French Tax Report - October 2018


We are pleased to provide you with a summary of the most important provisions of the draft French Finance Bill for 2019 (Draft) which is currently before the French Parliament.

  1. Limitation on the deductibility of the "net financial expenses" for corporate tax purposes

    1.1 Background

    The Draft proposes to introduce, from January 1, 2019, certain limitations (Limitations) on the deductibility of the "net financial expenses" or NFE as per the EU ATAD Directive.

    Our understanding is that the French Government obtained the right to defer the introduction of the Limitations until 2024 from the EU Commission; nevertheless, it has decided to implement the Limitations starting from 2019 with the official explanation that it will simplify the current various rules on the non-deductibility of interest and assimilated items.

    Indeed the current rules, which would be eliminated from 2019, provide different angles to limit the deduction (specific rules apply to French tax groupings):

    Under the so-called "rabot" rule, 25 percent of the NFE is not deductible, i.e. 25 percent of the excess, if any, of the interest paid by the taxpayer over the interest received by the same; the rabot kicks in if the NFE equal or exceed €3 million. Under the thin capitalization rules, the interest paid by the taxpayer to its affiliates is partly non-deductible if all the following conditions are met: i) The ratio of affiliate debts to own funds exceeds 1.5 times ii) The interest received from the affiliates is less than the interest paid to affiliates iii) the interest paid to the affiliates exceeds 25 percent of the EBITDA of the taxpayer; there are certain exceptions to the above limitation, one being that if the debt to own funds ratio of the consolidated group to which the taxpayer belongs is higher than the latter's one, no limitation would apply; where the limitation does kick in, the deductible amount is the highest one obtained under (i) to (iii) above. Specific non-deductibility rules apply in case of certain acquisitions of participating securities (see below). 1.2 Limitations

    The Limitations consist of two sets of rules:

    The principal rule which limits the deductibility of the NFE at 30 percent of the EBITDA The exception anti-abuse type rule which reduces the deduction to 10 percent of the EBITDA 1.2.1 Limitation at 30 percent of the EBITDA

    The basic rule is that the taxpayer may deduct the NFE up to 30 percent of the EBITDA; no limitation applies if the NFE do not exceed €3 million.

    The definition of the NFE is based essentially on the interest paid and received in respect of all forms of money borrowed and lent, but it also includes, inter alia, the following items:

    Amounts paid under derivative agreements and contracts hedging the borrowings of the taxpayer Currency exchange gains and losses in respect of the loans, borrowings and related agreements Fees related to the guaranties of financing transactions Certain payments under finance leases Any cost or income which may be assimilated to interest or financial income The EBITDA definition starts with the income liable to corporate income tax (before imputation of any previous tax loss) to which one would add i) the relevant NFE, ii) any amortization (with certain adjustments), iii) any depreciation (with certain...

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