Comparative Guides

Welcome to Mondaq Comparative Guides - your comparative global Q&A guide.

Our Comparative Guides provide an overview of some of the key points of law and practice and allow you to compare regulatory environments and laws across multiple jurisdictions.

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4. Results: Answers
Corporate Tax
5.
Anti-avoidance
5.1
Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
France

Answer ... Numerous anti-avoidance rules for corporate taxpayers are set out in both the French Tax Code and jurisprudence.

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
5.2
What are the main ‘general purpose’ anti-avoidance rules or regimes, based on either statute or cases?
France

Answer ... The ‘abuse of law’ doctrine under Article L64 of the French Tax Procedure Book prevents taxpayers from using artificial schemes or a literal reading of the tax laws which is contrary to the intention of the legislature for the sole purpose of reducing taxation. A 40% or 80% tax surcharge may apply.

Article L64A of the French Tax Procedure Book, implemented by the 2019 Finance Act, allows the French Tax Administration to dismiss schemes established by the taxpayer with either the main purpose or a main (and not sole) purpose of benefiting from a tax advantage that is contrary to the aim of the applicable tax legislation. This ability to dismiss schemes applies to tax reassessments notified on or after 1 January 2021 concerning agreements concluded on or after 1 January 2020. The rule applies to all tax matters other than corporate income tax matters.

Likewise, Article 205A of the French Tax Code implemented by the 2019 Finance Act allows the French Tax Administration to dismiss schemes set up by a taxpayer with either the main purpose or a main (and not sole) purpose of benefiting from a tax advantage that is contrary to the aim of the applicable tax legislation. This ability to dismiss schemes applies to tax reassessments notified on or after 1 January 2019. The rule applies only to corporate income tax matters.

The scope of the anti-abuse procedure under Article 205A of the French Tax Code and Article L64A of the French Tax Procedure Book is wider than the scope of Article L64 of the French Tax Procedure Book. However, the 40% and 80% tax surcharges applicable for the standard anti-abuse procedure (exclusively tax motivated) will not be systematically applied to these new procedures.

The abnormal act of management doctrine developed by the courts allows the French Tax Administration to reassess companies with respect to management decisions that are contrary to the interests of the company. Where an abnormal act of management is considered to be a deliberate inaccuracy, a 40% tax surcharge may apply.

In addition, the French Tax Administration is required to forward to the public prosecutor cases that have been subject to a 40% (in the event of repetition within a six-year period), 80% or 100% penalty where the tax reassessment exceeds €100,000 (Article L228 of the French Tax Procedure Book).

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
5.3
What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
France

Answer ... The major anti-avoidance tax rules are as follows:

  • The transfer pricing legislation prevents indirect transfers of profits among related companies. Under Article 57 of the French Tax Code, if it cannot be established that transactions between a French company and its related or controlled foreign companies have been carried out at arm’s length, the French Tax Administration can determine the company’s profits for corporate tax purposes, based on a comparison with independent comparable companies.
  • The controlled foreign company provisions (Article 209B of the French Tax Code) allow for a tax consolidation of the profits and losses made by a foreign entity located in a tax haven where at least 50% of the shares, voting rights or financial rights are held directly or indirectly by a French company, unless the French company can demonstrate that the main purpose and effect of the transactions executed by the local entity are not to locate profits in a tax haven. This is an exception to the principle of territoriality that normally applies to French corporate income tax. The interest rate limitation for interest payments to related parties to the maximum rate set forth by Article 39-1-3 of the FTC.
  • Under the anti-hybrid rule, interest on related-party loans is tax deductible only if the French borrower can prove that such interest is subject to income tax in the hands of the lender at a rate equal to at least to 25% of the French standard corporate income tax rate (ie, 7.75% to 8.6%, depending on the company’s turnover and the additional contributions applicable under French law).
  • Under the interest expense deduction limitation (transposition of the EU Anti-tax Avoidance Directive by the 2019 Finance Act), excess borrowing costs (eg, interest expenses, guarantee costs or foreign exchange losses on borrowings) are deductible only up to the greater of:
    • 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBIDA), restated with tax-exempt income; or
    • €3 million.
  • This ceiling drops to 10% (or to €1 million, if higher) for deemed thinly capitalised companies (ie, companies for which the average amount of related-party debt exceeds 1.5 times their net equity). Any excess borrowing costs may be carried forward indefinitely and unused interest deduction capacity in any given fiscal year may be carried forward for up to five years. For tax consolidated groups, the above rules (ie, EBITDA tests, group safeguard clause) will apply at the group level. A general safeguard clause will apply for companies that are members of a consolidated group for financial accounting purposes. Under this clause, if a company can prove that its equity-to-assets ratio is at least equal to the ratio of its consolidated group, it may deduct 75% of the excess borrowing costs disallowed under the EBITDA test. The general safeguard clause will be denied if the company is thinly capitalised.
  • The Charasse Amendment recaptures part of the financial expenses borne by a tax consolidated group where:
    • a tax consolidated company acquires shares in another company from an entity that is not part of the French tax group, but which controls the acquirer or is under common control with the acquirer within the meaning of Article 223B of the French Tax Code; and
    • the target joins the tax group.
  • Under the anti-abuse rules applicable to royalty payments, a portion of the royalties paid to a related party under an IP licensing agreement will not be deductible where the related party is not subject to income tax or corporate income tax at a rate of at least 25% in the current year. The non-deductible portion is calculated by multiplying the amount of the royalties by the following formula: (25% – the effective tax rate applied to the royalties)/25%. This rule applies where the IP owner is not established in an EU or European Economic Area member state.
  • Under the tax measures against non-cooperative states, as defined by Article 238-0A of the French Tax Code and listed by joint decree of the economy and budget ministers, a 75% withholding tax may be levied on payment of French-source income, unless the payer can prove:
    • that the main purpose and effect of the transaction at hand were not to locate revenues in a non-cooperative state (in certain circumstances, there are presumptions of non-fiscal purpose and effect); and
    • non-application of the participation exemption regime or the long-term capital gain regime.
  • A limitation on the deductibility of interest, royalties and remuneration for services paid or due to persons located or established in a tax haven also applies where the difference between the foreign corporate income tax and the tax that would have been paid in France exceeds 50%. Such income will be tax deductible at the level of the French debtor company only if the latter can demonstrate:
    • that these sums represent normal consideration for genuine transactions; and
    • where paid in a state which is listed as a non-cooperative state under French law, that the main purpose and effect of the transactions were not to locate expenses in a non-cooperative state.

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
5.4
Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
France

Answer ... Taxpayers have the opportunity to request an advance tax ruling for all taxes, levies and duties. The French Tax Administration is bound by the ruling it delivers to the taxpayer. Where a taxpayer submits a written request which is accurate, comprehensive and formulated in good faith, the French Tax Administration must, in principle, decide within three months. In numerous situations, a lack of response after this deadline does not equate to tacit approval. However, for certain ruling requests, the French Tax Administration is considered to have issued its tacit agreement if it does not respond within a specified period – for example:

  • six months for a ruling confirming the non-application of the new anti-abuse legislation to a company’s operations under Article 205A of the French Tax Code;
  • three months for a ruling confirming the application of the favourable tax status available for young innovative enterprises;
  • three months for a ruling confirming that a foreign company has no permanent establishment or fixed base in France; and
  • three months for a ruling confirming whether research and development (R&D) expenses qualify for a tax credit.

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
5.5
Is there a transfer pricing regime?
France

Answer ... An arm’s-length principle applies to transactions between related companies (ie, legal majority control or de facto control). In order to avoid transfer pricing adjustments, corporate entities may apply for an advance pricing agreement to the French Tax Administration regarding the compatibility of the applied transfer pricing methods with the relevant legislation.

Transfer pricing documentation is required in France for companies that meet at least one of the following conditions:

  • French companies with a gross annual turnover or gross assets equal to or exceeding €400 million;
  • French subsidiaries where more than 50% of the share capital or voting rights are held, directly or indirectly, by French or foreign entities meeting the €400 million threshold;
  • French parent companies that directly or indirectly hold at least 50% of companies meeting the €400 million threshold; or
  • French companies of a tax consolidated group where at least one entity of the group meets the €400 million threshold.

The scope of this documentation also covers French branches of foreign entities where the condition relating to the amount of turnover or gross assets is met either at the level of the branch or at the level of the foreign entity.

The master file must include:

  • a description of the main service providers within the group, other than R&D services;
  • information on related human capital, equipment, financial and logistic resources of the inter-company service providers; and
  • a description of the transfer pricing policies applied to R&D activities.

The local file must include:

  • the business objectives, and decisions concerning the allocation of resources, financing and risks assumed in order to achieve those objectives;
  • information on payment terms and conditions by type of inter-company transaction; and
  • the reconciliation of management accounts eventually used for transfer pricing purposes and of statutory accounts.

Failure to comply with the documentary obligations set out in Article L13 AA of the French Tax Code (ie, a master file at the level of the group parent company and local files within each country at the level of each subsidiary) will trigger the minimum penalty of €10,000 and can reach the higher of the following amounts:

  • 0.5% of the value of the transactions to which the documentation which has not been presented to the French Tax Administration relates; or
  • 5% of the recalculated taxable profits, based on Article 57 of the French Tax Code, generated by the transactions to which the documentation which has not been presented to the French Tax Administration relates.

According to Article 223quinquiesB of the French Tax Code, an annual transfer pricing declaration is required in France for companies that meet at least one of the following conditions:

  • French companies with a gross annual turnover or gross assets equal to or exceeding €50 million
  • French subsidiaries where more than 50% of the share capital or voting rights are held, directly or indirectly, by French or foreign entities meeting the €50 million threshold;
  • French parent companies that directly or indirectly hold at least 50% of companies meeting the €50 million threshold; or
  • French companies of a tax consolidated group where at least one entity of the group meets the €50 million threshold.

The transfer pricing declaration includes a presentation of the methods used to determine transfer pricing in relation to the arm’s length principle (ie, a transfer price should be the same as if the two companies involved were two independents, not part of the same corporate structure). This information must indicate the main method used and any changes that occurred during the financial year.

Form 2257 must be filed every year, within six months of filing of the corporate income tax return.

Companies with a global and consolidated turnover of more than €750 million and that carry out activities in France must file a country-by-country declaration if another company in the group does not prepare such a declaration in its home country, setting out information on:

  • the activities and locations of activity of group entities; and
  • profit splitting among these entities.

Failure to produce such documentation triggers a penalty of up to €100,000.

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
5.6
Are there statutory limitation periods?
France

Answer ... In principle, the limitation period during which the French Tax Administration may act expires at the end of the third year following that in which the tax is due (31/12/Y+3), as is the case for corporate tax, value added tax or local economic contributions. However, there are specific deadlines concerning local taxes (31/12/Y+1) and transfer tax (31/12/Y+3 or Y+6 if no declaration has been made for registration purposes). If the taxpayer undertakes undeclared activities, the limitation period is extended to 10 years.

The issuance of a tax reassessment notice suspends the limitation period and sets a new deadline to permit the recovery of taxes that have been avoided or not paid.

The French Tax Administration can pursue payment of the tax due for a maximum of four years.

For more information about this answer please contact: Eglantine Lioret from Pinsent Masons LLP
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Topic
Corporate Tax