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Interest barrier rule to be adopted in France

France
2 Dec 2012
Up to now, the French rules have basically been aiming at confining abusive structures (limit on the interest rate, thin cap rules, acquisitions from related parties, control in France on the stake acquired). This trend has changed since the new rule introduces a general limitation. The reform is inspired from the German interest barrier rule and will basically limit to 85% the deductibility of net interest expenses in 2012 and 2013 (75% as from 2014).

As anticipated in our last publication, France is about to introduce an additional limitation in the already complex tax legislation surrounding the deductibility of financial interest. 

The mechanism will be applicable to any enterprise subject to corporate income tax in France which annual net interest burden exceeds € 3 m. Specific rules will be applicable for tax consolidated group that will be regarded as a single consolidated entity, the € 3 m threshold being approached at group level only. 

The net interest expenses subject to this limitation will be determined by the difference between the financial expenses paid on sums of money made available to a taxpayer by related or third parties and the financial interest earned on funds released by the taxpayer. 

The financial interest included in financial lease fees together with fees paid to related parties for the rental of movable assets are assimilated to financial interest both for the lessee and the lessor. 

The interest barrier rule will be applied after the other restrictions limiting interest deductibility. For example, an interest added-back for thin capitalization purposes will be excluded from the interest barrier rule basis to avoid a double taxation. 

The Draft Finance Bill is being debated by the Parliament and is expected to be adopted with limited if no changes by the end of December 2012. The reform is expected to be applicable as from fiscal years closed on December 31, 2012. 

 

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