The Finance bill for 2019, implementing the ATAD directive, reforms the interest deductions limitation rules.

These rules will apply to the financial years beginning as of January 1st, 2019 and to all entities subject to corporate income tax in France, with specific provisions for tax consolidated groups.

The previous thin-capitalization, the Carrez and the Rabot mechanisms are repealed.

Net financial expenses are now deductible up to the higher of:

  • 3 million euros; and
  • 30% of the EBITDA.

When the company is thin-capitalized, the thresholds are lowered to:

  • 1 million euros;
  • 10% of tax EBITDA.

In tax consolidated groups, these thresholds are no longer assessed at an individual level but are now determined at the group level.

In addition, the text provides for safe harbour clauses bettering the financial charges’ deductibility when the companies are part of a group publishing consolidated accounts.

These new rules raise however the following practical difficulties:

  • The definition of EBITDA: the new text specifies that EBITDA is determined by adjusting the “accounting” EBIDTA with certain items. Among those items, the scope of financial expenses, for instance, is much broader and notably includes leasing.
  • The new rules also use accounting concepts that are not clearly defined (i.e. consolidated equity).

So far, the French tax administration has not yet officially commented on this new mechanism.

Nevertheless, it is necessary to anticipate the impact of these new rules on existing and future financing schemes by carrying out quantitative simulations.