French Implementation of ATAD Rules
On 24 September 2018, the French Government presented the Finance Bill draft for the year 2019. This draft will be discussed by the French Parliament over the next few weeks and may be subject to changes; the final version will be enacted before end of year, 2018.
Interest deduction limitation rules
Article 13 of the Finance Bill draft for 2019 transposes into French law the rules provided for in the “Anti-tax evasion” Directive (“ATAD”) adopted on 12 July 2016.
The following major changes to the current French interest deductibility limitation rules are planned:
- Cap on the deduction of “net financial expenses”: net interest expenses would be deductible from the taxable income of a company only to the extent that they do not exceed the higher of the following two thresholds: (i) €3 million or (ii) 30% of the adjusted taxable income of the company (« EBITDA », i.e., taxable income before the offset of tax losses and without taking into account net financial expenses, depreciation, provisions and capital gains/losses). The cap of €3 million is be understood as per financial year, i.e. a twelve-month period.
- Safe harbor provision: 75% of net financial expenses that exceed the cap (as above), would still be tax deductible provided that the equity-to-asset ratio of the company is equal or higher than the equity-to-asset ratio of the consolidated group to which it belongs. The ratio between shareholders’ equity and total assets of the company would be considered to be equal as to the equivalent ratio of the consolidated group in which the first ratio is not lower by more than two percentage points over the second ratio. The consolidated group refers to all French and foreign companies whose financial statements are fully consolidated for the preparation of consolidated financial statements.
- New thin-capitalization rule: in the event that the amount of debt granted by affiliated companies exceeds 1.5 times the amount of the company’s equity at the beginning or end of the financial year, the net financial expenses of the company may only be deducted up to a maximum of 10% of the “EBITDA” or €1 million if higher.
- Interest expense carryforwards: Financial charges that are not deductible under the rules summarized above may be carried forward indefinitely for possible future allocation, provided that the company’s ability to deduct these future financial charges is not already fully consumed by the financial charges incurred during these financial years.
- Deduction capacity carryforwards: if a company does not fully utilize its deduction capacity (i.e., the amount of net interest expense is lower than the above-mentioned thresholds of 30% of its EBITDA or €3 million), the unused portion of deduction capacity can be carried forward for the five following years.
- Tax Group: the above-mentioned new limitation rules also apply at the level of French tax-consolidated groups, subject to certain conditions.
These new rules would be applicable to financial years beginning on or after January 1, 2019. Financial expenses incurred as from financial years beginning on or after that date would therefore be affected, including those relating to borrowings set up before that date.
Implementation of the general anti-abuse rule for corporate income tax
Article 48 of the Finance Bill draft introduces a general anti-abuse rule for corporate income tax. This clause provides that for the purpose of establishing corporation tax, no account shall be taken of an arrangement or series of arrangements which, having been put in place to obtain, as a main objective or under one of the main objectives, a tax advantage contrary to the object or purpose of the applicable tax law, are not authentic considering all the relevant facts and circumstances.
This new system aims to transpose into French domestic law the general anti-abuse rule provided for by the ATAD Directive and is in line with the wishes of the Member States to fight tax evasion both at EU and international level. Drafted in very general terms, this clause will allow the tax administration to challenge arrangements whose main objective is to obtain a tax advantage, in the context of an ordinary law procedure, without having to implement the abuse of rights procedure. Since the notion of “main objective” is also broader than the notion of “exclusively fiscal purpose”, this mechanism should be easier to implement by the tax administration.
This clause would apply to fiscal years beginning on or after January 1, 2019.
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