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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing bus iness in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Why?
How it works
Tax payment
End of the tax consolidation
 Why?
Tax consolidation regime allows a French parent company to pay corporate tax on behalf of the other members of the tax consolidated group on the basis of the algebraic sum of the taxable results (profits or loss) of each member.
If at least one of the members of the tax group makes a loss, the consolidated tax charge of the group is lower then the addition of the tax charge of each member after adjustments to eliminate intra-group distortions.
As it is not possible to apply for the tax consolidation retroactively and as it is often difficult to forecast accurately the tax result of all the entities of a group, it is recommended to apply for the tax consolidation even if budget figures n+1 show that all entities will be profitable.
How it works
Description
Tax deductible interest limitation
Exit of a member of the group
Tax consolidation agreement
Dividends
Reorganizations within the tax group
Waver of debt
Inter company financing in EU
Description
The tax consolidation regime is elective and it is possible to modify the tax consolidation perimeter before each FY.
The election for tax consolidation must be filed before the end of the third month following the beginning of the fiscal year for which the election is made.
However the minimum 95% share holding by the head of the tax consolidation must be met the first day of the fiscal year for which the new member company applies to join the tax consolidation.
As from 1st January 2007 shares issued to non directors employees (stock-options, restricted stock, company saving plan) are not taken into account for the 95% minimum share holding test when such shares do not exceed 10%. This provision does not benefit to other types of shares (e.g. BSPCE)
This election is made for an initial period of 5 years and is renewed by tacit agreement.
The parent company of a tax consolidation must be subject to French corporate tax and cannot be held at more than 95% by another company subject to French corporate tax. To be part of the tax consolidation group, the parent company must held directly or indirectly at least at 95% of the financial rights and voting rights.
The regime allows the taxation on the basis of the algebraic sums of the tax consolidation members' profits and losses. Taxable results are first determined at each member level according the applicable general corporate tax rules. All taxable results are then aggregated and adjusted to eliminate distortions from intra-group transaction to form the group taxable result.
Good to remember:
- A tax consolidated subsidiary may be transferred without transition from one perimeter to another one when the sale of the shares take legal effect on the tax year and the two tax consolidations closed their books the same day.
- A new parent company of a reorganized group may change two times the length of the tax year of the members of the tax group during the period of tax consolidation.
- The French branch of a foreign company, subject to corporate income tax in France, may be tax consolidated in France.
- The French parent company of a tax consolidation may be 95% or more indirectly held by another French company subject to corporate income tax through a look through partnership.
- All dividends paid within the perimeter of a tax consolidation are again neutralized, for the computation of the tax consolidated result, when they do not benefit of the parent-subsidiary regime.
The Supreme Administrative Court referred the following two questions to the European Court of Justice for a preliminary ruling:
- Does the French provision which prohibit including within the perimeter of a French tax consolidation a French subsidiary held through a foreign subsidiary established in another EU Member State, and which does not have a permanent establishment in France, constitute a restriction to the freedom of establishment.
- If so, may such restriction be justified either by the consistency of the French tax group regime, specially the neutralization of transactions within the perimeter, or by any other overriding reasons in the public interest.
In its decision « Papillon » dated January 9, 2009, ECJ ruled that a French mother company may tax consolidate a French subsidiary indirectly held through a sub-holding located in another EU member country.
France will have to amend the related tax rules on tax consolidation .
NEWS: Mark & Spencer case
ECJ decided that a group relief scheme which does not allow a parent company to deduct the losses incurred by its subsidiaries established abroad from its taxable profits is, in principle, compatible with community law.
However, it is contrary to freedom of establishment to preclude the possibility for the resident parent company to deduct the losses incurred by non-resident subsidiaries from its taxable profits, if the parent company shows that those losses were not and could not be taken into account in the State of residence of those subsidiaries.
Tax deductible interest limitation also called "amendement Charasse"
Rules applicable until December 31, 2006:
When a tax consolidated entity acquires a new entity from individuals and/or companies controlling directly or indirectly the tax consolidated group and that new entity joins the tax consolidation, a portion of the interest paid by the tax consolidated group is no longer deductible the year of the acquisition of the new entity and during the next 14 years (15 years in total).
Limitation does not apply when the acquired company is no longer part of the tax consolidation. However, starting January 1st, 2006, limitation will still apply when the exit of the company results from the merger with another company part of the same group.
Rules applicable to tax years open as of January 1st, 2007 (Apply to shares acquired as of January 1st, 2007 onward)
The period of limitation is reduced from 15 years to 9 years,
Limitation extended to merger with another company before the setting up of the tax group
Limitation is calculated by reference of the consolidated interest charge and no longer on the addition of the interest deducted by each member of the tax group (Compliance with the new thin capitalization rules)
In a new guideline dated March 21, 2007, French tax authorities indicate that, as of January 1ST, 2006, it is possible to keep the deductibility of the interest when, during the non deductibility period, the parent company of the target company is no longer considered as controlled in the meaning of the guideline.
On December 31, 2007 French tax authorities published a guideline 4 H-8-07 commenting the new thin capitalization rules of article 212 CGI applicable to Fiscal Year starting as of January 1st, 2007. In this guideline the French tax authorities provides detailed explanation on how the global debt/equity ratio of a Group of company is calculated.
Exit of a member of the group
Subject to the tax consolidation agreement terms, the parent company, head of the tax group, may pay an indemnification to a subsidiary leaving the tax group. This indemnification is calculated on the basis of the subsidiaries losses used by the tax group to reduce its corporate tax.
The taxable result of the subsidiary is not included in the tax group result the year of the leave.
The subsidiary leave might also trigger some adjustments in the taxable group result.
Tax consolidation agreement
The tax consolidation agreement is a contract concluded between the head of the tax group and each group member to regulate the allocation of the tax burden among the members and the leave terms.
Dividend
In case of election for the parent – subsidiary regime between entities belonging to the same tax consolidated group, the dividends received deduction is no longer compensated for the computation of the tax consolidated result of the first taxable year the dividend paying entity belongs to the tax consolidated group (Effective as of January 1st, 2006).
As of January 1st, 2005 dividends paid by French companies will no longer carry any "Avoir fiscal".
"Precompte" is abolished for dividend paid as of January 1st, 2005.
Reorganizations within the tax group
Developments below apply only to reorganizations occurring between companies belonging to the same tax consolidation. Be aware that reorganizations occurring between a member of the tax group and a non member company triggers different tax consequences which are not covered in this section
For "merger", "spin-off", "partial transfer of assets" between two companies of the same tax consolidation, it is possible to apply either the general tax rules applicable to reorganizations or the specific rules applicable to tax consolidation.
Tax consolidations rules allow the tax neutralization of capital gains derived from sales of assets or shares between two members of the tax group. Related capital gains are only taxed when one of the two companies party to the transaction leaves the group or when the related assets are sold outside the group.
As from 01/01/2007, Capital gains on « titres de participation » are 95% tax exempt for fiscal years open on 1/1/ 2007 onward. In order to avoid that some tax consolidated groups bear a 1.67% tax charge (5%*33,33%) compared to prior exemption regime on disposal of shares within the perimeter of a tax group, the taxation of the 5% non tax exempt piece is neutralized. However taxation still applies on disposals outside the tax group or when the selling or acquiring tax group member leaves the perimeter.
Tax consolidations rules may appear more flexible compared to the tax free reorganization rules.
- a transfer of assets benefit from tax neutralization at the time of the transaction even though the assets transferred are not considered as a business unit "Partial transfer of assets".
- The group ordinary losses remain outside the scope of the restructuring.
However, losses derived from the activity prior entering in the tax consolidation might be jeopardized.
When a Partial transfer of assets triggers a change in activity of one of the companies part to the transaction, ordinary and/or evergreen losses derived from the activity prior to the entry in the tax consolidation can no longer be carried forward. Until January 1st, 2004, the merger between two members of the same tax consolidation group did change evergreen losses born before the entry in the tax consolidation into ordinary losses, except if the transaction did not exceed a certain amount or if a prior ruling was obtained "Ruling".
As of January 1st, 2004, all existing and new tax losses can be carried forward indefinitely.
It is important to anticipate the tax consequences of reorganizations.
Should reorganization trigger the leave of one or more group members, tax consequences might be very costly.
Group where the tax consolidation perimeter varies frequently might better use the general reorganization tax rules instead of the tax consolidation rules.
It is recommended to analyze the tax consequences of both tax regimes i.e. tax free reorganizations rules and tax consolidation rules before making any decision.
Waver of debts
Waver of debts are not taken into account for the computation of the group consolidated tax result. The neutralisation of waver of debts will be limited to the amount of debt kept in the books of the company granting the waver. (Effective as of January 1st, 2006).
Inter company financing in EU
On July 7, 2007, ECJ extended the possibility for an EU country member to restrict the liberty of establishment with respect of taxes. In the case at hand, Finland tax regime allowed the tax deductibility of financial transfer from subsidiaries to its parent company if incorporated in Finland. ECJ agrees with this difference of tax treatment in order to maintain a fair allocation of taxes between EU state members and to prevent tax evasion.
EJC considers that the system of allocation of tax basis between EU state members would be jeopardized if group of companies could choose with no restriction the EU country member in which the benefit of a subsidiary would be taxable. In addition, EJC enlarges the scope of the exception to prevent tax evasion beside the principle of fair allocation of the right to tax between EU member countries. Before this decision of the ECJ, tax fraud was received only for artificial scheme aimed at escaping EU country member tax rules and factual evidences were provided. According to this new decision, CJCE seems to agree that a theoretical risk is sufficient to justify a restriction to the liberty of establishment.
Tax payment
The parent company of the tax consolidation is the liable for the all corporate tax for the group. As long they are member of the tax consolidation, the subsidiaries no longer pay they corporate income tax to the tax collector
End of the tax consolidation
Several events can trigger the end of the tax consolidation group e.g. the parent company remains the only member of the group, the parent company merges with all its subsidiaries.).
The FY the tax consolidation ends it is necessary to make several adjustments to the taxable result. If the tax consolidated result is a loss, this loss is carried forward at the level of the parent company. If the tax consolidated result is a profit, the parent company pays all the tax.
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