FRANCE Law and Practice Contributed by: Véronique Millischer, Léna Sersiron, Eléonore d’Anthonay, Guillaume Nataf, Olivia Chriqui-Guiot, Pauline Celeyron, Damien Berruyer and Nella Picou, Baker McKenzie Paris
Anti-Hybrid Rules In line with the EU Anti-Tax Avoidance Directive (ATAD 2), anti-hybrid rules neutralise mismatch arrange - ments, ie, payments that are deductible in one juris - diction but not taxed in another. General Interest Deduction Limitation Rule (EBITDA Cap) In line with the EU Anti-Tax Avoidance Directive (ATAD 1), a taxpayer’s net financing charges for a given FY are deductible only up to 30% of tax-adjusted EBIT - DA or EUR3 million, whichever is higher. The same thresholds apply to tax-consolidated groups but are calculated and assessed on a consolidated basis (net financial expenses being likewise determined at group level). Where a company or group is thinly capitalised (ie, average related-party debt exceeds 1.5 times accounting net equity), these thresholds are reduced to 10% of tax EBITDA and EUR1 million. A safe har - bour may allow a taxpayer belonging to an accounting consolidated group to claim an additional deduction equal to 75% of the net financial expenses disallowed under the 30% cap. Disallowed net financing charges may be carried forward indefinitely, while unused deduction capac - ity (where the threshold exceeds the net financial expenses) may be carried forward for up to five FYs. Consolidated Tax Group Specific Limitation Within a tax-consolidated group, interest on debt incurred to acquire shares in a company from a related party, where that acquired company is part of, or sub - sequently joins, the group, is partially non-deductible over a period of eight FYs following the acquisition (the “ amendement Charasse ”). 5.6 Transfer Pricing Legal Framework France has comprehensive transfer pricing (TP) rules requiring transactions between affiliated enterprises to comply with the arm’s length principle, allowing the French tax authorities to adjust taxable income accordingly. Companies must maintain documenta - tion demonstrating such compliance.
Additional incentives may apply to specific invest - ments and to investments made in specific geograph - ic areas or in French overseas territories. 5.4 Tax Consolidation France’s tax consolidation regime allows eligible French groups to be taxed on a consolidated basis. To qualify, the group parent must hold, directly or indi - rectly, at least 95% of the share capital and voting rights of each member subsidiary. All group members must be subject to standard French CIT and share aligned FY opening and closing dates. Additionally, the parent must not itself be 95% held by another eligible French company. French subsidiaries held at 95% through an EU or EEA intermediary may also join the group under certain conditions (“ Papillon ” tax consolidation or horizontal consolidation). Under this regime, the parent is solely liable for the group’s CIT, calculated on the aggregate of the tax - able profits and losses of all group members. Key benefits include: • consolidation of the members’ tax results, allow - ing losses of one member to be offset against the profits of another in the same FY; • neutralisation of certain intra-group transactions, including capital gains on transfers of fixed assets (other than qualifying equity participations) and intra-group provisions; • a 1% add-back rule on intra-group dividends eligi - ble for the parent-subsidiary regime, in lieu of the standard 5% share of costs and expenses (subject to a one-year holding period); and • carryforward or carryback of tax losses at group level. 5.5 Thin Capitalisation Rules and Other Limitations Related-Party Interest Limitation Interest paid to related companies (ie, companies that directly or indirectly control the borrower, are con - trolled by it, or are under common control) is deduct - ible only up to a periodically published safe harbour rate or, if higher, the arm’s length rate.
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