Article 15 of the second 2012 Amending Finance Act restricts the conditions for transfers of tax losses by codifying in large part the administrative practice related to approvals for the transfer of tax losses in case of reorganizations, and by giving a broader legal definition to a change of real activity, which until now was only based on case law.
- Restricting of the conditions for obtaining an approval for the transfer of tax losses after a merger or transaction deemed as such outside an tax consolidated group
Henceforth, to obtain an approval, the activity which is the source of the tax losses must not have undergone any significant change, over the period during which the tax losses were posted, notably in terms of clients, employment, operating means effectively used or nature or volume of activity. The activity must also be continued for at least three years without undergoing any significant changes.
In addition, the legislature legalized the administrative doctrine that prohibits transfers of tax losses created by financial or real estate holding companies.
- Transfers of tax losses in case of a merger of a tax consolidated group’s parent company
In case of a merger of a consolidated tax group’s parent company, the transfer of the tax losses from the company taken over or from the former member companies who are part of the new group to the new parent company is henceforth subject to the same conditions: the activity must be stable over the period during which the tax losses are posted, the activity must be stable for at least three years and there must be no transfer of tax losses from a financial or real estate holding company. This provision applies both to subsidiaries and to the new parent company.
- Legal definition of change of activity
As a general rule, cessation of an activity causes deferrable tax losses to be eliminated. Henceforth, aside from a change in the real activity, an activity is also deemed to cease if production means disappear for a period of more than 12 months, except in the case of a force majeure, or when such disappearance is followed by a sale of the majority of the company’s shares.
In addition, a change in the real activity is notably defined as follows:
- adding of a new activity bringing abut, during the fiscal year in which it occurs or the following fiscal year, an increase in the company’s turnover by more than 50%, or in the average number of staff and the amount of fixed asset items; or
- abandonment or partial transfer of several existing activities bringing about, during the fiscal year in which it occurs or in the following fiscal year, a decrease in the company’s turnover by more than 50%, or in the company’s average number of staff and amount of fixed asset items.
However, an approval may be requested to maintain the carry over of tax losses if the temporary disappearance of production means is justified for main reasons other than tax reasons; and if the activity addition, abandonment or transfer transactions are required for continuing the activity which is the source of the tax losses and for maintaining the number of jobs.
All of these measures apply to fiscal years ended as of July 4, 2012.