DEDUCTIBILITY OF INTEREST CHARGES AND THIN CAPITALIZATION RULES

Posted on Isabelle VendevillePosted in Non classé

The rules applicable in France to the deduction of interest charges and thin capitalization were modified by the 2019 Finance Act

1. General principle: deductibility of interest charges

  • Except in the case of thin capitalization, interest charges are deductible up to the higher of €M3 or 30% of the company’s tax EBITDA
    • An additional deduction of 75% is possible if:
      • the company is part of a consolidated group and the equity / assets ratio is higher or equal to that of the consolidated group as a whole;
      • the company is not part of a consolidated group.
  • In the case of a French tax integrated group, the same cap amounts apply: the higher of €3M and 30% of the company’s tax EBITDA, the latter being calculated at the level of the tax integrated group.

2. Thin capitalization rules

  • A company or group of companies is said to be thinly capitalized when the amount of their accounts payable to related parties exceeds 1.5 times their shareholders’ equity. In this case, their deductible interest charges are calculated based on two ratios:
    • 1. For related-party interest charges:
      • (Related party debt-1.5*equity)/Total debt*100 = The charges are deductible up to the higher of €M1 or 10% of the prorated tax EBITDA
      • Only one third of the portion of interest charges exceeding the higher of €M1 or 10% of the tax EBITDA can be carried forward, the remaining two thirds being lost.
    • 2. For non related-party interest charges:
      • (Non Related party debt-1.5*equity)/Total debt*100 =The charges are deductible up to the higher of €M3 or 30% of the prorated tax EBITDA
      • The full amount of interest charges exceeding the higher of €M3 or 30% of the prorated tax EBITDA can be carried forward, but without entitlement to the additional deduction of 75% or the unused interest deduction capacity.
  • A company can be exempted from these thin capitalization rules if it is a member of a consolidated group and can prove that its debt-to-equity ratio is less than that of the consolidated group to which it belongs. This proof can be obtained by comparing the debt-to-equity ratios of the company and of the consolidated group.

3. Monitoring of retained interest charges and of the unused interest deduction capacity

  • Interest charges not deductible in respect of a financial year can be carried forward without any time limit. Special rules apply in case of thin capitalization.
  • The following tax forms must be attached to the tax return package: Form 2464 (for companies not belonging to a group, or companies belonging to a group in order to calculate their 2058-A bis tax return as if they were taxed individually) and Form 2363 for the parent company of the group.
  • The unused interest deduction capacity, i.e. the portion of interest charges exceeding the higher of €M3 or 30% of the tax EBITDA (except in the case of thin capitalization) must also be indicated on Forms 2464 and 2463