The two Finance Acts provide an additional restriction on the deductibility of interest paid to related legal entities, an obligation to disclose analytical accounting and consolidated accounts to the French tax authorities during tax audits, a tax on high compensations, an increase of the corporate income tax surcharge for companies whose annual turnover exceeds 250m.
The Constitutional Court struck down several provisions of the two bills, such as the reporting obligation of tax optimization schemes, the change of the "abuse of tax law" definition and the new rules regarding business restructuring.
SIGNIFICANT NEW MEASURES FOR 2014
New restriction on the deductibility of interests paid to a related entity
The Finance Act for 2014 introduces new prohibitions on the deduction of interest paid to related companies where such interest is not subject to a minimum taxation (so called "hybrid loans").
Pursuant to the new rules interest paid to a related lending company will be deductible only if the French borrowing company proves that the lending company is subject to a corporate income tax of an amount at least equal to 25% of the corporate income tax liability as determined under French standard rules. This proof is to be provided upon request of the tax authorities.
Where the lending company is established outside France, the foreign corporate income tax liability should be compared to the French corporate income tax that would have been levied if it were established in France.
For interest paid to tax-transparent entities (including investment funds), the condition of minimum taxation is examined at the level of the partners or shareholders. The partners must also qualify as related entities of the borrowing company.
This new restriction applies to interest paid to a related entity not subject to a minimal taxation on such interest either because it is considered as non-taxable dividend (qualification mismatch resulting from a genuine hybrid loan) or because the interest income is taxed at a low rate (favorable tax regime).
It applies to fiscal years ending as from September 25th, 2013 i.e. with retroactive effect for qualifying loans contracted before that date.
Comments - The new rules remain vague and contain a number of uncertainties that should be clarified by the French authorities in tax regulations to be issued shortly. The conformity of the new rules to EU law remains highly debated.
Communication of analytical accounting and...