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Tax authorities issue new limitations to financial expenses
French tax authorities have issued their definitive comments on the new article of French tax code. Taxand France summarises the main aspects of this new regulation.
What enterprises are concerned by the limitation?
Any debtor enterprise subject to French corporate income tax or any debtor transparent entity carrying out an activity in France held by an enterprise subject French corporate income tax, provided that the creditor and the debtor are affiliated entities, i.e. one of the entities holds directly or indirectly more than 50% of the share capital of the other, or exercises de facto decision-making power in the other entity, or both entities are under the control of the same 3rd entity (or common control of several 3rd entities).
What is the minimum rate applicable to escape the interest limitation?
According to French tax authorities, the minimum corporate income tax rate to which interest income must be subject in the hand of the creditor is equal to a 4th of French corporate income tax aggregated with social levies which may apply on the top of French corporate income tax. Thus, minimum ‘corporate income tax’ rate is comprised between 8.33% and 9.5% depending on facts and circumstances.
Does non-deductible interest qualify as distributed earnings?
French tax authorities agree to consider that non-deductible interest according to article 212 I-b of French tax code do not qualify as distributed earnings. As a result, non-deductible interest according to article 212 I-b of French tax code is not subject to additional levies or possible withholding taxes on distributed earnings or deemed distributed earnings.
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Also published in Thomson Reuters' Taxnet Pro, 20 August 2014
Although the initial aim of the new deduction limitation legislation was the fight against hybrid instruments in an international context, the actual legislation as commented by the French tax authorities goes beyond this goal and encompasses situations where the interest expense is not treated as an exempt dividend in the country of the beneficiary. Careful attention is needed to make sure that conditions and evidences are met to ensure deduction.