The French tax authorities have just submitted for
public consultation draft tax regulations interpreting the
anti-hybrid loan provision that was passed into law last
The Finance Act for 2014 introduced a new restriction on the
deduction of interest paid to related companies where such interest
is not subject to a minimum taxation.Pursuant to the new rules,
interest paid to a related lending company is deductible only if
the French borrowing company proves that the lending company is
subject to corporate income tax of an amount at least equal to 25%
of the corporate income tax liability as determined under French
standard rules. This proof is to be provided upon request of the
tax authorities (see our previous Tax Alert).In practice, the new
restriction applies to interest paid to a related entity not
subject to minimum taxation on such interest, either because it is
considered as non-taxable dividend (qualification mismatch
resulting from a genuine hybrid loan) or because the interest
income is taxed at a low rate (favorable tax regime).
The (draft) tax regulations, which are not definitive and remain
subject to further changes, are accommodating and preserve the
deduction of most interest paid to foreign affiliates. It can be
summarized as follows:
The foreign tax rate to be taken into account, when assessing
whether it exceeds 25% of the French corporate income tax rate, is
the statutory tax rate (and not the effective tax rate);
Only the inclusion of gross interest in the taxable profits of
the company would be relevant, to the extent that the tax rate
levied on interest income exceeds 25% of the French corporate
income tax rate that would have been levied in France.
Qualification of interest under the laws of the State where the
lender is based – such as dividend or other income - would be
Interest charges and other expenses could be deducted from the
taxable profits of the foreign company, without jeopardizing the
deduction of interest in France.
As a result, and subject to anti-abuse rules:
The new rules should not apply for the sole reason that the
foreign lender is in a loss-making or break-even situation,
including after using tax loss carry forward;
Back-to-back loans through an intermediate entity subject to
statutory tax rates above 8.5% to 9.5% (depending on additional
contributions levied on the French borrowing entity) should not
result in the application of the new restriction, even where the
secondary loan is a hybrid loan or where the secondary lender is
subject to low tax rates;
Notional interest deduction regimes allowing lenders to deduct
interest calculated on their equity funding should not trigger the
Favorable tax rulings should not trigger the new restriction so
long as the combination of the amount of interest income booked in
the lender's taxable profits and the statutory tax rate levied
on this piece of income, represent at least 8.5% / 9.5% of interest
paid by the French debtor.
On the other hand, a foreign regime that permits a foreign
lender to include in its taxable profits only a certain percentage
of interest received from France could be caught by the new rules
if the nominal tax charge on the combination of the amount of
interest income booked in the lender's taxable profits and the
statutory tax rate levied on this piece of income, represent less
than 8.5% / 9.5% of interest paid by the French debtor.
The restriction should apply to interest paid to tax-transparent
entities (including investment funds) only if the shareholders of
the tax-transparent entity (i) are related to the French
borrowing company and (ii) are not subject to minimum
taxation. However, the draft tax regulation has an all-or-nothing
approach whereby, if the restriction applies due to a related
shareholder not subject to minimum taxation, no interest expense
will be deductible, even though there are other shareholders to
which the provision should not apply (either because they are not
related or because they are subject to minimum taxation).
The public consultation process should end this month, so we may
expect to see the final tax regulations in mid-May.
Comments – Even though the anti-hybrid provisions apply
irrespective of the jurisdiction of the lender (France, EU member
State or any other State), their compatibility with EU legislation
is highly debatable. Nevertheless, by relaxing the rules as voted
by the Parliament, the proposed tax regulations open significant
restructuring possibilities to be analysed before engaging any
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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