The French Amended Finance Act for 2014 allows French companies that are directly or indirectly held by the same non-French parent company established in the European Economic Area (EEA) (EEA Parent Company), without being held by the same French company (French Sister Companies), to be included in a tax consolidated group (Horizontal Tax Consolidated Group) in France.  This reform follows decisions by the EU Court of Justice and a French Administrative Court of Appeal pursuant to which the prohibition of Horizontal Tax Consolidated Groups—as opposed to tax consolidated groups between a parent company and its direct or indirect subsidiaries that are all established in the same jurisdiction (Vertical Tax Consolidated Group)—constitutes a restriction to the EU freedom of establishment.  SeeEUCJ, n° C40/13, June 12, 2014, SCA Holding BV and others, and CAA Versailles, n° 12VE03684, December 2, 2014.

Advantages of a Horizontal Tax Consolidated Group

The main tax benefits provided by the general French tax consolidation regime are (1) the consolidation of the taxable income recognized by each of the French companies included in the tax consolidated group (Taxable Consolidated Income), such that for tax purposes the profits recognized by profit-making companies can be offset by any losses recognized by the other companies, and (2) the neutralization of the tax consequences of certain transactions entered into between those companies for tax purposes (e.g., distributions of dividends, transfers of assets, waivers of debt and subsidies).

Pursuant to the new legislation, such tax benefits would also be available to French Sister Companies that elect to be included in the same Horizontal Tax Consolidated Group.  Groups of companies including French Sister Companies that do not wish to reorganize their corporate structure in order to form a Vertical Tax Consolidated Group should therefore consider the possibility of forming a Horizontal Tax Consolidated Group.

Main Conditions for Forming a Horizontal Tax Consolidated Group

French Sister Companies may form a Horizontal Tax Consolidated Group with their direct and indirect French subsidiaries.  The French Sister Companies and their French subsidiaries must be subject to corporate income tax in France, and at least 95 percent of the financial and voting rights attached to their shares must be held by the same EEA Parent Company, directly or indirectly through one or more subsidiaries of the EEA Parent Company subject to corporate income tax in the EEA (Interposed EEA Companies).  The EEA Parent Company must be subject to corporate income tax in the jurisdiction of its incorporation, and generally no more than 95 percent of the financial and voting rights attached to its shares may be held, directly or indirectly, by a company subject to corporate income tax in the EEA.  However, more than 95 percent of the financial and voting rights attached to the shares of the EEA Parent Company may be held by a company subject to corporate income tax in the EEA if held through one or more companies not subject to corporate income tax, and also may be held through one or more companies subject to corporate income tax in the EEA so long as not greater than 95 percent of the voting and financial rights attached to the companies’ shares are held by a company subject to corporate income tax in the EEA. 

A further condition for forming a Horizontal Tax Consolidated Group is that the fiscal years of the companies included in the Horizontal Consolidated Group, the EEA Parent Company and any Interposed EEA Company (as the case may be) must not last more than 12 months and must commence and end on the same date.  This condition does not apply, however, if it cannot be met because of the mandatory requirements of the relevant jurisdiction.

Election to Form a Horizontal Tax Consolidated Group

Since the EEA Parent Company cannot be included in the Horizontal Tax Consolidated Group, the election to form the group must be made by one of the French Sister Companies, acting in the capacity of parent of the group, and be approved by the EEA Parent Company and any Interposed EEA Company.  Each French company included in the Horizontal Tax Consolidated Group must give its consent to become a member of the group, subject to the approval of the EEA Parent Company and any Interposed EEA Company.

The identity of the French companies included in the Horizontal Tax Consolidated Group, the EEA Parent Company and any Interposed EEA Company must be disclosed to the French tax authorities each fiscal year.

Issues to Consider when Forming a Horizontal Tax Consolidated Group

The termination of a tax consolidated group generally triggers the de-neutralization of certain transactions that were previously neutralized for the computation of the Taxable Consolidated Income of the group, resulting in potential additional corporate income tax costs and restrictions on the use of carry-forward tax losses.  Such de-neutralization costs should therefore be carefully evaluated prior to forming a Horizontal Tax Consolidated Group, considering that the following events in particular would trigger a termination of the group:

• A change of the (French) parent of the Horizontal Tax Consolidated Group, and any takeover or reorganization (merger or spin-off) involving that parent

• A takeover or reorganization (merger or spin-off) of the EEA Parent Company involving a company subject to corporate income tax in the EEA

In addition, the inclusion in a Horizontal Tax Consolidated Group of a French Sister Company acting as parent of a pre-existing Vertical Tax Consolidated Group would trigger the termination of the Vertical Tax Consolidated Group.

Entry into Force

The new legislation is applicable to fiscal years ending on or after December 31, 2014.

Possible Ground for Tax Refunds

For fiscal years ending before December 31, 2014, groups of companies that were in a position to form a Horizontal Tax Consolidated Group should consider filing a claim for a refund of the relevant French corporate income tax based on the previously mentioned EU and French case law no later than December 31 of the second fiscal year following the one during which such tax was paid.