FRANCE Law and Practice Contributed by: Raphaële Courtier, Sébastien de Monès, Victor Camatta and Jessica Chartier, Bredin Prat
Among other rules, the French Finance Law for 2019 carried out an overall reform of the deduc- tion of interest expense for companies subject to CIT. The reform implements a general limi- tation on interest deduction to comply with the Anti-Tax Avoidance Directive (ATAD) 1, under which the member states are required to set a minimum standard to determine a threshold for deductibility of interest by reference to taxable earnings before interest, tax, depreciation and amortisation (EBITDA). This mechanism limits, for non-thinly capitalised companies, the deductibility of interest if and to the extent that the net borrowing costs of the taxpayer concerned exceed the higher of: • 30% of its EBITDA (as specifically defined for the purpose of this provision); and • EUR3 million. A general safe-harbour rule allows certain taxpayers to deduct an additional 75% of the amount of net borrowing costs not allowed for deduction under the general limitation described above. For companies belonging to a consoli- dated group for financial accounting purposes, this safe harbour applies if the ratio between their net equity and their total assets is equal to or greater than the same ratio determined at the level of the consolidated group to which they belong for financial account purposes (it being specified that the ratio of the company is deemed to be equal to the ratio of the con- solidated group if the ratio of the company is lower than the group’s ratio by a maximum of two percentage points). The interest deduction threshold is reduced for thinly capitalised companies; ie, companies whose indebtedness towards related parties exceeds one-and-a-half times the company’s
net equity. In that case, a fraction of the net inter- est expense (which is the net interest expense multiplied by the ratio of (x) the sum of (i) the indebtedness towards unrelated parties and (ii) one-and-a-half times the company’s net equity over (y) the total indebtedness of the taxpayer) is deductible within the limits of the “regular threshold” (ie, the higher of EUR3 million and 30% of the company’s EBITDA but reduced pro rata to the above ratio). The remaining fraction of the net interest expense (which is the net interest expense multiplied by the ratio of the indebtedness towards related parties exceeding one-and-a-half times the company’s net equity over the total indebtedness of the taxpayer) is deductible within the limits of the “reduced threshold” ; ie, the higher of EUR1 million and 10% of the company’s EBITDA (again, reduced pro rata to this second ratio). A specific safe- harbour provision allows a thinly capitalised company not to be subject to these “reduced thresholds” if the debt-to-equity ratio of such a company is not higher, by more than two per- centage points, than the debt-to-equity ratio of the consolidated group to which it belongs for financial accounting purposes. The 2019 reform also provides for interest expense and unused interest capacity carry-for- wards, under certain conditions. Specific rules apply for tax consolidated groups and for certain financial expenses relating to the financing of public infrastructure. The French Finance Law for 2020 has imple- mented the anti-hybrid limitations resulting from ATAD 2 into French domestic law, and the former anti-hybrid limitations were abolished. These measures aim to eliminate mismatches attributable to differences in the legal charac- terisation of certain types of payments, financial instruments or entities between the legal sys-
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