Global Tax Alert | 16 April 2014

French Tax Administration releases draft regulations on “anti-hybrid” financing provisions

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Executive summary

On 15 April 2014, the French Tax Administration (FTA) released its draft regulations on the new “anti-hybrid” financing provisions included in the 2014 Finance Bill.

The draft regulations are open for public consultation between 15 April and 30 April 2014. Further to this public consultation process, the draft regulations could be subject to some amendments before final guidelines are issued by the FTA.

It should be noted that these draft regulations are currently binding on the FTA.

Detailed discussion

The 2014 Finance Bill introduced, under Article 212 I (b) of the French Tax Code (FTC), a new interest limitation rule – the so-called “anti-hybrid” financing provisions - providing that interest paid by a French enterprise subject to Corporate Income Tax (CIT) to a related French enterprise or a nonresident related enterprise is no longer tax deductible for French CIT purposes if the interest paid is not subject to tax at the level of the beneficiary company at a rate of at least 25% of the French CIT that would have been due under the standard French rules.

Under its draft regulations, the FTA further clarifies the following main concepts:

The CIT Reference Rate

According to the draft regulations, the notion of French CIT that would have been due under the standard French rules refers to the standard French CIT rate (i.e., 33.33%) increased by applicable additional CIT contributions/surcharges (i.e., 3.3% of social security surcharge1 and 10.7% of exceptional contribution to CIT2), which could lead, to a maximum effective tax rate of approximately 38% (or 34.43% in the case where the exceptional contribution to CIT would not be due).

Therefore, the CIT Reference Rate for the purpose of the minimum taxation test should be equal either to 8.33%; or 8.61% in the case where the social security surcharge would apply; or 9.5% in the case where the social security surcharge and the exceptional contribution to CIT would apply.

One should note that the proposed inclusion of CIT additional surcharges in the CIT Reference Rate is debatable as it is not in line with the actual wording of Article 212 I of the FTC as construed in the Parliamentary debates, which clearly indicate that the CIT Reference Rate for the purposes of the “anti-hybrid” financing provisions should be 8.33%.

The Minimum Taxation Test

The Minimum Taxation Test should be appraised at the level of the related lender enterprise by only taking into account the tax regime applicable to interest received from the French enterprise.

As a consequence, the FTA confirms that the Minimum Taxation Test is appraised by reference to the potential taxation of the gross interest income received.

In addition, the FTA further states that the following elements are irrelevant for the purpose of the Minimum Taxation Test:

  • The legal characterization of the income received in the jurisdiction of the lender;
  • The effective CIT cash tax liability of the lender regarding the income received;
  • The existence of expenses which may potentially offset the interest income received (i.e., back-to-back structures are not targeted);
  • The lender's overall taxable result is nil or the lender is in a loss making position.

In the case of a nonresident related lender, the FTA also further clarifies that:

  • The taxation of interest received by the nonresident related lender will be appraised by only taking into account the foreign jurisdiction rules applicable for the determination of the taxable basis of the nonresident lender;
  • Only the effective CIT rate applicable on the interest to the nonresident lender in the foreign jurisdiction (taking into account basis determination rules) will be relevant, not the lender's overall effective tax burden.

For instance, when the lender's statutory tax is 12% but due to local rules the lender benefits from a 50% basis rebate on such interest, then the effective CIT rate on the interest is only 6%.

The above effective CIT rate on the interest should then be compared to the CIT Reference rate (see above) to assess whether or not the Minimum Taxation Test is met.

Proof of the minimum taxation

Upon request of the FTA, French taxpayers must provide documentation supporting that the foreign CIT theoretically owed by

the lender on interest paid to it and deducted in France is at least equal to the CIT Reference Rate.

The FTA further indicates that:

  • Proof of the minimum taxation may be evidenced by any means;
  • The French debtor enterprise which has deducted the interest paid out to the nonresident lender must evidence that:
    • The CIT rate to which the interest paid is subject to, is equal or is higher than the CIT Reference Rate; and
    • The interest paid is effectively recorded in the profits and losses accounts of the nonresident lender enterprise.

The FTA provides that in the case where the deductible interest expenses are not taxed immediately in the hands of the lender due to the application of the foreign jurisdiction's rules (either accounting or tax rules), this interest cannot be immediately deducted from the French enterprise taxable result, but should remain tax deductible in the year when the interest is taxed in the hands of the lender subject to evidencing that the Minimum Taxation Test is met. In this particular case, proof of the minimum taxation should be provided spontaneously together with the CIT return where the interest deduction is taken.

Transparent entities

In the case where the lender is a transparent entity related to the French debtor, the Minimum Taxation Test should be appraised at the level of those of the transparent entity's partner(s) that are considered as related parties to the transparent entity and should only be appraised on the interest income received by these related partners (i.e., interest income taxation for non-related partners is irrelevant for the purpose of the Minimum Taxation Test).

In the situation where the global CIT rate applicable to the interest income received by the partners related to the transparent entity would be lower than the CIT Reference Rate, the entire interest expenses incurred by the French enterprise should not be tax deductible (no pro rata disallowance).

The draft regulations also state that when the related partner of the transparent entity is itself a transparent entity, the Minimum Taxation Test cannot be met, so that the interest expense is disallowed in full at the level of the French debtor.

Combination of the “anti-hybrid” provisions with other French interest limitation rules

The “anti-hybrid” financing provisions should apply after the arm's length test3 (article 212 I (a) of the FTC) and before all the remaining interest limitation rules set out under the FTC.

For instance, in the case where a portion of the interest paid out by a French enterprise would not be tax deductible under the arm's length test, this portion should not be taken into account for the purposes of the “anti-hybrid” financing rules and all the remaining interest deduction limitations.


1. The 3.3% social security surcharge (assessed on the CIT due) requires a minimum amount of actual CIT due (€750,000).

2. The 10.7% exceptional contribution (assessed on the CIT due, social security surcharge excluded) applies when the sales of the taxpayer exceed €250M. It applies to fiscal years closed on or before 30 December 2015, and is scheduled to expire thereafter.

3. Under the arm's length test, interest paid out to related parties is limited by reference to a mandatory interest rate published by the FTA, unless the taxpayer is in a position to evidence that the interest rate applied with the related parties is arm's length.

For additional information with respect to this Alert, please contact the following:

EY Société d'Avocats, Paris
  • Claire Acard
    +33 1 55 61 10 85
  • Philippe Paul-Boncour
    +33 1 55 61 10 20
  • Alexandra Loran-Wisznievski
    +33 1 55 61 18 51
Ernst & Young LLP, French Tax Desk, New York
  • Frédéric Vallat
    +1 212 773 5889
  • Daniel Brandstaetter
    +1 212 773 9164
  • Pierre-Eric Coquard
    +1 212 773 7318
Ernst & Young LLP, Financial Services Desk, New York
  • Sarah Belin-Zerbib
    +1 212 773 9835

EYG no. CM4355