More than a year after the tax authorities' first guidelines on the definition of a change of activity provided in Article 221-5, as amended by the second 2012 Amending Finance Act, were put online for public consultation, the final guidelines have just been published in the BOFIP (BOI IS-CESS-10).
Remember that Article 15 of the second 2012 Amending Finance Act had enacted stricter conditions for retaining losses in case of changes of activity by providing a broader definition of a "change of activity" to be deemed as a cessation of activity and, therefore, as a loss of tax loss carry-forwards. For fiscal years ended as of July 4, 2012, a change of the actual activity is defined as follows:
- adding a new activity that brings about more than a 50% increase in the company's turnover or in its average number of staff and in the amount of the company's fixed assets during the fiscal year in which it occurs or in the following fiscal year;
- or the cessation or partial transfer of one or more existing activities that brings about more than a 50% decrease in the company's turnover or in its average number of staff and in the amount of the company's fixed assets during the fiscal year in which it occurs or in the following fiscal year.
In addition to these situations, a cessation of activity also occurs "when the means of production disappear" over more than a 12-month period, except in cases of force majeure, or when such disappearance is followed by a sale of a majority of ownership interests.
In the online July 2013 guidelines, the tax authorities provide clarification for the notion "when the means of production disappear" and for specific situations in which an activity is added, ceased or transferred, with the criteria to follow and the consequences of the cessation of activity vis-à-vis tax loss carry-forwards.
Few changes were made in the final wording dated last September 12, although some additional clarifications were provided, including the following:
- shares booked in the assets of a holding company are no longer deemed means of production, as in the initial commentaries [which had been widely criticized by legal experts (BOI-IS-CESS-10, n° 90)]; therefore, we can infer that a sale of all the shares held by a holding company are not deemed to bring about a cessation of activity and, therefore, a loss of tax loss carry-forwards;
- the examples of added activities cited by the tax authorities have been clarified to cover, in our opinion, the case of a commissionaire ("opaque" or "transparent") who adds a same-type property purchase-resale activity on his own behalf to his activity for selling property on third parties' behalf (BOI-IS-CESS-10, no. 270);
- if involving several activities, one of which is ceased or transferred, much like what is already accepted for an added activity, the new commentaries state that if the company has management instruments allowing it to determine that a portion of the variation in thresholds mentioned above can be connected to the retained activity, this variation will not be taken into account to prove the change in activity (BOI-IS-CESS-10, no. 350);
- subject to application of the conditional reduction of Article 221bis of the French Tax Code (immediate non-taxation of profits subject to a tax exemption and of latent capital gains), the tax authorities state that losses incurred prior to the change of activity are still to be deducted from the operating profits that have not yet been taxed and the latent capital gains included in the taxable assets of the fiscal year of the change of activity (BOI-IS-CESS-10, no. 490);
- lastly, the tax authorities state that, in order to be able to retain the losses of the change in activity for the fiscal year of such change, the company must prepare a closing balance sheet on the date of the change of activity. If it fails to do so, all the losses incurred during the fiscal year of the change of activity are lost (BOI-IS-CESS-10, no. 495).
We note that this final version of the commentaries confirms the very narrow interpretation adopted by the tax authorities regarding the criteria constituting an added activity. They consider that, for a new added activity to be considered a change of activity bringing about a loss of the tax loss carry-forwards, the new activity must be "strictly identical" to the activity already conducted.
Lastly, some questions remain about the notion "partial cessation of the activity" because the tax authorities explain that a mere decrease in business volume does not suffice to prove a change in activity.