France: Amendments made by the Finance bill for 2025 to the Pillar Two mechanism

The purpose of Article 53 of the Finance bill for 2025 is to supplement the worldwide minimum tax regime for groups, codified in Articles 223 VJ to 223 WZ of the FTC, to include the administrative instructions published by the OECD up to those of June 17, 2024, which mainly concern deferred taxes and the rules relating to "transparent" entities. These latter instructions, like those of January 2025, will be included in a forthcoming Finance bill, or in the BOFIP (French tax authorities guidelines) for provisions that do not fall within the scope of the law.

The amendments introduced by the Finance bill apply to financial years ending on or after December 31, 2024, with the exception of those relating to article 1679 decies of the FTC, which introduce a principle of solidarity of payment in respect of the additional national tax or UTPR due in France.

The new features introduced by this law are of unequal importance and mainly concern the following points:

• How the substance-based deduction is determined
• The rules governing the application of the qualified domestic minimum top-up tax and the protection regime relating to this tax
• Application of the transitional protection regime
• Rules for apportioning the qualified domestic minimum top-up tax due in respect of constituent entities located in France belonging to the same group
• The introduction of two new categories of tax credits: transferable negotiable tax credits and transferable non-negotiable tax credits, and their treatment in calculating the TEI.
• The adoption of simplification measures concerning insignificant constituent entities
• The creation of solidarity of payment provided for in 2° and 3° of I of article 1679 decies

A. General Amendments

1. Modification of definitions (art. 223 VK)

The law introduces two new types of tax credits for determining GloBE income and covered taxes:

• Negotiable transferable tax credits
• Non-negotiable transferable tax credits

To our knowledge, these new categories of tax credits do not exist in France. Not to be confused with transfers of tax credits within a tax consolidation group (art. 223 O of the FTC).

The notion of "non-significant constituent entity" has also been defined, in order to simplify the treatment of constituent entities not included in the scope of consolidation, for which the data available is often problematic. The French law takes up the OECD's proposal to use data that are easy to obtain for these entities, but which have the effect of giving them a relatively low TEI compared with the normal calculation.

The notion of insurance investment entity has also been redefined. It mainly concerns "fund"-type structures whose units are backed by the unit-linked commitments of life insurance companies.

2. New options

Two new options are proposed :

• One relates to non-material constituent entities (Articles 223 VN and 223 VT of the FTC), i.e. those which are not included in the scope of consolidation because they are considered non-material or singular. This option must be formulated for each constituent entity concerned by the declaring constituent entity, and tacitly renewed unless terminated. It means that their qualified income is equal to their total sales, and that their amount adjusted for taxes covered is equal to the amount of (current) income taxes owed by this non-material constituent entity (NMCE).
• The other (art. 223 VO quindecies) concerns the inclusion in the qualified income of a constituent entity of capital gains or capital losses on shareholdings, valid for a period of 5 financial years, and which applies to all constituent entities in the same jurisdiction. This option can be useful, for example, when capital gains/capital losses are not covered by a preferential regime but by standard law. The exercise of this option has an impact on the determination of the taxes covered, and its termination is subject to certain conditions.
   

3. Clarification of the application of temporary safe-harbour measures based on the CBCR (minimis test; simplified TEI test; routine profit test)

Article 223 VZ incorporates the CBCR "qualification" requirement referred to in the OECD guidelines while Article 223 VZ bis aligns the French system with that of the OECD model (in particular, the restatements relating to hybrid financing agreements).

4. Substance-based deduction taken into account

Articles 223 W et seq. have been amended on a number of points : treatment of personnel costs and "mobile" tangible assets, assets acquired for leasing purposes...

5.  Clarification of currency conversion rules

A sub-section 2 is added to section VIII on reporting obligations to specify the exchange rate to be used for calculating the additional tax.

B.  Specific modifications

1. Rules relating to qualified domestic minimum top-up tax (QDMTT) (article 223 WF of the FTC)

Article 223 WF has been amended and supplemented on several points.

First, the paragraph providing that excess profit could, for the purposes of determining the QDMTT, be calculated on the basis of net accounting income determined in accordance with French accounting principles or international accounting nomenclature, instead of the financial accounting standard used to prepare the consolidated financial statements of the ultimate parent entity, has been deleted. This is an important change, as it could have prevented the QDMTT from being considered as a "super-qualified DMTT", which could not only be offset against the additional tax due by the foreign EMU, but could also exempt the latter from calculating this additional tax for the "France" jurisdiction according to its own rules.

Second, it is stipulated that the QDMTT allocated to a constituent entity is equal to the product of the group's QDMTT divided by the ratio between the additional tax calculated individually by this entity and the sum of the additional taxes calculated individually by each of the entities. This enshrines the "polluter pays" principle, which seems fairer than an allocation based on qualified profit without taking into account the level of taxation of each constituent entity.

Third and lastly, clarifications have been added concerning investment entities, joint ventures and the allocation of covered taxes between constituent entities covered by a particular regime (SEC, hybrid entities, etc.).

2. Solidarity payment for QDMTT or UTPR

When an QDMTT or UTPR is due in France, the entities liable for this tax may, at their option, designate one of them to file the statement of settlement and pay the full amount of this additional tax on their behalf. At the same time, the paying entity is jointly and severally liable for payment of the duties, penalties and ancillary costs of the additional tax owed by the constituent entities that have designated it. This mandate therefore implies liability on the part of the paying entity, and must be carefully drafted between the parties concerned.

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