Draft Comments By The French Tax Administration On The New Anti-Hybrid Financing Provisions

Author:Ms Sophie Borenstein
Profession:Reed Smith

On April 15 2014, the French Tax Administration released its draft guidelines commenting on the new anti-hybrid financing rules enacted in Section 22 of the French Finance law for 2014 dated December 29 2013 (BOI-IS-BASE-35-50-20140415 and BOI-IS-BASE-35-10-20140415). These comments, that currently bind the French Tax Administration, were opened for public consultation until April 30 2014. The final guidelines will then be issued.

The French finance law for 2014 has indeed created a new rule limiting the deduction of interest by a French borrower which is directly or indirectly related to a lender. Under this new limitation, a French borrower is not allowed to deduct interest when the lender is not liable on this interest income to a corporate income tax equal at least to 25 percent of the ordinary French corporate income tax (i.e. 33.33 percent) plus additional corporate surtaxes (i.e. the social security surcharge of 3.3 percent due by legal entities whose corporate income tax exceeds EUR763,000 and the temporary contribution of 10.7 percent due when the turnover of the creditor company exceeds EUR250 million) that would have been due under French tax rules (i.e. 8.33 percent, 8.61 percent or 9.5 percent depending on whether the lender is liable or not to these additional surtaxes).

It must be underlined that the position of the French Tax Administration is very rigorous regarding the additional surtaxes that must be added to the ordinary corporation tax rate in order to determine the reference tax from which the minimum taxation of the creditor company is calculated. And this interpretation does not comply with the current wording of Section 212-I of the French Tax Code as discussed during the debates before the French Parliament.

The minimum tax rate is the reference rate for assessing the tax level of the gross interest income corresponding to financial expenses paid by the debtor company.

The guidelines state that the interest income should not necessarily lead to an actual payment of tax. In addition, the French Tax Administration indicates also that neither the expenses that could reduce the amount of the taxable interest income nor the legal characterisation of the interest income received are taken into account.

Besides, the mere fact that the creditor company is in a loss position is not relevant for the application of this new rule if the debtor company can prove that the gross interest income is actually included in its taxable...

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