Tax consolidation involves combining the tax results of all the companies in a group. This means that losses made by one company in the group or by the parent company can offset the profits of the other companies.
The Finance Act for 2019 introduced several measures to improve the tax consolidation regime. The main measures are summarized below.
Tax consolidation mechanism:
Companies subject to corporate tax under the general rules, regardless of their sector of activity, may, by option for a period of 5 years, constitute a group of companies in which the parent company, holding at least 95% of the capital of the subsidiaries, is liable for corporation tax on all the profits of the companies forming part of the tax consolidation group.
Conditions to be met:
- The companies must be subject to corporate tax and taxable in France.
- The option is valid for five years and may be renewed indefinitely. The company must inform the tax authorities of its choice before the deadline for filing its income tax return for the previous financial year.
- Integrated companies must close their 12-month accounting periods on the same dates. However, during the five-year period, the length of the financial years may be changed once to be less or more than 12 months.
- The parent company must not be 95% or more directly owned by another company subject to corporation tax.
However, the parent company may be 95% or more indirectly owned by another entity subject to corporation tax, provided that this entity does not hold more than 95% of the capital of the intermediate company or companies.
Foreign companies are not eligible for the tax consolidation regime. However, a French parent company owned by a foreign company may opt for the group system if the subsidiaries agree to the integration. In such a case, the parent company is free to determine the scope of the tax group.
French subsidiaries may be included in the tax group if they are held by the parent company via a foreign company (at least 95% of which is held directly or indirectly by the parent company) whose registered office is in the European Union or in a member state of the European Economic Area that has signed a tax treaty with France to strive against tax evasion. The intermediate foreign company must also consent to the French subsidiary being included in the tax group.
Determination of consolidated income:
Each company in the group establishes and declares its taxable income but is not subject to corporate tax. The parent company determines the consolidated result by calculating the algebraic sum of the results of each company in the group and declares it. It is solely responsible for corporate tax due on all the group’s profits.
Adjustments must be made to the consolidated result in order to neutralize transactions carried out between companies integrated, such as debt write-offs or direct or indirect subsidies granted between group companies, which are not taken into account when determining the consolidated result.
Since January 1st 2019, the general principle of neutralizing subsidies and debt waivers no longer applies.
Advantages of tax consolidation :
The most obvious advantage is the offsetting of losses incurred by a subsidiary against the profits of the other companies in the consolidated group.
The option of tax consolidation is particularly attractive when the parent company is profitable and a subsidiary is generating losses with no prospect of positive results in the short term. This may also be the case when a new business is set up that generates losses in the first few years.
The option may be considered when the parent company is making losses and one or more of its subsidiaries is profitable. This is particularly the case when a holding company is set up for the acquisition of a company by an individual. The holding company then takes out a loan to finance the acquisition of the target company’s shares, and this loan is then repaid using the dividends paid by the subsidiary. The holding company’s tax losses, relating to finance costs and the amortisation of acquisition costs, can be deducted from the target company’s profits, thereby reducing the overall tax burden. These profits can be transferred to the holding company without any tax loss.
Where the companies in the group make profits, the option allows commercial and financial transactions between the various companies in the group (interest-free loans, preferential prices) to be neutralized for tax purposes.
If the corporate tax due on the consolidated profit is lower than the sum of the taxes that each company would have had to pay individually, the parent company makes a tax saving. This profit is not taxable and the parent company may dispose of it as it sees fit. However, an agreement between the companies in the group may allocate this saving between them.
A holding company may opt to consolidate in order to use all the dividends received from its subsidiary and to deduct loan interest from the profits of the target company. This is common in the case of an acquisition of a company through a holding company.
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