Draft comments by the French Tax Administration on the new anti-hybrid financing provisions

by Reed Smith

On April 15 2014, the French Tax Administration released its draft guidelines commenting on the new anti-hybrid financing rules enacted in Section 22 of the French Finance law for 2014 dated December 29 2013 (BOI-IS-BASE-35-50-20140415 and BOI-IS-BASE-35-10-20140415). These comments, that currently bind the French Tax Administration, were opened for public consultation until April 30 2014. The final guidelines will then be issued.

The French finance law for 2014 has indeed created a new rule limiting the deduction of interest by a French borrower which is directly or indirectly related to a lender. Under this new limitation, a French borrower is not allowed to deduct interest when the lender is not liable on this interest income to a corporate income tax equal at least to 25 percent of the ordinary French corporate income tax (i.e. 33.33 percent) plus additional corporate surtaxes (i.e. the social security surcharge of 3.3 percent due by legal entities whose corporate income tax exceeds EUR763,000 and the temporary contribution of 10.7 percent due when the turnover of the creditor company exceeds EUR250 million) that would have been due under French tax rules (i.e. 8.33 percent, 8.61 percent or 9.5 percent depending on whether the lender is liable or not to these additional surtaxes).

It must be underlined that the position of the French Tax Administration is very rigorous regarding the additional surtaxes that must be added to the ordinary corporation tax rate in order to determine the reference tax from which the minimum taxation of the creditor company is calculated. And this interpretation does not comply with the current wording of Section 212-I of the French Tax Code as discussed during the debates before the French Parliament.

The minimum tax rate is the reference rate for assessing the tax level of the gross interest income corresponding to financial expenses paid by the debtor company.

The guidelines state that the interest income should not necessarily lead to an actual payment of tax. In addition, the French Tax Administration indicates also that neither the expenses that could reduce the amount of the taxable interest income nor the legal characterisation of the interest income received are taken into account.

Besides, the mere fact that the creditor company is in a loss position is not relevant for the application of this new rule if the debtor company can prove that the gross interest income is actually included in its taxable basis.

Where the creditor related company is established outside France, the taxation is assessed according to the ordinary rules that would have been applied if it has been located in France.

It is therefore necessary to compare the effective tax rate of interest in the result of the creditor's business with the one applicable in France. To make this comparison, it is necessary to determine the effective tax rate on this interest income, taking into account the foreign rules applicable for the determination of the taxable basis of the foreign lender.

Only the effective taxation of the gross interest income is relevant and not the global taxation of the lender. When the foreign legislation provides for a specific rebate, deduction or exemption on the interest income, it is important to compare the effective tax rate actually applicable to the gross interest income with the French tax rate that would have been applied if the lender had been located in France.

The French guidelines provide also that it is up to the debtor to prove that the creditor company is liable to the minimum required corporate tax on the gross interest income. The proof can be done by any means.

The debtor company must demonstrate that:

  • Given the laws of the country in which the creditor company is located, the taxation of the gross income is greater than or equal to the minimum reference rate for the period in question
  • The corresponding interest income was actually recorded in the result of the creditor company under the reference period

The evidence must be made only at the request of the tax authorities. Companies do not have to include them with their corporate income tax return. In practice, although the evidence of minimal taxation of interest income in the creditor company will have to be provided only on request of the French Tax Administration, it is recommended that companies ensure compliance with this requirement before practising deduction.

Where the borrower and the lender companies have different financial years or where accounting or tax rules of the foreign jurisdiction are different from the French one, the new rules apply to the tax year during which the gross interest income is taxed in the hands of the lender at the minimum tax rate as provided by French law.

In this case, unlike the general case, the debtor company must attach evidence of the taxation of the interest income in the result of the creditor in support of its corporate income tax return.

The guidelines provide also that where the lender is a transparent structure or a collective investment fund, the new rules apply only if, on one hand, the debtor company is related to the creditor transparent entity or the creditor collective investment fund, and, on the other hand, the creditor transparent entity or the creditor collective investment fund is related to one or one or more of its partners or unit holders of the transparent entity or collective investment fund.

If this double condition is not met (for example, just one of the two is satisfied), the new rules do not apply. Where the double condition is met, the minimum taxation rate is applied at the level of the related partners or unit holders and only on the gross interest income paid to these latter. If the minimum taxation rate is not met at the level of the non-related partners or unit holders, it has no adverse consequence on the tax deductibility of the interest at the level of the borrower. Thus, the French Tax Administration considers that the full amount of interest is not deductible and does not allow a prorata deduction up to the part of shares or units held by the non-related partners or unit holders.

When the overall taxation of interest in the hands of the partners or unit holders related to the transparent entity or collective investment fund is lower than the reference rate, all financial charges are not deductible for the borrower.

By contrast, when the creditor transparent entity or the creditor collective investment fund is also related to the transparent entity or a collective investment fund (in cases when the partners or the unit holders are also a transparent entity or a collective investment fund), the condition for the minimum taxation rate cannot be fulfilled. In this case, the debtor company is not allowed to deduct the financial interest.

Lastly, the guidelines provide details for the combination of this new rule with the other French interest limitation rules.

The new rules apply after the rules under which interest paid by a company to a related company is deductible within the limit of interest calculated pursuant to the maximum legal interest rate or the market interest rate if higher as applied by independent financial institutions.

However, this new rule applies before all the other limitations rules, such as:

  • The thin-capitalisation rules
  • The Charasse amendment which limits the deduction of interest on debt related to the acquisition of shares of a target company which becomes a member of the same tax consolidated group from a person controlling directly or indirectly the group)
  • The Carrez amendment which limits the deduction of interest expenses related to the financing of the acquisition of shares
  • The general limitation of deductibility of financial expenses under which companies liable to corporate income tax are required to add back to their taxable income 25 percent of the net financial expenses for fiscal years beginning on January 1 2014 when such amount exceeds EUR3 million.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.