France: French Tax Report - October 2018

Last Updated: 15 October 2018
Article by Siamak Mostafavi

We are pleased to provide you with a summary of the most important provisions of the draft French Finance Bill for 2019 (Draft) which is currently before the French Parliament.

1. Limitation on the deductibility of the "net financial expenses" for corporate tax purposes

1.1 Background

The Draft proposes to introduce, from January 1, 2019, certain limitations (Limitations) on the deductibility of the "net financial expenses" or NFE as per the EU ATAD Directive.

Our understanding is that the French Government obtained the right to defer the introduction of the Limitations until 2024 from the EU Commission; nevertheless, it has decided to implement the Limitations starting from 2019 with the official explanation that it will simplify the current various rules on the non-deductibility of interest and assimilated items.

Indeed the current rules, which would be eliminated from 2019, provide different angles to limit the deduction (specific rules apply to French tax groupings):

  • Under the so-called "rabot" rule, 25 percent of the NFE is not deductible, i.e. 25 percent of the excess, if any, of the interest paid by the taxpayer over the interest received by the same; the rabot kicks in if the NFE equal or exceed €3 million.
  • Under the thin capitalization rules, the interest paid by the taxpayer to its affiliates is partly non-deductible if all the following conditions are met:

    • i) The ratio of affiliate debts to own funds exceeds 1.5 times
    • ii) The interest received from the affiliates is less than the interest paid to affiliates
    • iii) the interest paid to the affiliates exceeds 25 percent of the EBITDA of the taxpayer; there are certain exceptions to the above limitation, one being that if the debt to own funds ratio of the consolidated group to which the taxpayer belongs is higher than the latter's one, no limitation would apply; where the limitation does kick in, the deductible amount is the highest one obtained under (i) to (iii) above.
  • Specific non-deductibility rules apply in case of certain acquisitions of participating securities (see below).

1.2 Limitations

The Limitations consist of two sets of rules:

  • The principal rule which limits the deductibility of the NFE at 30 percent of the EBITDA
  • The exception anti-abuse type rule which reduces the deduction to 10 percent of the EBITDA 

1.2.1 Limitation at 30 percent of the EBITDA

The basic rule is that the taxpayer may deduct the NFE up to 30 percent of the EBITDA; no limitation applies if the NFE do not exceed €3 million.

The definition of the NFE is based essentially on the interest paid and received in respect of all forms of money borrowed and lent, but it also includes, inter alia, the following items:

  • Amounts paid under derivative agreements and contracts hedging the borrowings of the taxpayer
  • Currency exchange gains and losses in respect of the loans, borrowings and related agreements
  • Fees related to the guaranties of financing transactions
  • Certain payments under finance leases
  • Any cost or income which may be assimilated to interest or financial income

The EBITDA definition starts with the income liable to corporate income tax (before imputation of any previous tax loss) to which one would add i) the relevant NFE, ii) any amortization (with certain adjustments), iii) any depreciation (with certain adjustments) and iv) gains and losses subject to specific corporate tax rates of 15 percent or 19 percent.

Any NFE, which would not be deductible under the above Limitation, would be 75 percent deductible if the taxpayer has a ratio of own funds to assets which is equal to or lesser than (but not by more than two percent) the one of the consolidated group to which it belongs (Equity Ratio Deduction).

The fraction of the NFE which is non-deductible, in respect of a given financial year, may be carried forward and, during any relevant financial year, deducted up to an amount equal to 30 percent of the EBITDA of such financial year minus the NFE of such financial year. In addition, the unused 30 percent EBITDA portion of a given year may be used during the following five financial years.

A few examples below give an idea of the impact of the 30 percent EBITDA Limitation (the examples do not include any application of the Equity Ratio Deduction.)

Example of a holding entity

Non taxable dividend income 10

Interest paid 10

Interest received none

Under the rabot rule, the entity has an NFE of 10, of which 2.5 is not deductible.

Under the new rule, the entity would also have an NFE of 10, but the EBITDA would be zero1 , i.e. the whole of the NFE would be non-deductible.

Accordingly, the holding, with exempt dividends, was better off under the rabot rule.

Example of a commercial entity

Taxable commercial income 20

Interest paid 10

Interest received 2

Under the rabot rule, the entity has an NFE of 8, of which 2 would not be deductible.

Under the new rule, the holding would also have an NFE of 8, but the EBITDA would be 20 2, and the deductible NFE would go up to 6.

Accordingly, a commercial or industrial activity with EBITDA may be better off under the new rule.

Example of a financial entity

Taxable fee income 1

Interest paid 10

Interest received 8

Under the rabot rule, the entity has an NFE of 2, of which 0.5 is not deductible.

Under the new rule, the entity would also have an NFE of 2, but the EBITDA would be 1 3, i.e. the non deductible NFE would be 1.7.

Accordingly, a financial entity may to worse off under the new rule, although, in principal, these entities are expected to have more financial income than financial expense.

1.2.2 Limitation to 10 percent of the EBITDA

When the taxpayer has borrowed moneyfrom affiliated entities, and such borrowings represent more than 1.5 times its own funds, the Limit is reduced from 30 percent to 10 percent of the EBITDA (fully deductible up to € 1 million).

So, interestingly, while the thin capitalisation rules, mentioned above, are eliminated from 2019, the government is proposing to keep one of its 3 criteria and use it effectively as an anti-abuse rule by dividing by 3 the Limit of deduction.

The 10 percent EBITDA Limitation would not benefit from the Equity Ratio Deduction; it may be avoided only by credit institutions, and for financing transactions belonging to a centralized treasury pool or related to certain finance lease operations.

The ATAD Directive does not provide for such an anti-abuse rule, and it will be interesting to see whether the administration would keep it in the face of mounting lobbying.

1.2.3 French tax groupings

The rules described above would also apply within French tax groupings, the group's NFE being equal to the aggregate of the NFE of each member, and the EBITDA being computed on the basis of the taxable result of the group.

The Equity Ratio Deduction would be available to the tax group, using the group's own funds / assets ratio.

The 10 percent EBITDA limitation may also apply to the tax group using the group's affiliate debts to own funds ratio.

The carry forward of the non deductible NFE would be also available at tax group level, it being said that a new member entering the tax group may not use its previous carry forward NFE within the group.

2. French tax grouping

The Draft proposes various changes to the current French tax grouping rules, in order, generally, to make them compatible with the EU environment.

2.1 Distributions of dividends within the tax grouping

Currently, the dividends which are distributed within the group may have two different treatments:

  • Either they are eligible to the participation exemption privilege in which case they are 99 percent exempt;
  • Or they are not eligible to the participation exemption privilege, in which case they are 100 percent deducted from the group's taxable result (except the dividends distributed by an entity the first financial year it becomes part of the group).

Under the Draft, the above difference effectively would disappear from 2019, since those dividends distributed by an entity within the group (after one year of presence) which are not eligible to the participation exemption privilege, would be deducted from the group's taxable result for only 99 percent of their amount. The same treatment would apply to dividends received, by an entity belonging to the group, from EU entities (plus Iceland, Norway and Lichtenstein) which are liable to a tax equivalent to the French corporate tax and which could have been part of the group if they were liable to French corporate tax.

Finally, the dividends distributed by EU entities (plus Iceland, Norway and Lichtenstein) to a French entity which does not belong to the grouping) would be 99 percent exempt if the French entity and the EU entity could have been part of the same French tax grouping if the EU entity was liable to French corporate tax.

2.2 Taxation of long term capital gains

Currently, any capital gain derived from the sale, within a tax grouping, of certain equity securities entitled to the so-called long term treatment (participating securities) 4  is fully neutralized (until the purchaser or the seller or the securities leave the group). In the absence of the neutralization, such capital gains would have been 88 percent exempt.

The Draft proposes that the above neutralization is eliminated from 2019, and the relevant capital gains are 95 percent exempt.

Conversely, any capital gain on the sale of participating securities, outside a tax grouping, would be 95 percent exempt (rather than 88 percent exempt as currently).

2.3 Waivers of debts and subsidies within the tax grouping

Currently, these waivers and subsidies are neutralized within the group, until one or both of the two entities involved leave the group.

The Draft proposes to eliminate these neutralizations.

The Draft also proposes the neutral treatment of the sale of goods and provision of services within the group (except for the sale of fixed assets).

3. New anti-abuse rule

The Draft proposes to introduce, from January 1, 2019, a new anti-abuse provision applicable to corporate income tax. As with the limitation on the deductibility of the NFE (see 1 above), this provision consists in the implementation of the EU ATAD Directive.

Under the current French rules, the so called "abuse of law" procedure (applicable to various types of taxes) may be used if, inter alia, the tax administration may prove that a given transaction is purely motivated by a tax benefit which is against the purpose of the underlying rules (or that the none tax motivation is de minimis).

Under the new proposed rule, the relevant criteria is the tax benefit as the principal purpose or one of the principal purposes of a given transaction (Tax Purpose), i.e. a more manageable criteria than the abuse of law one (form the administrative perspective).

The consequences of the new proposed rule and the abuse of law are partly different: the latter may result into penalties of up to 80 percent of the tax avoided, whereas the former would not generate any penalty (i.e. the taxpayer would be liable only to the tax and interest).

More precisely, the new rule would entitle the administration to disregard, for corporate income tax purposes, arrangements (or series of arrangements with one or more steps) which have been put in place to achieve a Tax Purpose, and which are not genuine.

Whether a transaction is genuine or not is decided on whether it has been put into place with an economic justification.

Thus, going forward from 2019, a given transaction, liable to the corporate income tax, may be challenged under the abuse of law or under this new anti-abuse rule; the administration would probably use the former where it believes it has a very good case which may result into penalties, and the latter for the cases where the outcome is more doubtful and the Tax Purpose easier to evidence.

4. Patent income

Currently, inter alia, French corporate taxpayers benefit from a reduced 15 percent corporate income tax rate that applies to:

  • Any income resulting from the licensing of patents and patentable rights
  • Any capital gains realized on patents and patentable rights held for at least two years, except when the disposal takes place among affiliated entities

The Draft proposes to modify this favorable tax regime, as from 2019, in an effort to make it compatible with BEPS rules, i.e. conditioning its application to the actual performance by the taxpayer of research and development (R&D) activities in France.

The reduced 15 percent rate would apply, on an election basis only, to any net income derived from the licensing of qualifying patents, after deduction of R&D expenses, and after the application of a ratio comparing: (i) the R&D expenses incurred for the creation, the development, or the acquisition of the qualifying patent, either by the taxpayer or by non-related parties to (ii) the total R&D expenses incurred for the creation, the development, or the acquisition of the qualifying patent. The same treatment could apply, also on an election basis, to any net income derived from the sub-licensing of qualifying patents, and to the net gains derived from the transfer, to unrelated parties, of qualifying patents, two years or more after their acquisition.

The favorable regime would cover exclusively patents.


1 Taxable income = -10 to which one would add the NFE of 10 to arrive at an EBITDA of zero.

2 Taxable income = +12 to which one would add the NFE of 8 to arrive at an EBITDA of 20.

3 Taxable income = -1 to which one would add the NFE of 2 to arrive at an EBITDA of 1.

4 The participating securities refer to an accounting concept, but they include also the equity securities which are eligible to the participation exemption privilege. The long-term treatment is available after a holding period of two years.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions