Tax consolidation regime
French corporations and their 95% owned domestic subsidiaries may elect to file one single tax return, thus allowing the offset of losses of one group corporation against the profits of a related corporation. CIT is then levied on the aggregate income after certain adjustments for intra-group provisions (e.g. debt waivers, dividend distributions) have been made.
When shares in a company that will be tax consolidated into the group are acquired by a group company from individuals or legal entities that control this group, either directly or indirectly, a portion of the group's overall financial expense incurred by the members of the group is progressively added back to the group's taxable income on a straight-line basis over a nine-year period.
A French subsidiary can be included in a tax consolidated group even if its parent company is not located in France. However, at least 95% of the share capital of the foreign company must be held, directly or indirectly, by the French company that is head of the tax consolidated group. In addition, the foreign company must be subject to CIT, be located in the European Union or in a member state of the European Economic Area whose tax treaty with France includes a mutual administrative assistance clause to fight tax fraud and tax evasion, and hold 95% of the lower-tier subsidiary’s shares.
Amending Finance Bill for 2014 adds the opportunity for the companies subject to CIT to adopt horizontal tax consolidation. The creation of a horizontal tax consolidation between French companies’ subsidiaries of the same parent located in an EU member state, or Iceland, Norway, and Liechtenstein, and subject to a tax equivalent to CIT (‘non-resident parent entity’) is now permitted, allowing one of its subsidiaries (called ‘parent company’) to be solely liable for CIT. This regime applies, optionally, for fiscal years beginning on or after 1 January 2015.
A PE of a foreign company subject to French CIT can be a member of a French tax consolidated group if the shares of the foreign company are held by other French companies, which are members of the consolidated group.
Dividends distributed within a tax consolidated group under the parent-subsidiary regime are exempt up to 99%, and the remaining 1% may not be neutralised.
Allocation of the tax charge within a tax consolidated group
In an important decision dated 12 March 2010 ('Wolseley Centers France'), the French Supreme Court disagreed with the French tax authorities by ruling that the tax charge of the group can be freely allocated between members of the consolidated tax group.
Following this decision, group companies are free to enter into a tax consolidation agreement stating the conditions for the allocation of the group tax charge or, where applicable, the tax savings arising from the group arrangement.
The Supreme Court concludes that since the terms of an agreement to allow a re-allocation take into account the specific results of each of the group companies, the terms of this re-allocation cannot be regarded as an indirect subsidy. However, this allocation should neither undermine the corporate benefit of each group member nor the minority shareholders rights; otherwise, this will result in an abnormal act of management.
Cancellation of the neutralisation of intra-group debt waivers and subsidies
When determining the consolidated taxable basis debt wavers, direct and indirect subsidies granted between tax consolidated entities are no longer neutralised. In other words, they are taken into account in the tax basis.
Transactions at cost among consolidated entities
The 2019 Finance Act provides that goods and services sold at a lower price than the arm's-length one but higher than their cost of goods or cost of service do not qualify as indirect subsidies and thus never create a tax event within tax consolidation.
French parent companies (i.e. companies incorporated in France and holding qualifying shares that represent at least 5% of the issued capital of subsidiaries, French or foreign) have the option of excluding 95% of the subsidiaries' net dividends from CIT (5%, reduced to 1% in certain circumstances, of charges and expenses must be added back to the parent company’s taxable results). The French parent-subsidiary regime extends to certain shares without voting rights. There is no formal commitment to have held the shares for at least two years, and companies can benefit from this regime from the acquisition date of the shares. However, the obligation remains to hold the shares over this two-year period. Certain shares of listed real estate companies are not eligible to the French parent-subsidiary regime.
The taxation of dividends received by a parent company from its subsidiary cannot be capped at the amount of the expenses actually incurred by the parent company. Thus, the tax liability will be equal to 5% (or 1%) of the dividends received, tax credits included.
The French parent-subsidiary regime is not applicable to dividends paid from entities located in an NCST.
In principle, the subsidiary’s shares must be kept by the parent company for at least two years in order to benefit from the participation-exemption regime. However, some operations lead to a break of the two-year holding period. In that case, the exchanged shares are deemed withheld until the sale of the securities received in exchange.
The exchanged shares will be deemed kept for the application of the participation-exemption regime only if the gain or loss is not taken into account in the result of that exchange. If the gain or loss is included in the result, the dividends received may not benefit from the participation-exemption regime and will be taxed.
In addition to the above, the 2016 Act repealed the exclusion from the benefit of the parent-subsidiary regime for the dividends received on shares with no voting rights retroactive to 3 February 2016.
In case of tax consolidated group
There is a 99% exemption on dividends received by a member of a tax group from:
- another member of the same group or
- a company:
- subject to a tax equivalent to French CIT in another member state, or in an EEA member state that has concluded an administrative assistance agreement with France to fight against tax fraud and tax evasion, and
- that fulfils the conditions to participate in a French tax consolidated group if it is established in France (other than being subject to CIT in France).
Distribution followed by absorption or sale of subsidiary
The FTC prevents the possibility for a company to accumulate the exemption of dividends received from its subsidiaries (under the participation-exemption regime or the tax consolidation regime) and the deduction of a loss in value resulting from the dividends' distribution due to previous distributions at the time of the securities exchange or sale of shares.
Upon tax audit, companies whose gross assets exceed EUR 400 million, have a turnover that exceeds a specific threshold (EUR 152.4 million or EUR 76.2 million, depending on the activity of the company), or that are part of a group that meet those criteria, and assuming they have management accounts or consolidated accounts, have to provide the French tax administration with analytical and consolidated accounts.
Identically, rulings granted by foreign tax authorities have to be part of the transfer pricing documentation.
It is not possible to defer the collection of CIT reassessed when a mutual agreement procedure is launched.
Transfer pricing documentation
Large corporations located in France (i.e. with annual turnover or amount of gross assets in excess of EUR 400 million) are required to provide documentation containing general information regarding the relevant group of companies, including main activities, operational and legal structures of the related companies, functions performed and risks borne, main intangible assets, and group transfer pricing policy, amongst others.
Advanced pricing agreements (APAs)
APAs are available for taxpayers only on the basis of international agreements entered into in accordance with Article 25 of the OECD Model Tax Convention. Currently, taxpayers are also allowed to enter into APAs with the French tax authorities on a unilateral basis. In practice, taxpayers are entitled to submit their transfer pricing policy to the French tax authorities. Agreement of the tax authorities to the APA precludes a later challenge as long as facts and circumstances described in the APA and actual ones are identical.
Light French transfer pricing annual reporting obligation
All French entities with turnover or gross assets on the balance sheet exceeding EUR 50 million, or with more than 50% direct or indirect shareholder or subsidiary interest meeting this threshold, are also subject to the light but annual French transfer pricing documentation requirements.
French companies subject to these transfer pricing obligations must file Form 2257 no later than six months after the deadline to file the annual CIT return with the tax authorities.
Form 2257 discloses general information related to the consolidated group (i.e. activities performed, group transfer pricing policy, country of location of intangibles, etc.). The form also includes specific information on the French entity (i.e. aggregated amounts of inter-company transactions exceeding EUR 100,000, main transfer pricing method used for each kind of transaction, etc.).
The 2016 Finance Act introduced two main changes:
- Electronic filing of Form 2257.
- If the relevant French entities are members of a French fiscal unity (consolidated group), Form 2257 must be filed by the head company of the French fiscal unity on behalf of the entire consolidated tax group.
Country-by-country (CbC) reporting
To align with recommendations of the OECD and the G20 BEPS Initiative (Action 13), France has introduced CbC reporting for multinational corporations, applicable to tax years beginning on or after 1 January 2016. The annual obligation requires multinational corporations to file with the French tax authorities anytime within the 12 months following their fiscal year-end a CbC report disclosing information regarding the name, activities, and profits of foreign entities in the same group.
French entities are subject to the CbC reporting requirement if they:
- establish consolidated accounts
- directly or indirectly hold or control one or several legal entities established abroad, or have foreign branches
- generate annual consolidated group revenue of at least EUR 750 million, and
- are not held by one or several legal entities established in France already subject to the French CbC reporting requirement, or by legal entities established abroad that are subject to similar CbC reporting requirements pursuant to foreign legislation.
The French government publishes a list of states or territories that have implemented a similar CbC reporting requirement, have concluded an automatic exchange of information agreement with France, and comply with this agreement.
An entity established in France is also subject to the French CbC reporting requirement when that French entity is held, directly or indirectly, by a legal entity established in a foreign state or territory that would have been subject to the CbC reporting requirement if established in France when:
- the French entity is designated by the consolidated group to perform the CbC reporting obligation for that group, and the French tax authorities have been informed of that designation, or
- the French entity is not able to demonstrate that any other entity of the group, either established in France or in a listed state or territory, has been designated to perform the CbC reporting for the group.
Failure to provide the French tax authorities with complete CbC reporting will result in a penalty of up to EUR 100,000.
Interest accrued by a French corporation in relation with borrowings from its direct shareholders may be deducted if the following two conditions are met:
- The share capital of the borrower is fully paid-up.
- The interest rate does not exceed the average interest rate on loans with an initial duration of more than two years granted by banks to French companies or a higher rate if it can be demonstrated that this rate would be at arm's length.
For financial years beginning on or after 1 January 2019, in line with the implementation of the ATAD 1 rules in France, deduction is further limited.
Related-party interest charges are tax-deductible only if they are at arm’s-length and if the lender meets a minimal taxation test as referred to below.
Under the arm’s-length test, the deductible interest rate is limited to the higher of:
- The average annual interest rate on loans granted by financial institutions that carry a floating rate and have a minimum term of two years.
- The interest rate at which the company could have borrowed from any unrelated financial institution, such as a bank, in similar circumstances (i.e. the market rate).
The portion of interest that exceeds the higher of the above two thresholds is not tax-deductible and must be added back to taxable income for the relevant financial year (this portion is furthermore deemed distributed).
Under this minimal taxation test, the tax deduction of interest accrued to related parties is disallowed if the French taxpayer cannot prove that the related party is subject to tax on such interest at least equal to 25% of the CIT that is/would have been payable in France had the lender been taxable in France.
For taxpayers considered to be thinly capitalised (i.e. where the related-party debt-to-equity ratio exceeds 1:5), the portion of deductible financial expenses is determined based on the following limitations:
- External debt: The 30% EBITDA test applies to the interest charges derived from external debt, determined as being the total interest multiplied by the amounts put at the disposal of the taxpayer by third parties increased by 5 x equity/total amounts put at the disposal of the corporation.
- Related-party debt: Interest on related\-party debt will be subject to stricter rules, with a 10% of tax EBITDA limitation applying to interest charges derived from related-party debt, calculated as being the total interest multiplied by the amounts put at the disposal of the corporation by related parties/total amounts put at the disposal of the corporation.
For a tax-consolidated group, the limitation rule based on a portion of the adjusted taxable income applies at the level of the group.
Special thin capitalisation rules for tax consolidated groups
A member of the tax consolidation may benefit under restrictive conditions of an extra interest charge deduction when the ratio of the consolidated group is higher than its own one.
Controlled foreign companies (CFCs)
The CFC rules provide that:
- French corporations are required to include in their taxable income profits made by their more than 50% owned foreign subsidiaries and branches. The 50% holding is determined by direct and indirect control of shares and voting rights.
- The minimum holding threshold has to be reduced to 5% if over 50% of the share capital of the foreign entity is indirectly held through French or foreign companies controlled by the French parent company. However, if the shares in the foreign entity are listed on a regulated market, the French tax authorities will have to demonstrate that the French parent company, together with other entities holding shares in such foreign entity, is acting in concert.
- The CFC rules are only applicable if the foreign legal entity or PE in which the French company owns the requisite percentage of shares is in a country with a privileged tax regime. A privileged tax regime is defined by the FTC as a tax regime in which a foreign jurisdiction subjects taxable income of a foreign entity to at least 50% or lower of the income tax liability that would have been incurred in France, had the activity of the foreign entity been performed in France.
- Profits of the foreign entity that fall under the CFC rules are no longer taxed separately. They are now aggregated with the other taxable profits of the French parent company. Consequently, any tax losses incurred by the French parent company may be offset against the foreign entity’s profits.
- The French parent company can avoid the application of the CFC rules if it demonstrates that the foreign entity carries an effective trading or manufacturing activity, conducted from its country of establishment or registered office. Furthermore, the CFC rules, in principle, are not applicable with respect of foreign branches or subsidiaries located in another EU country. However, this exception is not applicable if the French tax authorities can demonstrate that the foreign entity located in another EU country constitutes an artificial arrangement, set up to circumvent French tax legislation. This concept is similar to the ‘abuse of law’ concept, although it does not have all the same characteristics.