As discussed in a previous article (Covid-19: tax perspective on cash management within groups), the increased cash requirements of companies during the current crisis means that financial support between entities within the same group is often necessary, thus giving rise to a number of tax issues.
Administrative and legislative developments are bringing these issues to the forefront.
Update on comments issued by tax authorities regarding tax consolidation
The tax authorities have just published their comments in the BOFIP concerning Article 32 of the 2019 Finance Act, which introduces several amendments to the tax consolidation system. These include the rule now codified in Article 223 B, paragraph 5 of the French Tax Code, which authorises the supply of goods comprising current assets and services at cost price, provided they take place between companies belonging to the group under French tax consolidation.
The Tax Authorities confirm that loans and advances granted between companies in the same tax group fall within the scope of these provisions and, in cases where the lending company fails to provide proof of having contracted a specific debt in order to finance the loan or advance granted within the group, the BOFIP offers a further clarification as follows:
“The cost price of the loan service is estimated by reference to the return this lending firm could obtain from placing the funds with a financial institution or similar body; in practice, this return is calculated using the 3-month Euribor rate communicated by the Banque de France” (BOI-IS-GPE-20-20-40, No. 290).
If this rate is negative, as it is currently the case, we believe that the lending company would be justified in including a 0% minimum rate in its loan agreement, since, in such a case, the company would benefit from investing its excess cash in a non-interest-bearing account on the market. Even though the tax authorities recognise, on a practical level, that the 3-month Euribor rate may be used as the cost price of loans and advances within a tax group - without any restriction whatsoever, in particular as regards the characteristics of such financing - it follows that a creditor company shall act in an economically sensible manner by protecting itself against the risk of cash-flow erosion if the reference rate were to yield negative earnings on its investment. Indeed, the creditor could improve its financial position by simply holding the corresponding funds on hand rather than making them available temporarily to a member company of the same group.
However, it should be noted that when the funds loaned are specifically tied to a loan taken out by the lending company for this purpose, it is unlikely, in view of the legislation, that companies will be able to implement this pragmatic solution, although administrative comments have not been entirely unequivocal on this point. Moreover, the notion of "debt specifically contracted to finance a loan’, may itself give rise to debate depending on the circumstances.
Second Amending Budget Act for 2020 - Widening of derogating measures for debt write-offs (Article 3)
Introduced by way of amendment, a provision of the Second Amending Finance Act for 2020 provides for a new and extended tax deduction opportunity for creditor companies with regard to certain debt write-offs, as well as for an additional case in which the debtor company is allowed to increase the allowance for tax losses carried forward. This measure has already been the subject of a more in-depth commentary on this site. Note that it concerns the write-offs of rents and related claims granted between April 15 and December 31, 2020, unless there is an arm's length relationship between the two companies as defined in Article 39.12 of the French Tax Code. Such write-offs are deductible in full with no requirement for the company granting them to demonstrate a commercial or financial interest in doing so, nor for the beneficiary company to be the subject of collective proceedings. As for the latter, it may increase the 1 million euro limit on the allocation of losses carried forward up to the amount of the write-off received.
Article 39, 12 of the General Tax Code deems companies to be dependent on one another if one company holds, directly or through a third party, a majority of the share capital of the other or has de facto decision-making power therein. A non-arm's length relationship is also deemed to exist between two companies within the meaning of Article 39, 12 of the CGI, even though there exists no direct shareholding ties between the two companies, either where one of these companies de facto exerts decision-making power in the other entity by proxy or where both companies are under the control of the same third party.
Finally, it should be noted that these new provisions apply only to rent (and related) claims and only concern aid formally provided by way of debt write-offs. Other aid, such as revenue forgone of any kind and in particular non-interest-bearing loans and advances, is therefore excluded. Hopefully, a further finance bill will broaden the scope of the measure, so that companies currently experiencing financial hardship can support other intragroup companies through broader means than rent write-offs.
Insight: impacts of the Covid-19 outbreak
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