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New Anti Abuse Rule Financing Expenses

New Anti Abuse Rule Financing Expenses

In addition to rules on thin capitalisation and arm's length interest rates, France has just introduced a new rule that disallows the deduction of interest and other financing expenses incurred for acquisitions if the decisions relating to the shareholdings are not made in France or the control or influence over the acquired company is not exercised in France. This new rule affects the tax treatment of French and non-French acquisitions by French companies held by international corporate groups or private equity funds that do not have an autonomous decision making centre in France. Taxand France analyses the tax new rules in acquisition transactions and how this will affect multinationals.

Description of the New Rule
Under the new rule, interest and other financing costs incurred by a French company upon the acquisition of a participation shareholding will not be deductible for French tax purposes if the French acquiring company is not able to demonstrate, by whatever means, that:

  • the decisions relating to the acquired shareholding are effectively made in France by itself directly or
  • by its French resident controlling or sister company; and
  • the ''control or an influence'' over the acquired company is also effectively exercised in France by
  • the French acquiring company directly or by its French-resident controlling or sister company

Taxand France takes a closer look at the new rule


Taxand's Take

Although the way it is written indicates the contrary, this new rule is clearly and solely an anti abuse provision. Therefore, in theory, it should only target structures with an artificial location of a holding in France; otherwise its compatibility with EU law would be questioned. Its actual impact, however, will depend on the attitude of the French tax authorities. It is not clear whether they will require the French acquiring company to have a high degree of substance. As it is not in the tradition of French tax authorities to give clear-cut criteria for the application of anti abuse provisions, the new rule will probably require the auditing of past and future acquisitions by French companies to ensure the deductibility of interest and other financing expenses. It is also advisable to prepare documentation to prove that the French acquiring company (or its French resident controlling or sister company) held by an international corporate group or investment fund plays a key role in the management of the acquired companies.Still, it is too soon to qualify this badly conceived new anti abuse provision as a sledgehammer to crack nuts.

Your Taxand contact for further queries is:
Nicolas Jacquot
T. 33 1 70 38 88 08

First printed in Tax Notes International, 23 January 2012 (PDF)

Taxand's Take Author