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France: ATAD and possible loosening of new interest limitation

France: ATAD and loosening of new interest limitation

The high chamber of the French Parliament (“Sénat”) on 23 November 2018 voted to limit the effects of a lower interest limitation to the net interest expenses corresponding to the debt above a debt-to-equity ratio.

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Background

The French government in September 2018 unveiled the main tax provisions of the draft Finance Bill for 2019 that included certain provisions of the EU anti-tax-avoidance directive (ATAD), in particular regarding the deductibility of net financial expenses. Read TaxNewsFlash

According to the new proposed limitation (which slightly differs from the ATAD’s minimum standard) the deductibility of net financial charges would be limited to the greater of:

  • €3 million or 
  • 30% of the company’s (or the tax group’s) adjusted tax earnings before interest, tax, depreciation, and amortization (EBITDA) 

However, if the ratio of related-party debt-to-equity of the company (or tax group) exceeds a 1.5:1 ratio, the 30% limitation would be reduced to €1 million or 10% of the tax EBITDA. 

Amendment

The Sénat on 23 November 2018 voted on an amendment, introduced by the government, that would limit the effects of the lower 10% (or €1 million) limitation to the net interest expenses corresponding to the debt above the 1.5:1 debt to equity ratio.

If the amendment is finally adopted and included in the enacted legislation (enactment of the French Finance Law for 2019 is expected in late December 2018), the new capping mechanism would provide for the simultaneous application of the following limitations: 

  • A 30% tax EBITDA cap on net financial charges owed to 
    • non-related companies,
    • and related companies, but only for the portion below 1.5 times the company’s (or tax group’s) equity, and
  • A 10% tax EBTIDA cap on the remaining net interest

Non-deductible interest expenses, in light of this new limitation, would be eligible for carryforward without a time limitation:

  • For the full portion added-back in application for the 30% (or €3 million) cap, and
  • For one third of the portion disallowed in application of the 10% (or €1 million) cap

 

For more information, contact a tax professional with Fidal* in France or with the KPMG member firm in France: 

Olivier Ferrari | +33 1 55 68 14 76 | olivier.ferrari@fidal.com

Gilles Galinier-Warrain | +33 1 55 68 16 54 | gilles.galinier-warrain@fidal.com

Laurent Leclercq | +33 1 55 68 16 42 | laurent.leclercq@fidal.com

Bruno Bacrot | +33 1 47 38 89 96 | bruno.bacrot@fidal.com

Patrick Seroin | + 33 (0) 1 5568 4802 | patrickseroin1@kpmgavocats.fr

 

* Fidal is a French law firm that is independent from KPMG and its member firms.

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