Among the measures provided for by the ATAD Directive, some already exist in the French tax law, whereas others will imply slight amendments or even more important adaptations of the national law, particularly with regard to the limitation of interest deductions.
Regarding the exit tax rule: the French Tax Code (FTC) - art. 221,2 - states that the transfer of the head offices or of a permanent establishment to a European Union Member along with the transfer of certain of its assets entails the taxation of unrealized and deferred capital gains, but the company has now the choice between an immediate taxation and a taxation spread over 5 years. However, in any event, transfers to a non-Member State are always subject to immediate taxation. Moreover, according to usual tax rules, when a branch transfers an asset to its foreign parent company, the revenue generated is taxable. The French tax regime is very similar to the European rules.
Regarding the rule governing controlled foreign companies (“CFCs”): the FTC (art. 209 B) provides with a similar measure to Article 7 of the Directive. When a French company holds directly or indirectly more than 50 percent of the shares, financial rights, or voting rights of a non-resident entity that is liable to low taxation in its country of location, the French company is taxed on the profits of this non-resident company, if the latter is subject to an effective taxation which is 50 percent lower than that of France. It is specified that within the European Union, the measure is applicable only if it is proved that the operations and the control of the company are aimed at setting up an artificial arrangement solely aimed at escaping national tax normally due. As for the settlements outside the European Union, the taxation does not apply if the company proves that the foreign entity set up outside of France essentially has an industrial or commercial activity abroad. It must be noted that, contrary to what allows one of the two options of the Directive, the FTC does not provide for the taxation of the “CFC's” passive income taxation.
In theory, the French tax regime seems to have a wider scope than the European rules.
Regarding the limitation of the deductibility of interest: According to the FTC (art. 212), the deductibility of the interests paid by a company liable to Corporate Income Tax directly or indirectly to affiliated companies is subject to a threefold limitation related to: (i) the rate used to calculate the interests; (ii) the fact that the company must be liable to a minimum rate of taxation on the profits related to the interests received (iii) the thin capitalization rules. Moreover, the FTC provides for a general interest capping rule which limits the deductibility of interests to 75 percent of the net financial expenses (art. 212 bis).
These limitations are different from the rules set out by the Directive and the adaptation of our tax regime to European guidelines will therefore be necessary. The issue at stake is the transitional period. If our tax regime is nevertheless deemed « as efficient as » the measures proposed by the Directive, France could benefit from the transitional rules until 1 January 2024 at the latest.
Regarding the general anti-abuse measure: Article L. 64 of the French Tax Procedure Code provides for the concept of substance over form which allows the disregard of arrangements with a main purpose of defeating the applicable tax law and which are not "genuine" i.e. not put in place for valid commercial reasons that reflect economic reality. This raises this issue of the compatibility of the French measure with the Directive’s anti-abuse measure. Furthermore, it must be noted that the wording of the Directive on this point is very similar to the anti-abuse rule within the Parent-Subsidiary Directive as recently modified and that the latter was incorporated into French law in the Parent-Subsidiary tax regime.
Regarding the anti-hybrid regime guidelines: French law contains two provisions aimed at avoiding double non-taxation situations. (i) Article 212 of the FTC provides for the non-deductibility of financing expenses paid to affiliated companies if that interest is not subject to corporate income tax in the recipient’s jurisdiction at a rate equal to 25 percent of the French corporate income tax. (ii) Regarding the Parent- Subsidiary tax regime, Article 145 of the FTC provides for the non-application of the tax exemption of dividends paid to the parent company when the said profits are tax-deductible at the level of the subsidiary.