The 2014 Finance Act enacted a new limitation to the deductibility of loan interest paid to a related company by a French company subject to corporate income tax.  Article 212-I-b of the French Tax Code effectively provides for a minimum taxation condition at the level of the related lender company.  At the French tax authorities' request, the borrower company must therefore be able to show that, on the same interest, the lender company would have been subject to income tax or tax on profits equal to at least 25% of the French tax on profits determined under standard conditions.

Beginning of August, the tax authorities published its final comments in its official base (BOFIP dated August 5, 2014).

Without going into the details of the conditions of application of this new mechanism (see our January 2014 Tax Newsletter), the following points should be highlighted in relation to the tax authorities' comments:

  • the minimum taxation rate (compared with the 25% of tax on profits determined under standard conditions) will be assessed by taking into account the additional and exceptional contributions due on top of the standard  corporate income tax rate(which is not obvious given the drafting of the legislation),
  • the minimum taxation rate is the reference rate to appreciate the taxation level of the gross income corresponding to the interest paid by the debtor. The comments state that the taxation regime of these products will be taken into account, without looking at charges that may be deducted from the creditor 's taxable basis. As regards foreign creditors, the tax authorities refer to the effective taxation rate of interest received, after taking account the specific provisions applicable to these amounts, such as allowances or rebates (but without taking into account the lender 's overall taxation),
  • if the debt receivable is assigned, with respect to whether the creditor company is related, the non-deductibility will be assessed based on the portion of interest pro rata temporis based on the period of time the related or unrelated creditor company held the debt over the fiscal year,
  • in case of joint control of the creditor company by several shareholders where only one would not satisfy the minimum taxation criterion, only the interest paid to this shareholder is not deductible. However, if interest is paid to a partnership, the entire interest will be treated as non-deductible if one single partner does not satisfy the minimum taxation criterion (so that non-deductibility will not be limited to that only portion of interest representing such partner's interest in the partnership),
  • the fiscal year of the deduction will depend on when the interest is included in the creditor's taxable results, which will imply follow-up needs when fiscal years ends or taxation years will differ at creditor and debtor level,
  • as for precisions relating to transparent structures, no clarifications were provided regarding the notion of structures of similar nature incorporated under foreign law.  The minimum taxation criterion will be appreciated at the level of related partners  of the concerned transparent structure or ultimate related partners in case of dual-level transparent structure. However, the tax authorities do not provide for such an appreciation in case of a larger number of interposed transparent structures,
  • the non deductible character of interest by application of this mechanism does not result in qualifying them as distributed income, which is a welcomed clarification.

In addition, Council Directive 2014/86 of July 8, 2014, was published in the Official Journal of the European Union dated July 25, 2014, in order to amend the parent-subsidiaries Directive 2011/96/EU: the main modification consists in no longer applying the exemption to dividends received when they are deductible at the level of the subsidiary. Member States have until December 31, 2015, to adopt the necessary legislation to comply with this directive.

With this directive, the EU has taken an opposite position of France's upon enactment of the 2014 Finance Act:  we will see whether France will change its current legislation when it adopts a new one to comply with the directive, but this is doubtful.