The French Tax Authorities have specified the tax treatment regarding VAT for subsidies between companies members of a tax consolidated group.

Subsidies involved

According to the provisions of Articles 223 A and following of the French General Tax Code, a company may under certain conditions, come forward as sole liable for the corporate tax income due on the whole results of the group composed of the latter and the companies of which it holds at least 95% of the capital. The Law specifies that the parent company of the group is the only one to be liable for all taxes.

It does not specify how the sharing of taxes due between the companies of the group should be divided.

As a whole, the tax paid by the subsidiaries is equal to the tax that they should have borne in the absence of consolidation. Thus, when a subsidiary in a loss position becomes beneficiary again, it benefits from its loss carry-over.

However, some groups provide for particular modalities of sharing taxes between subsidiaries. These sharing modalities are set up by agreements and must not infringe the rights of the shareholders of the subsidiary. So they must not involve taxes superior to the one that the companies would have borne in the absence of regime of group.

Under these agreements, subsidiaries may benefit from subsidies corresponding:

- in some cases, for subsidiaries in a loss position, to a payment equal to the tax economy from which the group benefited;

- or in other cases, for beneficiary subsidiaries, to a decrease of the tax that they should have normally paid.

VAT rules applicable

These subsidies are not taxable to VAT and should not be booked in the denominator of the report determining the percentage of deduction of the company benefiting from the subsidy.

But this regime only applies if:

- the subsidies are granted under a lawful agreement concluded between the parent company and the subsidiary;

- and if the subsidies correspond exclusively to the way of sharing income taxes due by the group.

Should those two conditions not be met, the subsidies involved must systematically be booked in the denominator of the report determining the percentage of deduction of the subsidiary.

Any other subsidy or forgiveness of debt granted within the group follows the regime described in the Decree dated September 8, 1994 (FR 41/94, p. 20, no. 149 s.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances. For additional information contact Claire Acard on 33/(1)/ or Lionel Benant on 33/ or enter text search: "ARCHIBALD ANDERSEN Profile". The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.