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France - Taxation of cross-border mergers and acquisitions

France - Taxation of cross-border M&A

To summarize the French rules applicable to cross- border mergers and acquisitions (M&A), this report addresses three fundamental decisions facing a prospective buyer.


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To summarize the French rules applicable to cross- border mergers and acquisitions (M&A), this report addresses three fundamental decisions facing a prospective buyer.

  • What should be acquired: the target’s shares or its assets?
  • What will be the acquisition vehicle?
  • How should the acquisition vehicle be financed?

Tax is, of course, only one piece of transaction structuring. Company law governs the legal form of a transaction, and accounting issues are also highly relevant when selecting the optimal structure.These
areas are outside of the scope of the report, but some of the key points that arise when planning the steps in a transaction plan are summarized later in the report.

Recent developments

The latest major French reforms in the area of cross-border transactions are described below.

3 percent tax on distributions found unconstitutional

  • In decisions of the European Court of Justice (ECJ) on 17 May 2017) and the Constitutional Court on 6 October 2017, the 3 percent tax on distributions was found to
    be unconstitutional, opening opportunities to claim for refunds for the tax, subject to conditions and limitations.
  • The Finance Act for 2018 formally repealed the tax, as of 1 January 2018.

Exceptional corporate income tax surtaxes

  • Exceptional surtaxes on corporate income tax (CIT) apply only once for fiscal years (FY) ending between 31 December 2017 and 30 December 2018.These taxes apply to large companies only (i.e. companies with a sales turnover exceeding 1 billion euros (EUR). For the head of a
    French tax consolidated group, the sales turnover to be considered is the aggregate sales turnover of each entity that is a member of the tax group.
  • A first surtax of 15 percent of the CIT due for the FY (before offsetting of any tax credits) applies to companies with a turnover exceeding EUR1 billion.
  • Companies with a turnover of at least EUR3 billion are subject to a second 15 percent surtax.
  • The payment of these exceptional, additional contributions must be made by the CIT balance due date. The law provides for an advance payment of 95 percent of the exceptional surtaxes due, to be paid by the last CIT installment due date.
  • The contributions cannot be offset against available tax credits, tax reductions or any other tax receivables.

Standard corporate income tax rate reduced

  • The standard CIT rate is 33.33 percent. This rate will be progressively reduced to 25 percent by 2022 as follows:
    • 2018: 28 percent on the profits up to EUR500,000 and
      33.33 percent on profits over this amount
    • 2019: 28 percent on the profits up to EUR500,000 and 31 percent on profits over this amount
    • 2020: 28 percent
    • 2021: 26.5 percent
    • 2022: 25 percent.
    • The 3.3 percent social surcharge (which applies on the fraction of CIT above EUR763,000) remains in place. A lower CIT rate of 5 percent can benefit smaller enterprises, subject to conditions and limitations.

Carrez amendment modified

  • The provisions of the Carrez amendment have been modified to bring them in line with EU legislation.
  • The Carrez amendment disallows the deduction of interest expenses relating to the acquisition of
    qualifying participations (titres de participation) that are not managed by the company holding them or by a company established in France and belonging to the
    same economic group. As of 1 January 2018, companies established in the European Union (EU) or a member state of the European Economic Area (EEA) (which
    has concluded with France a tax treaty providing for administrative assistance) are ‘assimilated’ to companies established in France (meaning that the French company can be managed by a company established in France, the EU or the EEA under certain conditions).

Tax deferral for mergers and similar transactions

  • The deferral regime for mergers and similar transactions was amended, partly in light of the ECJ’s Euro Park Service decision (Case C-14/16).
  • For transactions executed on or after 1 January 2018, the most significant changes are as follows:
    • For cross-border transactions, pre-approval from the tax administration is no longer required. However, the deferral regime applies only if the assets transferred by the French absorbed company to the foreign absorbing company are allocated to a French permanent establishment and certain reporting obligations are complied.
    • In case of demerger or spin-off (partial business transfer), the 3-year holding requirement (which applies to the shares received in consideration of the contribution) is no longer applicable, except when assets and liabilities contributed do not qualify as a full branch of activity (in which case the required pre- approval from the tax authorities is subject to a 3-year holding commitment, among other things).
    • For spin-offs (partial business transfers), pre-approval is no longer required for distributions of shares received in consideration for the contribution to the contributor’s shareholders (proportional), subject to conditions and limitations (in particular, the distribution must occur within 1 year following the contribution).
    • The definition of ‘full branch of activities’ is extended to the contribution of shares reinforcing an existing majority stake (more than 50 percent) in the company receiving the contribution.
    • The anti-abuse clause in Article 15.1-a of EU the Merger Directive is introduced in French law. Under this clause, the tax deferral does not apply where it appears that the main objective, or one of the main objectives, of a restructuring transaction, is fraud
      or tax avoidance (unless there is evidence to the contrary) when the transaction is not carried out for sound business reasons, such as the restructuring or rationalization of the activities of the participating companies).

Contract law reform

  • Ordinance no. 2016-131 of 10 February 2016, which reforms contract law, the general regime and the proof of obligations, entered into force on 1 October 2016, introducing new articles into the French Civil Code (Articles 1100 to 1386-1).
  • This reform primarily codifies numerous previous jurisprudential solutions and introduces new concepts (e.g. the legal obligation of confidentiality, unpredictability).
  • This reform affects pre-contractual negotiations and drafting of contracts for M&A transactions, particularly the drafting and execution of unilateral promises to sell or purchase. The judge’s power of interpretation has also been strengthened.

Asset purchase or share purchase

Although an asset purchase may be considered as a more flexible funding option, a share purchase can be more attractive, notably regarding the amount of registration tax and the right to transfer tax losses of the target company. Some tax considerations relevant to each method are discussed later in this report.

Purchase of assets

Transfers between associated parties must normally be made at market value, although market value, being an economic rather than a tax concept, is not defined in the law.The market price is generally the price that an ordinary buyer would agree to pay.

Where the assets are transferred at a price that is lower or higher than their market value, the difference can be qualified as a deemed distribution, subject to withholding tax (WHT) where one of the parties is a non-resident.

Within a tax-consolidated group, if assets are transferred between members at a price that is lower or higher than the assets’ market value, the difference constitutes an indirect subsidy, which is only partly neutralized at the level of the
tax-consolidated results (following Corbfi case law). However, such indirect subsidies (to the extent that they were initially neutralized) must be de-neutralized in the group-taxable results of the FY during which either the company that grants or the company that benefits from the indirect subsidy leaves the tax group or the tax-consolidation group ceases to exist. This can result in an effective tax impact in certain cases.


Under French tax rules, goodwill, which is considered an intangible asset, generally cannot be amortized except by the creation of a provision, subject to strict conditions.

The value of the goodwill is included in the net worth of the company. If goodwill is transferred, it must be included in the recipient company’s accounts.


Most tangible assets may be depreciated for tax purposes, the major exception being land. Rates of depreciation vary depending on the asset. Higher rates are allowed for plant and machinery used in two-or three-shift manufacturing and for assets subject to substantial corrosion or abrasion.

As of 1 January 2005, new accounting rules apply to depreciation. Based on International Financial Reporting Standards (IFRS), component accounting is used for the separate components of an asset, and depreciation is booked component-by-component.

Typical rates are as follows:

  • motor vehicles: 20 percent, straight-line method
  • plant and machinery: 10 to 20 percent, straight-line method
  • buildings: 2 to 5 percent, straight-line method.

Intangible assets, such as goodwill and securities, may not generally be amortized, but, under certain circumstances, they may be depreciated by way of provisions. However, the acquisition costs of technical processes, patents, patterns and knowhow are usually depreciated over the length of their legal or contractual life.

Under French tax rules, patents may be depreciated over a period that is shorter than their period of legal protection but not less than 5 years.

In order to encourage investment in the industrial production, companies can deduct from their taxable income a sum equal to 40 percent of the original cost of eligible assets (except financial charges) used for their activity when such assets are manufactured or purchased between 15 April 2015 and 14 April 2017. This measure also benefits to companies renting qualifying assets under a leasing contract, or a rental contract with a purchase option, concluded during that period of time. Thus, instead of deducting 100 percent, companies may deduct 140 percent of the value of the purchased, manufactured or rented assets. The measure has been extended to optic fiber equipment, heavy trucks and robots acquired or manufactured between 1 January 2016 and 14 April 2017.

Value added tax

In the absence of special rules, the standard valued added tax (VAT) rate is 20 percent.

A VAT exemption is applicable where the sale qualifies as a transfer of universality or part thereof within the meaning of French and EU law, such as a transfer of a business.

On the transfer of a business, the exemption applies to the disposal, subject to payment, of all the assets constituting the business (i.e. intangible and tangible assets excluding real estate).

The effective transfer of the clientele is necessary to qualify for such VAT exemption. The disposal of an isolated element would then be subject to VAT, unless the element in question is the clientele or real estate, in which case the disposal is usually subject to the transfer tax.

The VAT exemption does not apply to inventories sold alone.

Transfer taxes

In principle, the buyer pays French registration tax. However, article 1705 of the French Tax Code provides for the joint and several liability of both the buyer and the seller for the payment of this tax.

The transfer of immovable property is subject to a transfer tax that ranges between 5 percent and 6 percent (plus notary fees), calculated on the sale price (or the fair market value of the related assets if higher). The rate can vary depending on the place where the immovable property is located.

In the transfer of a business, the word ‘business’ refers to the French notion of ‘fonds de commerce’. From a legal standpoint, a fonds de commerce is an aggregate of business assets, both tangible and intangible, used in a particular business. It consists mainly of a clientele attached to a particular group of business assets. It may
also consist of a right to a lease or a specific collection of equipment, tools and merchandise.

Article 719 of the French Tax Code stipulates that the transfer of a business would trigger the payment of a transfer tax amounting to:

  • 3 percent for the portion of the sale price (or fair market value, if higher) between EUR23,000 and EUR200,000
  • 5 percent for the portion of the sale price (or fair market value, if higher) that exceeds EUR200,000.

The tax is assessed on:

  •  the intangible assets transferred, such as clientele, goodwill, leasehold rights to the business premises, patents, inventions, trademarks, current contracts (e.g. distribution agreements), licenses and administrative authorizations
  • tangible fixed assets, such as furniture and equipment
  • tools and supplies.

New merchandise (inventories) is usually not subject to French registration tax or VAT if certain conditions are met (FrenchTax Code, articles 723 and 257). When these conditions are not fulfilled, the new merchandise is subject to VAT.

Purchase of shares
Tax indemnities and warranties

In the case of negotiated acquisitions, it is usual for the buyer to request, and the seller to provide, indemnities and warranties as to any undisclosed tax liabilities of the company to be acquired. The extent of the indemnities and
warranties is a matter for negotiation. Where an acquisition is made by way of a market raid or hostile takeover, it is
not possible by virtue of the nature of the acquisition to seek warranties or indemnities.

Tax losses

French tax legislation does not include any rule restricting the validity of tax losses in the case of a change of ownership.
However, specific restrictions have to be considered for tax losses crystallized in a tax group.

Tax losses generated by the target company cannot be offset against the profits of other companies that are members
of the tax group, but tax losses may be offset against the company’s own future profits (subject to conditions and limitations).

Where a French target company with trading losses is acquired, these losses may be used against its own future trading profits unless the company undergoes a ‘real change of activity’
or changes its tax regime.The concept of a ‘real change of activity’ has recently been clarified by French tax law. It now includes the addition, discontinuance or transfer of an activity that entails, respectively, an increase or a decrease of over 50 percent (relative to the previous FY) in either revenue or the average headcount and gross amount of fixed assets.

For FYs ending after 20 September 2011, the following limitations apply to the utilization of losses:

  • carry back of prior-year losses is limited to EUR1 million; a credit is granted that can be used to pay CIT in the following 5 years and is refundable in the sixth year
  • carry forward of losses to offset against profits of future year is limited to EUR1 million plus 50 percent of the taxable result exceeding that threshold.

Crystallization of tax charges

If the target belongs to a tax-consolidated group,
de-consolidation costs could arise if the acquisition leads to dissolution of the tax group or at least the exit of the target from the tax group. Such costs would crystallize at the level of the head of the tax group. Indirect costs must also be considered in some cases, such as an increase in the number of employees profit sharing during the FYs following
the deconsolidation (for the subsidiaries that generated losses within the tax group). Also, a potential indemnification of
the exiting company could be considered in relation to the tax losses transferred to the group (a case-by-case analysis is required, in particular considering the tax-consolidation agreement in place).

Pre-sale dividend

A dividend distribution and a capital gain realized on a sale of shares may benefit from a full tax exemption when some conditions are met. Pre-sale dividend issues arise in France
since, in the case of dividends distribution, the lump sum that remains taxable corresponds to 5 percent of the distributed dividends while it corresponds to 12 percent of the realized capital gain (provided the parent company held the shares for at least 2 years, among other conditions). As a result, it could be advantageous for a company to make a dividend distribution prior to a sale of shares.

Additionally, within a tax-consolidated group, dividend distributions are no longer fully exempt as of FYs starting on or after 1 January 2016, and a lump sum of 1 percent remains taxable. Under certain conditions, this regime also applies to dividends received from EU and EEA companies.

Otherwise, a sale of shares or a dividend distribution is subject to the standard CIT rate.

Pre-sale transfer of debt of the target entity

Where the seller has a receivable from the company the shares of which will be disposed of and the fair market value of the receivable is lower than its nominal value, the capitalization of the receivable before the sale or its sale to the buyer followed by its capitalization by the buyer (new shareholder) is not treated similarly for tax purposes. An in- depth analysis is required on a case-by-case basis.

Transfer taxes

The transfer of shares in a joint stock company, i.e. an SA (corporation), SAS (simplified joint stock company) or SCA (société en commandite par actions) is subject to transfer tax at the rate of 0.1 percent.

The transfer of shares in all other corporate companies, such as SARLs (limited liability companies) or partnerships (e.g. SNC — general partnership or SCS — limited partnership) is subject to transfer taxes at the rate of 3 percent for that part of the price exceeding EUR23,000. The tax base is reduced by EUR23,000 multiplied by the percentage that the shares to be disposed of represent of the capital of the company.

However, no transfer tax is due where the seller and buyer belong to the same economic or tax-consolidated group.

By exception, companies whose assets are more than
50 percent real estate (société à prépondérance immobilière) (the comparison is made on the basis of the respective
fair market values) are subject to transfer tax at the rate of 5 percent (with no allowance and no cap), regardless of the legal status of the company (or the membership to the
same group of companies). The intragroup exemption is not available where the 5 percent transfer tax applies.

Transfer tax is assessed on the sale price increased of liabilities taken over by the buyer or the fair market value if higher.
Tax clearances

It is not possible to obtain a clearance from the French tax authorities giving assurance that a potential target company has no tax arrears or is not involved in a tax dispute.

Choice of acquisition vehicle

The following vehicles may all be used to acquire the shares or assets of the target company:

  • subsidiary
  • branch of a foreign company
  • treaty country intermediary company
  • local holding company
  • joint venture
  • other special purpose vehicle (such as a partnership).

The choice of the structure can be critical for tax purposes, especially if it is intended to set up a tax-consolidated group.

Moreover, some specific constraints must be taken into account, such as thin capitalization rules (see later in the report) as well as the Charasse and Carrez amendment rules.

The Charasse amendment rule applies where a tax- consolidated group member purchases a company outside the tax-consolidated group from shareholders that directly or indirectly control both companies (‘control’ is defined by the French Commercial Code) and the target company becomes a member of the same tax-consolidated group. In this case, a portion of the group’s financial expenses is not deductible for tax purposes for 9 years, even if no loan is used to purchase the target company. In case of acquisition from a third-party, followed by an internal reclassification of the shares of the
French companies, it may be possible to fall outside the scope of the Charasse amendment, subject to strict conditions.

According to the Carrez amendment rule, the deduction of interest expenses relating to the acquisition of qualifying participations (titres de participation) requires substantiating that those participations are effectively managed by the company holding them or by a company established in France and belonging to the same economic group (subject to conditions). For FYs ending on or after 31 December 2017, companies established in the EU or a member state of the EEA that has concluded a treaty providing for administrative assistance are ‘assimilated’ to companies established in France. In other words, the French company can be managed by a company established in France, the EU or the EEA under certain conditions. In addition, when the subsidiary can be considered to be ‘controlled’ by another company within the meaning of the French Commercial Code, such control must be effectively exercised from France or the above territories. Otherwise, a portion of all the taxpayer’s interest expenses is considered as non-tax-deductible and must be added back to its tax result. This add-back is made over a period of 8 years, starting in the year following that of the acquisition of the qualifying participation.

Local holding company

If profits are to be reinvested in the business or invested in other undertakings carried on by the buyer in France, the buyer should consider incorporating a local holding company to act as a dividend trap. The local holding company would receive the dividends from the ventures carried on in France or abroad by the group free of tax (i.e. exempt up to 95 percent, decreased to 99 percent in the case of tax consolidation as of 1 January 2016, subject to conditions). In addition, using a French holding company partly funded by debt and forming a tax group with the target could allow the interest paid by
the parent company to be offset against the operating profits of the target (subject to anti-hybrid rules, thin capitalization restrictions, the Charasse and Carrez amendment rules and the general limitation on interest deductibility). The holding company could reinvest those dividends in other subsidiaries. Obviously, the French holding company must have sufficient substance in France.

Foreign parent company

The use of a foreign parent company to acquire the shares or assets of the target company has important tax consequences for dividend distributions and interest.

The French Tax Code stipulates that dividends distributed by French companies to non-residents, in principle, attract a WHT to be levied and paid to the tax authorities by the distributing company. The statutory rate of this WHT is, in principle, currently 30 percent where the dividends are distributed to legal entities (75 percent where the recipient is located in
a so-called ‘non-cooperative’ country or territory). The rate is expected to be aligned with the domestic CIT rate as of 1 January 2020. The WHT rate may be reduced by one of France’s tax treaties, where certain requirements are met.

According to article 119 ter of the French Tax Code, which incorporates the EU Parent Subsidiary Directive, dividends paid by a French company to its EU member state parent company (which must be the beneficial owner of the dividends) are exempt from WHT when the following conditions are met:

  • The parent company and the distributing subsidiary take the form of one of the companies listed in the appendix to the 2011/96 EU Directive.
  • Both companies are subject to corporate tax at the standard rate in the EU or EEA member state in which they are located.
  • The parent company’s effective place of management is in an EU or EEA member state.
  • The parent company has held at least 10 percent of the subsidiary’s share capital for at least 2 years (or has committed to hold the participation for at least 2 years).
  • For FYs ending on or after 31 December 2015, parent companies established in another EU member state or EEA country can legally benefit from the EU WHT
    exemption if they hold 5 to 10 percent of the capital of the distributing company and have no opportunity to offset French WHT against the tax due in their country.

The WHT exemption regime is applicable to companies established in the EEA (i.e., Iceland, Norway and Liechtenstein) for FYs ending on or after 31 December 2015 (subject to the existence of a tax treaty providing for administrative assistance).

Moreover, the anti-abuse clause was amended to comply with EU directives for FYs starting on or after 1 January 2016. As a consequence, the WHT exemption does not apply when the distribution is made in the context of
an arrangement or a series of arrangements, one of the main purposes of which is to obtain a tax advantage in contradiction with the object or purpose of the regime and that is not ‘authentic’, having regard to all relevant facts
and circumstances (i.e., it is not set up for valid commercial purposes reflecting the economic reality).

Finally, the French Tax Code provides that interest paid by French individuals or companies to non-resident entities is, in principle, exempt from French WHT unless the interest is
paid to a so-called ‘non-cooperative’ country or territory (WHT applies at the rate of 75 percent in this case).

Non-resident intermediate holding company

Most tax treaties signed by France contain provisions designed to prevent treaty shopping. The fact that an EU holding company is controlled by non-EU investors does not necessarily prevent the application of the EU Directive; this depends on each case and on compliance with the above anti- abuse clause.

Also, the French courts consider that a tax treaty may only apply when the recipient of the revenue meets a ‘beneficial ownership’ test, even if the applicable tax treaty does not specifically mention it.

Local branch

When profits will be regularly repatriated, it is sometimes desirable to form a branch or use an existing one to acquire the assets of the target company. The remittance of branch profits is subject to a 30 percent special branch profits tax.
Tax treaties may provide for a lower rate or exemption from this tax. Moreover, no branch tax is levied within the EU when the company at stake is subject to corporate tax in the state where it has its effective place of management.

French CIT applies the same way to branches and subsidiaries and, except for the branch tax, no WHT is levied in France on branch profits of foreign companies.

A French branch of a foreign entity may be the head of a French tax group.

A number of legal and tax issues need to be considered when choosing between a branch and a subsidiary. The main tax issues concern CIT. Examples are as follows:

  • Head office expenses reasonably attributable to subsidiary and a parent company are only deductible if carried out on an arm’s length basis.
  • Branch profits, whether or not remitted to head office, are subject to a 30 percent WHT or branch tax1, depending on the relevant tax treaty, although an exemption may be obtained if there is no remittance.
  • The profits of a subsidiary are subject to WHT only if they are distributed. Dividend distributions made abroad are subject to a 30 percent WHT, which is normally reduced by tax treaties.
  • Moreover, there is a WHT exemption on the basis of the EU directive (see ‘Foreign parent company’), except where the head office is not located in an EU or EEA member state.
  • Branches generally are not covered by France’s tax treaties and thus cannot usually benefit from them. Subsidiaries are French entities and thus qualify for reductions or exemptions from taxes.
  • Branches are not presently entitled to claim a credit for foreign taxes paid, whereas subsidiaries, as residents, may claim a credit for foreign taxes (in particular, WHT).

Joint venture

Where an acquisition is to be made in conjunction with another party, the question arises as to the most appropriate vehicle for such a joint venture. Although a partnership can be used, in most cases, the parties prefer to conduct the joint venture via a limited liability company. A limited liability company offers the advantages of incorporation (legal existence separate from that of its members) and limited liability for its members. In a partnership, the partners
have unlimited joint and several liability for the debts of the partnership.

Choice of acquisition funding

A buyer using a French acquisition vehicle to carry out an acquisition for cash needs to decide whether to fund the vehicle with debt or equity. The tax implications of the two approaches are discussed later in the report.


The principal advantage of debt is the potential tax- deductibility of interest paid to a related party or to a bank in the framework of a bank loan.

Deductibility of interest

Generally, interest paid by a company is tax-deductible. However, French tax rules include an exception concerning the deductibility of interest paid to shareholders. Such interest is tax-deductible only if the borrowing company’s capital is fully paid-up (article 39.1.3 of the French Tax Code), and only up to the rate of the yearly average of average effective rates accorded to companies by credit institutions for variable rate loans having an initial duration of over 2 years (article 39.1.3 of the French Tax Code). For FYs ending on December 31, 2017, the maximum deductible interest rate was 1.67 percent.

French thin capitalization rules apply to any loan or advance between affiliated companies and between sister companies.

Interest paid to a related party should not exceed the interest rate provided for by article 39.1.3 of the French Tax Code. Any excess interest is permanently non-tax-deductible and may be subject to WHT if paid abroad. However, a higher rate can be accepted for tax purposes (provided that the lender is a related entity, i.e. the lender controls the borrower, or the
borrower controls the lender, or both of them are controlled by the same person) if it corresponds to a rate the French paying entity could have obtained from a third-party bank. In this case, the paying company must prove that the interest rate used is arm’s length (e.g. by providing bank offers).

Then it must be determined whether the theoretically deductible interest can be effectively deducted in the FY of accrual. This would be the case if the paying company is not considered thinly capitalized, that is, where the borrower meets one of the following three ratios:

  • the borrower’s intragroup debt-to-net-equity ratio does not exceed 1.5:1 (debt-to-equity ratio)
  • the amount of interest does not exceed 25 percent of the current pre-tax result plus intragroup interest and deductible depreciation (interest coverage limit)
  • the amount of interest does not exceed the total interest amount received by the French borrower from affiliated entities (received intragroup interest limit).

Where the amount of acceptable interest simultaneously exceeds these three thresholds, the excess amount is not immediately deductible but it can be carried forward to future FYs. The deferred interest is deductible in the following FY (FY + 1) if the interest accrued during FY + 1 does not exceed the interest coverage limit of FY + 1. If it does, the deferred interest is deductible only up to the difference between
the interest coverage limit of FY + 1 and the amount of FY
+ 1 interest. The part of the deferred interest not available for deduction in FY + 1 is rolled over, but the amount of the deferred interest is decreased by 5 percent per year as from the second year of carry forward.

These French thin capitalization rules also apply to all loans that, while borrowed from a third-party company, are guaranteed by an affiliated company, subject to certain
exceptions (e.g. bonds issued under a public offer or pledge on borrowers’ shares).

Affected guarantees include personal safety guarantees (e.g. personal securities, first demand guarantees and even letters of comfort in certain circumstances) and security interests (e.g. pledges of the debtor’s securities, mortgages).

The interest limitation does not apply:

  • where the borrower proves that the debt-to-net-equity ratio of the group equals or exceeds its own debt-to-net- equity ratio
  • to certain financial transactions or structures (i.e. group cash pools, credit institutions and goods leased through finance leases) under certain conditions
  • where the portion of interest that is not immediately deductible is less than EUR150,000.

In addition, specific rules apply to tax-consolidated groups: generally, a deferred interest is limited to the excess of the interest paid to related (but not tax-consolidated) entities over the 25 percent coverage limit computed at the level of the tax group.

The Carrez amendment rule disallows deductions of interest expenses relating to the acquisition of qualifying participations (titres de participation) that are not managed by the company holding them or by a company established in the EU or an EEA member state that has concluded with France a tax treaty providing for administrative assistance and belonging to the same economic group.

Additionally, a general restriction to the deductibility of interest (‘25 percent haircut’) was introduced for FYs starting on or after 1 January 2014. Only 75 percent of the net interest expenses are tax-deductible (unless such net interest expenses are lower than EUR3 million).

Finally, there is an anti-abuse mechanism for indebtedness involving related parties. Interest related to loans granted by related parties is only deductible where the lender’s interest income is subject to income tax equal to at least 25 percent of the standard French income tax (if the lender is a foreign tax resident, the comparison is made with the theoretical income tax that would have been due in France if the lender had been a French tax resident).

Withholding tax on interest and methods to reduce or eliminate withholding tax

As of 1 March 2010, the general rule is that French-source interest is exempt from French WHT (unless it is characterized as a constructive dividend, in which case the WHT related to dividends may apply).

The sole exception to this exemption concerns the interest arising on financial advances paid into non-cooperative jurisdictions. According to French tax law, non-cooperative jurisdictions are countries and territories that:

  • are not EU member states
  • have not concluded treaties with at least 12 different member states or territories containing a mutual assistance clause allowing for the exchange of information
  • have not entered into any such treaty with France.

The French tax authorities publish a list of non-cooperative jurisdictions annually. As of 1 January 2016, the non- cooperative countries or territories are Botswana, Brunei, Guatemala, Marshall Islands, Nauru, Niue and Panama.

The interest derived from financial advances granted by entities located in such jurisdictions is subject to a 75 percent French WHT, unless the debtor demonstrates that the underlying transactions do not intend or lead to the interest revenue being located in a non-cooperative jurisdiction.

Checklist for debt funding

The use of bank debt may avoid thin capitalization, the recently enacted anti-abuse mechanism (i.e. allowing interest deductibility only where there is sufficient taxation of the interest income at lender’ level) and transfer pricing problems (regarding the evaluation of the arm’s length interest rate).

Interest paid by a company in the framework of a bank loan is tax-deductible when some conditions are met. In particular:

  • The loan must be granted in compliance with the borrower’s own interest.
  • Thin capitalization rules must be considered if the loan is secured by a related party.
  • The Charasse and Carrez amendments (see above) must be considered.
  • The interest expense must be considered in calculating the 25 percent haircut (see above).


If there is a risk of non-deductibility of interest, it may be better to use equity to fund the acquisition.

Under French corporate law, the share capital of a company may be increased to finance the acquisition. This capital increase may result from a cash contribution or from issuing new shares to the seller in consideration of a contribution.

From a French transfer tax standpoint, increasing share capital by way of a contribution under the apport à titre pur et simple regime (i.e. the sole consideration received in exchange should be new shares issued by the French company) only triggers the payment of a nominal fixed transfer tax of EUR375 (if the contributed company’s share capital is less than EUR225,000) or EUR500 (if higher).


1 The rate is expected to be aligned with the domestic CIT rate as of January 1, 2020

Tax treatment of reorganizations


The following comments on the restructuring of companies focus on mergers. Specific issues arising from dissolutions, split-ups and spin-offs are dealt with separately.

Direct taxes

A merger involves the dissolution of the absorbed company generally followed by an increase in the capital of the absorbing company.

The absorbed company is taxed at the current rate of CIT on the profit and provisions of the FY. A 3.3 percent surtax applies on the amount of CIT that exceeds EUR763,000.

Long-term capital gains arising from the transfer of qualifying shareholdings (held for at least 2 years) are 88 percent exempt.

Short-term capital gains are taxed at the same rates as business profits.

The absorbing company generally acquires the assets transferred free of tax.

Preferential treatment is available in the case of mergers (Article 210 A of the French Tax Code), subject to an election. The principal advantages of this treatment are as follows:

  • The absorbed company is not subject to CIT on net capital gains on fixed assets transferred in a merger.
  • In general, from an accounting standpoint, the assets and liabilities transferred are booked in the accounts of the absorbing entity on the basis of their net book value. Exceptions exist in rare cases, e.g. where the merger is realized between unrelated parties (unless it is a reverse merger). In such a case, attention must be paid to the
    accounting / tax consequences of the merger in particular on the depreciable fixed assets.
  • The absorbing company must include in its own balance sheet the provisions and depreciations made by the absorbed company.
  • Capital gains on non-depreciable assets can be exempt from French CIT and are not taxed even if the fair market value of these assets is higher than their value in the absorbed company’s accounts.
  • If the absorbing company re-sells a non-depreciable asset, it must calculate the capital gain or loss on the basis of the tax value of the asset in the absorbed company’s accounts (rollover).
  • If the absorbing company sells the transferred assets, the relevant date for long-and short-term capital gains is the date of acquisition by the absorbed company.

In principle, the absorbed company’s losses cannot be offset against the absorbing company’s profits, except when a special ruling from the tax authorities is granted. This ruling can only be obtained when the merger is carried out under the preferential regime and where certain conditions regarding the transferred activities are met.

Registration tax

Under article 816 of the French Tax Code, the merger of two companies is subject to transfer taxes, paid by the absorbing company at a fixed amount (EUR375 if the absorbed company’s share capital is lower than EUR225,000, and EUR500 if higher).

Retroactive effect

Mergers may be given retroactive effect from both accounting and tax standpoints. However, the merger’s effective date cannot be earlier than the more recent of:

  • the first day of the absorbing company’s FY
  • the first day of the absorbed company’s FY.

This provision enables the results realized by the absorbed company during the months preceding the effective date of the merger to be offset against the profits and losses incurred by the absorbing company in the same period.

Note that no retroactivity is considered for business tax (CVAE) purposes.

Dissolution without liquidation

Direct tax

According to article 1844-5 of the French Civil Code, the dissolution without liquidation (transmission universelle de patrimoine) of a company owned by a sole shareholder is not followed by its liquidation. Instead, it entails the transfer of all the company’s assets and liabilities to the sole shareholder. The dissolution without liquidation qualifies for the favorable tax regime under Article 210 A of the French Tax Code as described above for mergers.

Thus, the tax treatment of dissolution is the same as that for mergers.

Registration tax

The dissolution of the merged company is subject to a transfer tax of EUR375 or EUR500 (article 811 of the FrenchTax Code), depending on the share capital of the dissolved company.
However, the transfer of real estate resulting from such a transaction can be subject to a registration tax of 0.715 percent (article 678 of the FrenchTax Code).

Retroactive effect

Dissolutions may have a retroactive effect only from a tax standpoint. Unlike mergers, retroactive effect is not allowed for dissolutions from an accounting standpoint.

Note that no retroactivity is considered for business tax (CVAE) purposes.


A spin-off (or partial business transfer) is a transaction whereby a company transfers part of its assets and liabilities to another company in exchange for shares. The portion
of assets transferred must constitute a complete and autonomous branch of activity.

The concept of a complete and autonomous branch of business requires that the collection of assets and liabilities to be transferred are those of a division of a company that constitutes, from a technical standpoint, an independent activity capable of being carried on using the division’s own

resources under normal conditions in the economic sector concerned. In short, a complete and autonomous branch of activity is a collection of assets and liabilities of a company’s division able to carry out an activity autonomously. As of
1 January 2018, a contribution of securities to reinforce a majority shareholding can qualify as a complete and autonomous branch of business.

Regarding direct taxes, under article 210 B of the French Tax Code, a partial transfer is eligible for the favorable tax
treatment applicable to mergers if all the following conditions are met (in addition to the above conditions for mergers in general):

  • The transfer relates to a complete and autonomous branch of activity.
  • The transferring company commits itself to calculate capital gains on the sale of shares with reference to the value that the assets had in its own accounts from a tax standpoint.

Note that the remuneration of the contribution must be calculated on the basis of the respective fair market values, subject to a strict exception, which rarely applies.

If one of these conditions is not met, it remains possible to obtain a ruling from the French tax authorities. This ruling may be granted by right where:

  • The contribution is based on economic reasons and is not motivated by tax avoidance reasons.
  • The transferring company commits to hold the shares received in consideration of the contribution for at least 3 years.
  • All guarantees are provided to the French tax authorities that they will subsequently be able to tax the capital gains on which the taxation has been deferred.

As of 1 January 2018, mergers, spin-offs and partial business transfers realized with foreign companies are no longer subject to a compulsory prior approval by the
French tax authorities. The favorable tax regime for mergers automatically applies to these transactions, subject to
filing requirements (documenting the reasons for and consequences of the transaction) and the allocation of the assets contributed to a French permanent establishment of the recipient of the contribution. Note that this obligation to allocate the shares to a French permanent establishment does not seem to apply to participations contributed in the context of spin-offs (subject to future comments of the French tax authorities).

Regarding registration tax, the transfer is subject to the favorable treatment provided for in article 817 of the French Tax Code, which limits the registration tax to a fixed amount of EUR375 or EUR500, depending on whether the level of share capital is lower than or equal to or higher than EUR225,000.


The split-up of a company (scission) is a legal transaction whereby all the assets and liabilities of the company are transferred to two or more new companies. The old company ceases to exist and its shareholders receive the shares issued by the new companies. The favorable treatment available for mergers/spin-offs for direct tax can also be applied to the split- up to the extent that:

  • The split-up company transfers at least one autonomous branch of activity to each company benefiting from the contribution.
  • The shareholders who held at least 5 percent of the split- up company commit to keep the shares of the beneficiary companies or the new company for at least 3 years.

The favorable transfer tax treatment applicable to mergers also applies to a split-up.

However, the favorable tax treatment only applies to a split-up within the framework of a reorganization and not to a split-up resulting in equity sharing.

Deferred settlement

Deferred payments under earn-out clauses are subject to the same tax treatment as capital gains or losses realized on the sale.

Other considerations

Concerns of the seller

Capital gains are taxable at the standard French CIT rate subject to the restriction noted above. Transfer taxes are generally payable by the buyer.

The seller would mainly be concerned with the indemnities and/or warranties requested by the buyer (usually subject to negotiation).

For companies, capital gains on the sale of qualifying shareholdings held for at least 2 years are 88 percent exempt from tax. If the shares sold do not qualify as substantial shareholdings, the capital gain is taxable at the standard CIT rate.

For individuals, before 1 January 2018, capital gains were subject to personal income tax at the progressive rates (up to 45 percent) after application of an allowance of:

  • 50 percent where the shares were held for 2 to 8 years
  • 65 percent where they have been held for more than 8 years (higher allowances exist for shares of small and medium enterprises, subject to conditions).

Capital gains were also subject to social contribution at a rate of 15.5 percent (with no allowance).

As of 1 January 2018, a flat rate tax (prélèvement forfaitaire unique) is imposed on investment income, including capital gains from the sale of shares, parts and other income and assimilated gains. At the same time, most of the existing allowances are repealed.The overall rate for the flat rate tax is set at 30 percent in total, including income tax at 12.8 percent and social surtaxes (i.e. 'Contribution Sociale Généralisée', 'Contribution à la Réduction de la Dette Sociale', additional social withholdings), for an effective rate of 17.2 percent.

By exception, the taxpayer can choose, by an irrevocable and global option, to have investment income including capital gains subject to personal income tax at progressive rates (up to 45 percent).

A 12.8 percent WHT applies to capital gains on qualifying shareholdings (held in entities that are not qualified as real estate entities) derived by non-residents individuals. When the seller is a non-resident company, the WHT rate is aligned with the domestic CIT rate; non-resident companies could benefit from the holding period allowance, subject to conditions. In any case, a 75 percent WHT would apply where the seller is located in a non-cooperative country or territory.

Company law and accounting

Types of reorganization

  • Merger (fusion) involves the absorption of one company by another company. The absorbing company may be
    a new company that takes over one or more existing companies, or it may be an existing company that takes over one or more existing companies.
  • Split-up (scission) consists of the transfer of all of a company’s assets to two or more existing or new companies. In principle, a split-up involves complete and independent branches of activity.
  • Spin-off (apport partiel) occurs when a complete and independent branch of activity of one company is transferred to another company. The spin-off may be made to an existing company or a new company (it may also involve the contribution of isolated asset(s) under French law but, in that case, the transaction would not benefit from the favorable tax regime).
  • Dissolution without liquidation (transmission universelle de patrimoine) occurs when all shares of a company are held by a single shareholder; it may be decided to dissolve this company, leading to a transfer of all its assets and liabilities to the single shareholder.
  • Exchange of shares (fusion à l’anglaise) occurs when a contribution of shares is deemed to be a complete branch of activity benefiting from the favorable tax treatment for CIT purposes in three cases:
    • where the contribution applies to more than 50 percent of the capital of the contributing company
    • where the contribution confers on the beneficiary company a direct holding percentage of the voting rights, when no other partners hold more
    • where the beneficiary company already holds more than 30 percent and the contributions give it the majority of the voting rights.

Investment in France

France’s regulations on foreign investment are relatively relaxed. In principle, investment in France does not require prior approval from the exchange control authorities.
Nevertheless, foreign investment in certain economic sectors must be pre-approved by the Ministry of Finance, based on the fulfillment of certain conditions. The approval is deemed to be granted if, within 2 months of filing a prior authorization, the Ministry of Finance has not opposed the investment.

On 15 May 2014, a decree was enacted to update the list of activities requiring prior authorization, taking into account those activities currently deemed essential to guarantee France’s interest in public order, public security and national defense.

Before the 2014 decree, 11 types of activity connected with public health, public security and public authority fell within the scope of the prior authorization regime.
For non-EU investors, the 2014 decree significantly extends the scope of the regime to other activities, in particular relating to materials, products or services ensuring the protection of public health or the integrity, security and continuity of:

  • the supply of electricity, gas, hydrocarbons or other energy resources
  • the supply of water
  • the operation of transport networks and services
  • operation of electronic communication networks and services.

The applicability of this regime also depends on conditions relating to the nature of the investment and the nationality of the foreign investors (inside or outside the EU), which have not been modified.

The following investments from a third country are subject to prior authorization:

  • acquisition of control of a French company
  • direct or indirect acquisition of all or part of a branch of activity of a French company
  • the crossing of the 33 percent threshold of direct or indirect holding of the share capital or of the voting rights of a French company (applicable to non-EU investors only).

Prior authorization is deemed to have been obtained for:

  • Investments between companies that are members of the same group, which means that the same shareholder holds more than 50 percent of the share capital or of the voting rights of the entity, unless their aim is to transfer abroad all or part of a branch of activity belonging to a type of activity mentioned above (sensitive activity).
  • Investments made by an investor that holds more than 33 percent of the direct or indirect shareholding or voting rights and that has already been authorized to acquire control of the entity.

Non-compliance with this prior authorization regime constitutes a criminal offence, which may be punishable by a maximum 5-year prison sentence and a maximum fine equal to 2 times the amount of the investment.

Moreover, if the prior authorization has not been obtained, the agreement (and/or commitment directly or indirectly materializing the foreign investment) is deemed null and void.

Lastly, some categories of investments must be reported to the Banque de France for statistical purposes, notably:

  • acquisition of at least 10 percent or crossing of the 10 percent threshold of share capital or voting rights of French or foreign company by respectively non- residents or residents, over EUR15 million
  • any transaction between related companies (i.e. loans, deposits, etc.) over EUR15 million
  • real estate investments
  • payments made in France between a resident and a non- resident over EUR12,500
  • for residents, outstanding amounts of their assets and receivables or debts abroad exceeding EUR30 million
  • acquisition or sale of a foreign company by a resident over EUR15 million
  • acquisition or sale of real estate in France by a non- resident and abroad by a resident over EUR15 million
  • liquidations of foreign investments in France. 

These rules are applicable to mergers and takeovers.

Choice of entity for investing in France

  • Commercial companies are divided into joint stock companies (sociétés de capitaux) and partnerships (sociétés de personnes).
  • The most frequently used company forms in France are the SA (corporation), the SAS (simplified joint-stock company) and the SARL (limited liability company).

Corporation, Société Anonyme (SA)

  • Earnings are taxed once at the corporate level.
  • Distributions of after-tax earnings are also taxed at the shareholder level. France reduces the financial effect of taxing corporate profits twice (at the entity and recipient levels). There is no deduction for dividends paid to a company. However, if the parent company owns at least 5 percent of the French subsidiary’s share capital and keeps the shares for at least 2 years, the parent company is eligible for the 95 percent dividend exemption provided for by article 145 of the French Tax Code.The 5 percent
    share is taxed at the current tax rate. However, within a tax- consolidated group, dividends eligible for the participation exemption regime on dividends are subject to 1 percent taxation as of the first year of tax consolidation (for FYs ending on or before 31 December 2015, these dividends were 100 percent tax-exempt as of the second year of tax consolidation).
  • Minimum share capital for an SA is EUR37,000.
  • Shareholders have limited liability for the company’s debts.
  • There is no maximum number of shareholders (minimum seven for listed-companies and two for non-listed companies).

Limited liability company, Société à Responsabilité Limitée (SARL)

  • Minimum share capital is EUR1.
  • Minimum number of shareholders is one.
  • Maximum number of shareholders is 100.
  • The shareholders must give their prior majority approval to the transfer of SARL shares to third parties.
  • Shareholders may participate in the management of the company.
  • Taxed according to the same rules as an SA (except for family-owned SARLs, which may elect to be taxed as look-through entities).

Simplified joint-stock company, Société par Actions Simplifiée (SAS)

  • Minimum number of shareholders is one.
  • Both companies and individuals may be shareholders.
  • Minimum share capital is EUR1 (introduced in loi de Modernisation de l’économie-LME, dated 4 August 2008).
  • Taxed in the same way as an SA.
  • Shareholders have limited liability for the company’s debts.
  • Restriction regarding public offering.

General partnership, Société en Nom Collectif (SNC)

  • No minimum or maximum capital requirements.
  • Minimum of two partners.
  • All the partners are jointly and severally liable for the partnership’s liabilities.
  • Not taxed at the entity level (unless an election for CIT is made).
  • Partners are taxed on their share of earnings, whether or not distributed.

Limited partnership, Société en Commandite Simple (SCS)

  • No minimum or maximum capital requirements.
  • Minimum number of shareholders is two and at least one general partner (commandité) and one limited liability partner (commanditaire).
  • Two categories of partners: general partners (commandités) and limited liability partners (commanditaires).
  • General partners are jointly and severally liable for the company’s debts.
  • Liability of the limited liability partners is limited to the amount of their contribution to the SCS’s capital subject to their absence of interference into the SCS’s social management.
  • General partners are subject to income tax on their share of the SCS’s income, whether or not distributed.
  • The limited liability partners’ share of SCS income is subject to corporate tax at the SCS level. Dividend distributions to limited liability partners are taxed at their level under normal tax rules.

Limited stock partnership, Société en Commandite par Actions (SCA)

  • Minimum share capital for SCA is EUR37,000.
  • Minimum number of shareholders is one general partner (commandité) and three limited liability partners (commanditaires).
  • General partners (commandités) are jointly and severally liable for the SCA’s debts.
  • Limited liability partners (commanditaires) are considered as shareholders and their liability for the SCA’s debts is limited to the amount of their capital contribution.
  • Taxed as an SA.

Group relief/consolidation

There is a special tax regime for groups of companies. A French parent company and its 95 percent-owned subsidiaries may elect to be treated as a group so that CIT is imposed on the aggregate of the profits and losses of the group members.

The group may be composed of a parent company holding directly 95 percent or more of all its subsidiaries. A group may also exist if the 95 percent shareholding is held through other subsidiaries. Such subsidiaries can be located in France or an EU country (although in the latter case, the foreign
intermediary subsidiary is excluded from the tax-consolidated group). The Corrective Finance Act for 2014 extended the scope of the tax consolidation mechanism to ‘horizontal’
tax-consolidated groups (i.e., between French-resident sister or cousin companies with their parent company established in another EU or EEA member state). Thus, one of the French
sister or cousin companies is entitled to become the head of a French tax group subject to specific conditions.

To qualify for group treatment, all the companies must be subject to French CIT.

An election for this special regime is made for a period of 5 years. A new company may be included in the group. If a
company leaves the group, adjustments must be made, which can be expensive for the parent company.

The group profit is taxed at the standard rate of CIT. The group profit or loss is the sum of all the members’ profits and losses.

For FYs starting in 2016 and later years, the rule providing for neutralization of the 5 percent taxable share for dividends paid between entities of a French tax consolidated group is repealed. However, the taxable share is reduced to 1 percent for dividends that are received by a company (that is a member of a French tax group) from another company of the tax group or from a company established in an EU or EEA member
state if this company, had it been French, would have met the conditions of being a member of the tax group. The 1 percent taxation applies from the first year of membership and to each level of shareholdings.

The advantages of group treatment are as follows:

  • netting of the profits and losses of the companies of the group
  • double taxation is avoided, so dividend distributions made within the group are exempt from corporate tax (but
    only up to 99 percent as of 1 January 2016, as explained above)
  • tax-neutrality for transfers of assets and for transactions within the group (but clawed back if the group terminates or one company leaves the group).

The main drawbacks of the tax group regime are as follows:

  • potential increase in the CIT rate (depending on the group’s overall turnover)
  • potential increase in the company value added contribution rate (depending on the group’s overall turnover)
  • potential limitation on the deduction of interest expenses (application of the Charasse amendment rule and appreciation of the EUR3 million threshold at the group level for application of the general limitation of the deductibility of interest expenses).

Transfer pricing

Where the companies involved in a cross-border reorganization have commercial relationships before the transaction, it may be necessary to review, modify or amend the transfer pricing agreement in force in order to avoid any potential transfer pricing reassessment.

Companies with turnover or gross assets of over EUR400 million (or companies held directly or indirectly by such an entity by more than 50 percent as well as companies holding directly or indirectly more than 50 percent of such
an entity) are required to maintain at the disposal of the tax administration documentation justifying the transfer pricing policy with affiliated companies.

Under the Finance Act for 2018, this documentation must include other information not requested before and more precise information on certain topics, including:

  • the supply chain for the main goods and services as well as a functional analysis of the role of the various entities of the group
  • intangible assets and intragroup agreements regarding these assets
  • information about the substantial financing transactions of the group.

For tax audits launched as of 1 January 2015, failure to provide the documentation to the French tax authorities (after formal notice) entails a fine of up to the higher of:

  • 0.5 percent of the amount of the transaction for which complete documentation has not been provided, or
  • 5 percent of the transfer pricing reassessment (in base). 

The penalty cannot be less than EUR10,000.

For tax-consolidated groups, the parent company is required to file this declaration for both itself and each tax group member. The documentation must be filed in electronic format for each FY.

As of 11 December 2016, companies with turnover or gross assets on the balance sheet of over EUR50 million (or companies held directly or indirectly by such an entity by more than 50 percent as well as companies holding directly or indirectly more than 50 percent of such an entity) must file an abridged version of their transfer pricing documentation (within 6 months of the date of the tax return filing). This abridged documentation must contain:

  • general information regarding the group, such as:
    • a general description of the activities performed by the group, including any changes that occurred during the FY
    • a list of the main intangibles in relation to the French entity (e.g. patents, trademarks)
    • a general presentation of the group's transfer pricing policy and any changes that have occurred during the concerned fiscal year.
  • Specific information about the entity, such as:
    • a description of the activities of the entity, including any changes that occurred during the FY
    • a summary of any transactions with other related entities where the aggregate amount per transaction type exceeds EUR100,000
    • a description of the method(s) used to determine transfer prices based on the arm's length principle; any change of method during the previous fiscal year must be indicated.

Finance Act for 2016 introduced a country-by-country (CbyC) reporting obligation (article 223 quinquies C of the French Tax Code) in accordance with Action 13 of the Organisation for Economic Cooperation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS). These reports are subject to automatic exchange between national tax authorities, and they are designed to reinforce the transfer pricing documentation obligations of multinational groups.

Two types of companies are required to prepare CbyC reports:

  • companies that create and draw up consolidated accounts; belong to a group with a consolidated turnover in excess of EUR750 million; and have foreign branches or hold or control, directly or indirectly, foreign entities (except companies held by parent companies that are required to file a CbyC report in their state of incorporation)
  • companies held by entities established in countries that do not participate in the automatic exchange of CbyC reports where:
    • the company is held, directly or indirectly, by a legal entity established in a state that does not participate in the automatic exchange and would be required to file the CbyC report if it were established in France, and
    • the company is designated to file the report by the group to which they belong or have not demonstrated

that another entity of the group established in a country that participates in the automatic exchange has been designated to file the report.

The CbyC report must include a breakdown, by country, of the group’s earnings and aggregate economic accounting and information on the location and activities of the different members and entities of the group. The report must be filed
in electronic format for each FY. Failure to file the report would attract a penalty of up to EUR100,000.

The CbyC reporting requirements have applied for FYs starting on or after 1 January 2016. Accordingly, the first reports were filed by the end of 2017 and automatically exchanged between participating countries in 2018.

Foreign investments of a local target company

Profits made by controlled foreign companies (CFC) established in low-tax countries and whose parent companies are subject to French CIT are taxed at the French parent company’s level according to Article 209 B of the French tax code. This treatment applies where the French company directly or indirectly holds more than 50 percent of the subsidiary’s capital (5 percent if more than 50 percent of
the CFC is held either by companies located in France or by companies that control or are controlled by such companies located in France).

For undertakings controlled by French companies and located in low-tax jurisdictions, the burden of proof is shifted to the taxpayer.

This measure does not apply if the French parent company can prove that the main effect of the CFC’s transactions is other than that of locating profits in a low-tax country (which is generally the case where the subsidiary is engaged in an actual industrial or commercial business in the jurisdiction where its establishment or head office is located).

Further, article 209 B is not applicable to companies established in the EU unless the structure constitutes an artificial scheme that aims to avoid the application of French legislation.

Comparison of asset and share purchases

Advantages of asset purchases

  • The purchase price (or a portion of it) can be depreciated or amortized for tax purposes (but not to the extent that it includes goodwill).
  • A step-up in the cost base of individual assets for capital gains tax purposes is obtained.
  • No previous liabilities of the company are inherited.
  • It is possible to acquire only part of a business.
  • There is more flexibility in funding options.

Disadvantages of asset purchases

  • Possible need to renegotiate supply, employment and technology agreements, and change stationery.
  • A higher capital outlay is usually involved (unless debts of the business are also assumed).
  • May be unattractive to the seller, thereby increasing the price. In most cases, capital gains derived from the sales of assets are subject to the standard CIT rate whereas capital gains on shares generally benefit from an 88 percent exemption.
  • Higher transfer duties (a transfer of goodwill is subject to higher registration tax than a sale of shares of an SA, SAS or SARL).
  • Accounting profits may be affected by the creation of acquisition goodwill (at a consolidated level).
  • The benefit of any losses incurred by the target company remains with the seller.

Advantages of share purchases

  • Likely more attractive to the seller, so the price is likely lower.
  • May benefit from tax losses of target company (the target company retains its tax losses).
  • May gain benefit of existing supply or technology contracts.
  • Transfer taxes are generally lower.

Disadvantages of share purchases

  • Liable for any claims or previous liabilities of the entity.
  • No deduction for the purchase price (but interest payable on acquisition financing may be deductible for the purchasing company).
  • Less flexibility in funding options.

FIDAL in France

Audrey-Laure Illouz
4-6 avenue d’Alsace Paris La Défense Cedex 92982

T: +33 1 55 68 14 95

Maxime Amar
4-6 avenue d’Alsace Paris La Défense Cedex 92982

T: +33 1 55 68 15 25

FIDAL is an independent French law firm that is separate from KPMG International and its member firms.

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