All businesses in one company
The simplest way to blend profitable and not-so profitable French businesses to maximise the offset of losses, is simply to concentrate all the businesses in one French company. In this scenario, a foreign corporate owner could establish a French 'compound business', with three different divisions, all inside one single French corporation. This would effectively enable losses from one business to be set against profits from another.
However, this structure will not work for those who want to grow by buying new French companies or who want to establish joint-ventures. It would also not work for those who want to isolate each different line of business in a special purpose vehicle.
Tax transparent or CIT 'look-through' vehicles
Article 8 of the French Tax Code (FTC) provides a tax transparent regime for entities whose shareholders do not have limited liability, such as Société en nom collectif (SNC) – where partners are all jointly and several liable, Société en commandite – a sort of hybrid tax vehicle, where the limited partner's share is subject to CIT while the general partner shares are tax look-through, and the Société Civile (SC) – where partners are jointly liable (without limit) for the liabilities.
Article 8 entities are not liable to CIT, instead CIT is payable by their shareholders in proportion to their stake in the entity. There is no minimum ownership for tax transparency to apply.
However Article 8 provides only vertical consolidation of profits and losses so that in the example below the French corporation can effectively offset the profits and losses of the three businesses operated by the SNCs. However, if there was no top corporation owning the SNCs – offset of the losses would not be totally possible between the three sister entities.
Article 8 CIT look-through vehicles are also commonly used as a vehicle for joint ventures between partners who wish to remain independent as regards the liability or not of their joint venture vehicle to CIT.
Combining putting several businesses in one company with tax transparent vehicles
You can combine putting several businesses in one company with Article 8 tax transparent vehicles. In the example below an SNC combines businesses 1 and 2, and the third line of business is isolated in another sister SNC, both held by the same French corporation. This effectively enables losses incurred by one SNC to be offset, in the French corporation's hands, against profits from the other SNC.
Tax consolidation regime (régime d'intégration fiscale)
If organisations wish to limit their liability by isolating different lines of business in separate special purpose vehicles (SPVs), the above options will not be attractive. Instead, the tax consolidation regime (régime d'intégration fiscale) can be used.
Under the tax consolidation regime, each company in the group works out its liability for CIT and files a return as if it were taxed on a stand-alone basis. Then the tax group parent company includes each subsidiary’s profits or losses in a CIT group return. The parent company is liable for the payment of the CIT due by the whole tax group. Each subsidiary remains jointly liable for its share of the CIT and penalties.
The tax losses incurred by a group company prior to its election for tax consolidation may only be offset against the company's own taxable profits. However, tax losses incurred by a group company after its election are transferred to the parent company and cannot be used against the subsidiary's own future profits, even after the subsidiary has left the group.
This regime is only available if the group parent company holds directly or indirectly at least 95% of the share capital and voting rights of each subsidiary and it must be a French resident company which is not itself held 95% or more directly by another French resident company subject to CIT in France. Also, both parent company and subsidiaries must elect for the intégration fiscale regime to apply.
French tax grouping after the Papillon case
Originally the intégration fiscale legislation required that all the group companies had to be held directly by another French entity. However, in 2008, in the Papillon case, the Court of Justice of the European Union (CJEU) decided that the restriction was contrary to the principle of freedom of establishment.
In 2009, France changed its law so that integration fiscale will be available where a French tax group parent holds an eligible French affiliate, indirectly, through a company established in an European Economic Area (EEA) State (i.e EU plus Norway, Iceland and Liechtenstein).
Horizontal tax grouping
As a result of another decision of CJEU, it is now possible to set up a horizontal tax group in France, i.e. to consolidate French sister affiliates all controlled by a foreign EU or EEA parent company.
In the 2014 decision in SCA Group Holding BV the CJEU ruled that the Dutch fiscal unity regime was contrary to the principle of freedom of establishment because no fiscal consolidation was possible between a Dutch parent and a Dutch second tier subsidiary which was held by an intermediate company in another EU Member State. Similarly, the regime did not allow two Dutch subsidiary (sister) companies held by a parent company in another Member State to enjoy fiscal unity.
As a result of this decision, the French intégration fiscale regime was changed to permit French sister companies, both held by a EEA parent company, to benefit from the regime. It is therefore now possible to set up a horizontal tax group in France, i.e. to consolidate French sister affiliates all controlled by a foreign EU or EEA parent company.