French Tax Update
In this second French Tax Update of the year, we will first focus on one of the key provisions of the Finance Law for 2014 (Loi de finances pour 2014, 2014 Finance Law) which essentially aims at combating hybrid debt instruments put in place between French borrowers and affiliated foreign lenders. We will then review a selection of recent official publications (such as guidelines issued by the French tax authorities, case law, and ongoing tax treaty negotiations) which may be of importance from both an inbound or outbound perspective.
FOCUS ON THE ANTI-AVOIDANCE PROVISION TARGETING HYBRID DEBT INSTRUMENTS
As presented in the previous French Tax Update, the 2014 Finance Law has implemented yet another limitation of the deductibility for tax purposes of interest payments made by a French borrower to an affiliated entity (i.e., an entity controlled by the borrower, controlling the borrower, or controlled by the same third party as the borrower), this time targeting more specifically cross-border hybrid debt instruments (Anti-Hybrid Provision or AHP).
The AHP is applicable to fiscal years closed as from 25 September 2013, and may thus have an immediate impact on the corporation tax returns to be filed (and the corresponding corporation tax liability to be paid) during the upcoming months.
In essence, interest payments made by a French borrower to an affiliated entity will be deductible for tax purposes only if such borrower is able to demonstrate that the lender (be it French or foreign, even though the provision was clearly designed to target cross-border hybrid debt instruments) is subject to an income tax on the corresponding interest income which is at least equal to 25% of the French corporation tax that would have been due had it been computed in accordance with standard French rules (25% Test). Specific rules are also provided where the lender is a flow-through entity such as an investment fund or a partnership (Look-Through Rule).
Given its broad language and the lack of precise guidance within the parliamentary reports and debates which have preceded its enactment, many issues are likely to arise with respect to the scope of the AHP, the operation of the 25% Test, and the reach of the Look-Through Rule. The guidelines to be published by the French tax authorities are thus eagerly awaited.
25% Test
The main uncertainties pertaining to the AHP revolve around the 25% Test, and the way the comparison of the tax liabilities (i.e., the actual tax liability of the lender on the one hand and its theoretical liability under French standard rules on the other hand) will operate. Whilst the 25% Test is at the heart of the AHP, there is no unequivocal indication as to whether the comparison basis should be:
the gross amount of the relevant interest payment; the net amount of the relevant interest payment and its repayment, if any, by the lender (e.g., in case of a back-to-back financing arrangement); the net amount of the overall interest payments received and made, if any, by the lender; or the overall taxable result of the lender (i.e., in order to apply every single French tax rule as if the foreign lender was a French tax resident). Whilst the language of the AHP itself offers little guidance, certain parliamentary debates seem to indicate that the first option (i.e., based on the gross amount) should be followed. Its main upside would be its simplicity; it would nonetheless substantially hurt the efficiency of the anti-avoidance motivation behind the AHP. Another upside would be the correspondingly reduced declarative burden, as the taxpayer is the one bearing the 25% Test burden. There is, however, no guarantee that such option will be followed by the French tax...
To continue reading
Request your trial