include only gains on (a) participation shares; (b) shares in listed real estate companies; and (c) units in specified investment vehicles.

Subject to certain conditions, capital gains resulting from mergers, divisions, and similar transactions benefit from rollover relief (see Sec. 11.). Effective 1 January 2015, profits derived from the buy-back of shares will be subject to capital gains tax, and such profits cannot be classified as dividends regardless of the buy-back procedure used.

Whilst technically not (entirely) capital gains, proceeds from and gains on the disposal of specified intellectual property rights were assimilated to long-term capital gains and assessed to tax at a reduced rate of 15%. The regime for IP rights has, however, been overhauled (essentially to adapt it to the new nexus principle), and at the same occasion a separate regime for IP proceeds and gains (providing inter alia for a reduced 10% tax rate) was introduced (see Sec. 10.3.).

Gains on Participation Shares

Capital gains on qualifying participations benefit from an 88% participation exemption regime. Technically, the qualifying gain is subject to tax at the rate of 0%, but 12% of its amount is deemed to correspond to the expenses incurred with respect to the participation and are added back to taxable income and assessed to regular corporate tax. Qualifying gains for the purposes of the 88% exemption are those realized on participation shares representing 5% or more of the capital and held for at least 2 years, thus globally corresponding to participations eligible for the participation exemption for dividends (see Sec. 10.1.). One difference between the regime for dividends and capital gains, however, is that the 88% exemption for gains may still apply if the seller is a partnership not subject to corporate tax, whilst the 95% exemption for dividends is restricted to corporate tax recipients. Note also that the Supreme Court accepted the application of the 88% exemption to participations below the 5% threshold if meeting the accounting definition of participation shares.

Long-term gains on shares in non-resident entities may also qualify for the 88% exemption. Generally, most tax treaties grant to France (as the country of residence) the exclusive right to tax gains on shares realized by French resident. In the infrequent cases where the treaty grants to the source country a shared taxation right, double taxation is avoided in France through a tax credit for the foreign tax on the gains. However, where the foreign gains benefit from the 88% exemption, the foreign tax credit is forfeited. The reason for this is that the gain is technically there is no double taxation to mitigate: the gain is subject to tax at 0% and the 12% add-up is merely a formulaic recapture of any expenses incurred with respect to the participation. In those situations, the tax authorities accept that the foreign tax be deducted as an expense. The 12% add-up will then be calculated on the net gain received.

Net long-term gains and losses on participation shares are ring-fenced and no set-off is allowed against business income or other types of gains.

Gains on Listed Real Estate Companies

Net long-term capital gains on the disposal of shares in a listed company whose assets consist predominantly of real estate are assessed to tax at the reduced rate of 19%. Net-long term capital losses may be carried forward for 10 years and set off against future long-term capital gains (except those benefitting from the 88% participation exemption, see above).

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