French tax consolidation

Tax consolidation (intégration fiscale) is the regime that allows a parent company to make itself solely liable for the corporate income tax due on the combined result of the group it forms with its subsidiaries. The losses of one company are offset against the profits of the others. In an acquisition financing, this regime allows the interest paid by the acquisition holding company to be offset against the profits of the target. The parent must hold at least 95% of the share capital of the subsidiaries, directly or indirectly, continuously throughout the financial year; for an indirect holding, the successive percentages are multiplied. No other company subject to corporate income tax may hold 95% or more of the parent’s capital. A subsidiary that crosses the threshold during a financial year joins the group from the following financial year. The tax authorities accept entry from the year of acquisition when the shares are acquired on the first day of a financial year that opens on the same date for both companies. The Charasse amendment, in article 223 B of the French General Tax Code, adds back part of the financial expenses when the holding company buys the target from the shareholder that controls the group: the add-back follows the ratio between the acquisition price, less the concurrent capital contributions, and the average debt of the group. It is in your interest to align the closing date and the ownership structure with these rules.

A holding company buys 100% of a target on 1 January, the first day of both companies’ financial year, and elects for tax consolidation. The holding company pays €8m of interest and the target makes €20m of taxable profit. Subject to the cap on the deduction of financial expenses, the group is taxed on €12m instead of €20m.

• The threshold of 95% of the capital, held without interruption during the financial year.
• The closing date in relation to the first day of the financial year.
• Ownership of the target by a shareholder that already controls the acquirer.
• The cap on the deduction of net financial expenses.
• The shares allocated to managers and minority shareholders, which lower the holding percentage.