Article 18 of the second 2012 Amending Finance Act is aimed at eliminating distortions between the tax regime for subsidies or debt waiver and for contributions (New Article 39 quaterdecies 2 bis of the French tax code).

Until now, when a company wished to improve its subsidiary’s net equity, it had the choice between a contribution and a subsidy.  Tax symmetry conferred neutrality on the transactions:  the contribution was not taxable for the beneficiary company and was not deductible for the parent company if it was paid with an issue of shares, whereas the subsidy was deductible for the parent company and taxable for the subsidiary.  However, the shares issued as consideration for the contribution were necessarily worth less than the contribution, or even close to zero because the contribution balanced the net equity.  Consequently, the contributing company booked a provision for the shares’ depreciation.  And in case of a sale of shares within two years, the contributing company would have realized capital losses, corresponding to the difference between the contribution’s value and the value of the shares issued, which were deductible from its taxable income.

Therefore, in order to avoid this tax distortion, this new article (which differs from the first bill presented by the Government to the Parliament) provides for eliminating the deductibility of the short-term capital losses resulting from the sale of shares received within two years as consideration for a contribution made to a subsidiary when the shares have a market value, on their issuance date, of less than the value booked for the issued shares.  These capital losses are not deductible, “within the limit of the amount resulting from the difference between the book value of such shares and their market value on their issuance date”.

This measure applies to sales of shares received as consideration for contributions made as of July 19, 2012.