Deductibility of financial expenses and consolidated group
Last week, the Paris Administrative Court of Appeal issued a ruling regarding the former rules on the deductibility of financial expenses, and more specifically the exception related to the group’s debt-to-equity ratio.
Article 212 of the General Tax Code then in effect did indeed provide for a limitation on the deductibility of financial expenses, but it also stated that this limitation did not apply "if the company provides evidence that the debt-to-equity ratio of the group to which it belongs is greater than or equal to its own debt-to-equity ratio."
In this case, following a tax audit of the parent company of an integrated group,administration challenged the deductibility of financial expenses, arguing that the conditions of Article 212 had been met.administration had also applied penalties for willful noncompliance; however, these penalties were subsequently waived a few months after thetax bill was issued.
The company believed that the deductibility of its financial expenses should not be limited because the group's debt-to-equity ratio was higher than its own.
The Paris administration Court administration then had to determine which group—required to file consolidated financial statements—the company belonged to.
After noting that the failure to prepare consolidated financial statements has no bearing on the application of Article 212(III) of the General Tax Code, the Court will determine whether the conditions set forth inArticle L. 233-19 of the Commercial Code apply.
It will therefore conclude that the provision in this article stating that "a subsidiary […] may be excluded from consolidation when […] the shares or interests [in a subsidiary] are held solely for the purpose of their subsequent sale" applies in this case, and that consolidation should have been performed at the level of the parent company of the tax consolidation group. Since the group’s ratio was higher than that of the company, the financial expenses were indeed deductible.
The Court has thus overturned the company's tax assessment.
CAA Paris, May 23, 2025, No. 24PA01659
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