Law & Numbers - News Tax


24.03.2008 (France)

FRANCE - CIT – Thin-capitalization – Publication of new guidelines

To comply with EU rules and case law (ECJ 2002 "Lankhorst-Hohorst Gmbh - CE 2003 n°233894 SARL Coreal Gestion - Freedom of establisment) and the tax treaties signed by France (CE 2003 Andritz - International treaty) new thin-capitalization rules applies to tax years closed as from January 1st, 2007.

On December 31, 2007 French tax authorities published a guideline 4 H-8-07 commenting the new thin capitalization rules of article 212 CGI applicable to Fiscal Year starting as of January 1 st, 2007. In this guideline the French tax authorities provide detailed explanation on how the global debt/equity ratio of a Group of company is calculated.

The new rules only apply to related entities i.e. :
- One company owns directly or indirectly more than 50% of the financial rights of the other company,
- One company controls the other company,
- Two companies are controlled, as indicated above, by the same third company.

The new rules do not apply to:
- Inter company loans between not related companies as defined above,
- Loans granted through «cash pooling »,
- Lease-back,
- Interest due to a financial establishment.

Maximum interest rate deductible:
- Interest rate not exceeding the average rate on loans with an initial duration of more than two years granted by banks,
- Interest rate similar to the interest rate applicable the borrowing entity may have obtained from an independent financial institution for a similar loan.

Interests exceeding the above limits are definitively not tax deductible.

Maximum amount of deductible interest:

The interest paid to one or several related parties during a tax year are deductible up to the highest of the 3 following limits:
- 1,5 x Equity capital on opening or closing balance,
- Average amount of loans granted by related parties,
- 25% of the restated current profit (interest, depreciation, leasing),
- Amount of interest received from related parties.

Non deductible interest may be carried forward.

For further information, Please contact Marylène BONNY-GRANDIL:

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