Tax consolidation combines the tax results of all companies in a group, allowing losses to offset profits. This mechanism can be a game-changer for businesses with profitable and loss-making entities. But how does it work, and is it right for your business? Understanding tax consolidation is essential when setting up a company in France.
How can tax consolidation benefit your business?
The benefits of tax consolidation include:
- Offsetting losses incurred by a subsidiary against the profits of other companies in the group
- Reducing the overall tax burden
- Neutralizing commercial and financial transactions between group companies for tax purposes
- Making tax savings that can be allocated between group companies
As noted by the International Fiscal Association, tax consolidation can help reduce the risk of double taxation and improve the overall tax efficiency of a group.
Tax consolidation is a key aspect of international tax planning, and its benefits can be significant for multinational enterprises. – OECD, Tax Consolidation and Loss Offsetting, 2018
What are the conditions for tax consolidation in France?
The Finance Act 2019 introduced several measures to improve the tax consolidation regime in France. To be eligible, companies must meet specific conditions:
- Being subject to corporate tax and taxable in France
- Having a parent company that holds at least 95% of the capital of its subsidiaries
- Closing their 12-month accounting periods on the same dates
- Not being 95% or more directly owned by another company subject to corporation tax
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. The French tax authorities provide more information on the conditions for tax consolidation in their official brochure.
How does tax consolidation work for foreign 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. Our tax assistance services can help individuals and corporates navigate the complexities of tax consolidation and ensure compliance with French tax laws.
How is consolidated income determined?
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.
What are the 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. Tax consolidation can also help reduce the overall tax burden and improve cash flow.
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. Our team can help you navigate complex business and commercial issues, including tax consolidation – learn more about our business and commercial services.
If your company is struggling with debt, it’s crucial to understand how tax consolidation can impact your debt recovery strategy. Our team can help you navigate complex debt recovery issues – learn more about our debt recovery services.
Make the most of tax consolidation
By understanding the mechanism and advantages of tax consolidation, companies can make informed decisions about their tax strategy. Tax consolidation can be a powerful tool for businesses to reduce their tax liability, improve cash flow, and increase competitiveness. With careful planning and execution, companies can maximize the benefits of tax consolidation and achieve significant tax savings.
Tax consolidation requires careful planning and execution to ensure that the benefits are maximized and the risks are minimized. – KPMG, Tax Consolidation: A Guide for Multinational Enterprises, 2020