France: Tax losses - their utilization, the impact of restructuring operations and recent case law

In France, losses incurred by a company in a given fiscal year can be carried forward to offset profits in subsequent years, without time limit. The annual offset against future profits is limited to a maximum of €1 million, plus 50% of the portion of profit exceeding this threshold. Any unused balance is carried forward to the following year. It is also possible to opt to carry back losses against the previous year's profits, up to a maximum of €1 million.

The right to carry over losses is forfeited in the event of a change in the company's actual activity. Such a change may result inter alia from an addition, abandonment or disposal of an activity leading to a 50% increase or decrease in either turnover or average headcount and gross fixed assets compared with the previous year. Where such operations are critical to the continuation of the business activity that gave rise to the losses, and to maintaining jobs, the forfeiture of the losses may be avoided subject to prior ministerial approval.

In the event of a merger (or contribution of assets or demerger), any previous losses not yet deducted by the absorbed (or contributing or demerged) company may be carried forward in their entirety against the subsequent profits of the absorbing (or beneficiary or resulting) company, if special approval is granted. Approval is automatic if the transaction is placed under the French preferential tax regime, if it is economically justified, and if the activity giving rise to the losses has not undergone any significant changes. No approval is required if the loss is less than €200,000.

Recent French case law has addressed the possibility of carrying over the final losses of foreign subsidiaries within the international context of tax-consolidated groups of companies holding non-resident sub-subsidiaries (CAA Paris 15-12-2023 no. 21PA03001 Société Compagnie Plastic Omnium SE and no. 21PA01850 Société Générale).

It will be recalled that the CJEU’s decision in Marks & Spencer (CJEU 12/13/2005 C-446/03) had originally established the possibility of offsetting, in the parent company’s State of residence, the definitive losses of a subsidiary resident in another Member State where the latter had exhausted all possibilities of taking its losses into account.

In the Plastic Omnium and Société Générale cases, two sub-subsidiaries, Belgian and Latvian respectively, held by French subsidiaries belonging to a tax-consolidated group, were liquidated following the 2008 financial crisis, without being able to offset their final losses. The question arose as to whether it was possible to offset in France the definitive losses recognized upon the foreign sub-subsidiaries’ liquidation.

In a ruling in line with CJEU case law, the Paris Administrative Court of Appeal has confirmed that definitive losses incurred by a foreign sub-subsidiary can be offset against the overall taxable income of a tax-consolidated group, provided that the intermediary entity between the foreign sub-subsidiary and the parent company is resident in the same country as the parent company.

The Court thus confirms that the rules specific to the tax consolidation regime cannot justify the disallowance of losses incurred by a non-resident subsidiary where it is shown (i) that the non-resident subsidiary has exhausted the possibilities available in its home state for using the losses in the current accounting period and also for previous accounting periods – if possible by transferring those losses to a third party or by offsetting them against profits made by the subsidiary in previous periods – and (ii) that there is no possibility of taking these losses into account in the subsidiary's country of residence for future periods, either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.

The Court thus affirms that the tax authorities cannot require a French company to prove that it was "absolutely impossible" to capitalize on its foreign subsidiary’s losses by transferring them to a third party prior to the subsidiary’s liquidation.

Lastly, in response to the tax authorities' objections concerning the years of origin of the foreign sub-subsidiary's losses, the Court ruled that the fact that losses recognized upon a subsidiary’s liquidation originated from prior years had no bearing on whether or not they were final on the date of liquidation, and that the tax authorities could not rely on the French domestic law prohibition against using pre-consolidation losses to disallow recognition of a foreign subsidiary’s losses.

These two appellate court decisions open up the possibility of offsetting final losses incurred by subsidiaries of tax-consolidated groups. Confirmation from the Conseil d'Etat (the French supreme tax court), which has so far taken a contrary position, is now awaited.

Further authors:

Alexandre Almira

Manthieta Gory