France mulls business tax hikes: What does it mean for investors?

The French government is considering a significant tax hike for companies so they shoulder some of the expenses of halving the public deficit by 2029. 

However, the new levy could cost more than one-fourth of the expected growth in earnings for the biggest companies traded on the French stock exchange, according to equity research analysts at British multinational bank Barclays. 

France urgently needs to tighten its belt

The French public deficit is more than 6% of the GDP, very far from the 4.4% initially targeted for 2024, while debt reached a new record at the end of June 2024 of €3.2bn, 112% of the economic output. 

Prime Minister Michel Barnier laid out some details in his speech to the National Assembly on 1 October, talking about his intention to reduce the public deficit from the current levels of more than 6% of the GDP to 5% in 2025 and 3% by 2029.

To achieve this, the government plans to find €60bn next year.

The measures planned include spending cuts (reportedly by around €40bn in 2025), an exceptional contribution from the wealthiest people in France as well as a temporary and “exceptional participation” from the biggest companies that make significant profits. 

There are also plans for a new tax on share buybacks, reported Le Monde.

According to the French newspaper Le Monde, which has consulted the draft tax measures, the corporate tax rate is to be raised by 8.5%, a jump from 25% to 33.5% and it would affect companies with more than €1bn turnover, starting in 2025.

The rise in corporate taxes could yield €8bn to the budget by 2025.

Financial companies are hit the hardest

The expected growth in earnings for the 40 most significant stocks among the 100 largest companies traded on Euronext Paris are about to be hit hard by the proposed levy. 

“The corporate tax hikes should hit the pretax income companies generate in France, so, all else equal, the total net income expected should be lower”, Emmanuel Makonga and Emmanuel Cau from Barclays Investment Bank told Euronews Business.

They estimate that the CAC 40’s earnings per share (EPS) growth is going to be lower by 2.5% in 2025. 

“This would take current estimates of 9.4% EPS growth for 2025 down to 6.9%.”

Lower growth in earnings affects the overall macroeconomic performance, “corporate tax increase could slightly reduce companies business investments in France”, said the analysts.

The most negatively impacted sectors by a higher corporate tax are financial, communication and media and utilities.

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“For French banks in particular, our analysts see the potential tax rate increase removing up to 4% of EPS”, said the report, adding that the impact of a 1% increase in the French corporate tax rate could lower the growth in earnings by up to 0.3% for BNP and 0.5% for SocGen & CredAg SA. for the financial year of 2025.

Although French stocks have underperformed recently, they still look too pricey, according to the report, adding that investors should take a cautious approach, until the political, economic and fiscal uncertainty stops lingering.

The final details of the new tax bill are going to be clarified on 9 October when the government presents the new budget.

Debates in the National Assembly will begin on 21 October and a formal vote is scheduled on 29 October concerning the “state revenue” part of the proposed budget.

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