France’s Amended Finance Act for 2014, dated 29 December 2014, includes provisions extending the scope of the French tax consolidation regime to "horizontal" tax consolidated groups (i.e. tax consolidation between sister or cousin companies).

This significant reform aims at making French legislation compliant with EU law.

The reform emerged from recent decisions by the Court of Justice of the European Union (regarding the Dutch tax consolidation regime, which is similar to the French one) and by a French court (regarding the French regime), in which they ruled that the existing provisions which prohibit the tax consolidation of French subsidiaries controlled by a foreign EU parent company violate the freedom of establishment.

As a reminder, the French tax consolidation regime allows a French parent company and its 95 percent owned domestic subsidiaries to combine their profits and losses and to pay corporate income tax on the consolidated result (subject to certain adjustments to neutralize intra-group transactions). Since 2009, a French parent company indirectly owning at least 95 percent of French affiliates through one or more foreign companies based in the EU, Iceland, Norway or Liechtenstein  (intermediary companies) can also form a tax group.

To elect for the "horizontal tax consolidation" provided for by the new provisions, three main conditions shall in particular be met:

  1. All French companies that are members of the French tax group shall be owned for at least 95 percent, directly or indirectly through intermediary companies, by a foreign company that is subject to corporate income tax in another EU country or in Iceland, Norway or Liechtenstein (the foreign parent company) .
  2. The share capital of the foreign parent company shall not be owned for 95 percent or more by another French or EU company that is subject to corporate income tax in its jurisdiction (save for limited exceptions); as a result, in a chain of ownership including only 95 percent-held corporations, only the top EU corporation will be eligible to be the foreign parent company.
  3. All intermediary companies between the foreign parent company and the French members of the French tax group shall have financial years of 12 months with the same opening and closing dates (subject to mandatory provisions applicable in their jurisdiction of incorporation).

These new provisions come into force for financial years closed on or after 31 December 2014 (subject to further guidance from the French tax authorities, the deadline to elect to the tax consolidation regime for financial year 2014 should therefore be exceptionally extended).

When considering future tax plans, it is worth considering the opportunity to form a tax group between French sisters companies, or to enlarge existing French vertical groups to the sisters of the French parent company and their affiliates.

Regarding past tax events, there are arguments that groups which were deprived from the right to form (or to extend) their tax group may claim a refund of the tax overpaid. Such a claim must be filed by December 31, 2015 and December 31, 2016 respectively for corporate income tax overpaid in 2013 and 2014 (financial years 2012 and 2013).