The Finance Act 2014 introduces a new limitation on the deductibility of interest on loans obtained from (French or foreign) related parties (the "New Measure").

The New Measure completes the existing different schemes in France of limitation of the deductibility of financial expenses ie:

  • The Thin capitalisation rules (French Tax Code "FTC" art 212, I) which limit the deductibility of interest paid by a company on shareholders' loans from the company's taxable income if certain conditions/ratio are not met;
  • The Specific rules for tax consolidated groups (FTC art 223B, 7; also known as the "amendement Charasse") which limit interest deductibility where there is an acquisition of shares between related parties belonging to the same group;
  • The Anti "debt push down" rules (FTC art 209, 1X, also known as the "Carrez rule") which limit the deductibility of interest expenses relating to the acquisition of shares, when the acquiring company cannot prove that the shareholding is managed from France;
  • The Interest capping rules which limit the deductibility of financial expenses (including external debt) at 75% as from FY 2014 if the amount of the financial expenses incurred by the company exceeds EUR 3 million per financial year.

The New Measure aims to prevent hybrid financial instruments (eg loan regarded as a debt in the state of the borrower and as equity in the state of the lender) by disallowing the interest deduction on a loan granted by a related company if interest received is not subject to corporate income tax at the level of the lending company at a rate equal to at least 25% of the estimated French corporate income tax based on the French domestic tax rules.

In practice, at the request of the French tax authorities the borrower should be able to demonstrate with the relevant documentation that interest received by the lender is subject to tax at a minimum rate of 8.43% in the state of the lender.

This New Measure applies retrospectively to interest paid as from 25 September 2013.