France - Draft guidelines for interest deductions on related-party loans 

April 16:  The French tax authorities issued draft guidelines (subject to consultation) on the newly enacted rules that limit interest deductions on loans between related parties.


The Finance Act for 2014 introduced a provision that limits the deductibility of interest on certain loans between related parties.

Read TaxNewsFlash-Europe (6 January 2014).

A deduction for interest (before application of any other interest limitation provision, such as the thin capitalization rules or the general 25% reduction) is allowed only if the lender is subject to “sufficient taxation”—i.e., during the same tax year, the rate of income tax on the interest payment received must be equal to at least 25% of the French standard corporate income tax that would have applied if the lender were a French tax resident.

Proof of “sufficient taxation” must be provided by the taxpayer, when requested by the French tax authorities.

Areas of uncertainty

Tax professionals noted that clarifications of measures in the new law were needed concerning the following points:

  • Whether the "sufficient taxation" standard requires an effective payment of income tax at the lender level, or if a “theoretical” income tax applicable on the gross interest income is the relevant measure?
  • Whether the French standard corporate income tax rate is all that must be compared to the income tax rate applicable to the lender, or whether additional French tax surcharges (i.e., the 3.3% social contribution and the 10.7% exceptional levy) must be taken into account as well? [The legislative history indicates that Parliament’s consideration of the law, prior to its enactment, focused only the standard corporate income tax rate, without the additional surcharges.]

Draft guidelines of French tax authorities

The French tax authorities’ draft guidelines concerning the interest deduction limitation clarify that the "sufficient taxation" standard is to be determined as follows:

  1. First, a “theoretical” foreign income tax is determined by applying the foreign income tax rate to the foreign tax base of the lender’s gross income. In this respect, the draft guidelines provide it is irrelevant whether there is no actual payment of income tax by the lender (e.g., when there is no income tax liability because of the application of net operating losses or because of the availability of certain deductible expenses).

  2. Second, the resulting theoretical income tax is then compared to the French income tax that would have applied, had the lender been a French tax resident. In this respect:

  • Categorization of income (e.g., as interest) is made under French tax rules (for example, if there are hybrid instruments that qualify as equity at the (foreign) lender's level but are treated as debt at the (French) borrower's level, the hybrid instruments will be treated as debt).

  • Additional French tax surcharges must be added to the standard corporate income tax rate, if such surcharges are applicable to the lender—i.e., as if the lender had been subject to French corporate income tax.

If the amount determined under (1) above is equal to at least 25% of the amount under (2) above—corresponding to a “minimum liability threshold” between 8.33% and 9.5%—the interest expense would be deductible at the (French) borrower’s level, subject to other standard interest limitations (application of the thin capitalization rules, etc.).

Also, the French taxpayer would need to maintain supporting documentation in its records, so as to demonstrate that these two conditions (above) were satisfied. Such documentation must be provided to the French tax authorities, on request.

Also, the draft guidelines include provisions concerning timing issues—for instance, in situations when there is mismatch between (1) the financial year during which the interest income is taxed at the lender’s level and (2) the year during which the interest expense would be deductible at the (French) borrower’s level. In such instances, the new rule would result in the deduction of the interest expense at the (French) borrower’s level only when the interest income would be effectively included in the tax base at the lender’s level. In such instances, supporting documentation would have to be appended to the borrower’s corporate income tax return.

Finally, the draft guidelines address certain specific situations resulting from: (1) the involvement of “tax transparent” entities; and (2) interaction of this measure with the French CFC rules (Article 209 B of the French tax law).

KPMG observation

Tax professionals with Fidal* have observed that the draft guidelines appear to clarify certain open issues concerning the interest limitation rules, and that taxpayers potentially subject to the interest limitation rules would want to examine their related-party loans to determine whether the conditions are satisfied.

It is noted that under these rules, the required information would have to be collected in advance—specifically, proof that the interest income has been effectively included in the lender’s tax base. If it is determined that certain interest expenses on loans between related parties would not be deductible under the draft guidelines and/or if there is an interest rate that could be viewed as excessive, withholding tax implications would need to be considered and reviewed.

For more information, contact a tax professional with Fidal in Paris or with KPMG’s French Tax Center in New York:

Olivier Ferrari

+33 (0)1 55 68 14 76

Patrick Seroin

+33 (0)1 55 68 15 93

Gilles Galinier-Warrain

+1 212-954-8605

Cédric Philibert

+33 1 55 68 15 58

*Fidal is an independent legal entity that is separate from KPMG International and its member firms.

©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this


Current and future KPMG clients may subscribe to TaxNewsFlash email alerts.

Email your contact information.

TaxNewsFlash-United States by year