French General Tax Code
In forceI. - French companies which establish a commercial presence in a foreign country in the form of an establishment created for this purpose or a subsidiary whose capital they acquire, may set aside a tax-free provision for losses incurred by this establishment or subsidiary. The acquisition of shares must give the French company a holding of at least one-third of the capital of the commercial subsidiary or, where its holding is at least equal to one-third, enable it to maintain or increase its holding by a fraction equal to at least 10% of the capital.
The allocation to the provision is equal to the amount of the losses incurred by the establishment or to a fraction of the amount of the losses incurred by the subsidiary, during the financial years ending after the date either of creation of the establishment, or of acquisition of the securities, and during the four years following that of this creation or this acquisition; the fraction referred to above is obtained by applying to the amount of these losses the ratio between the nominal value of the dividend-paying securities, thus acquired, and the nominal value of all the dividend-paying securities issued by the subsidiary; the losses are retained up to the amount of the investment.
The investment is equal to the net amount of capital transferred to the establishment since its creation and for each of the financial years mentioned in the second paragraph, or to the amount of the sums paid in respect of each acquisition of securities representing the capital of the subsidiary, within the limit of the expenditure actually incurred for the purposes of the commercial activity defined below.
The subsidiary, which must take the form of a capital company, or the establishment must be subject abroad to taxation of its profits comparable to that which would result from the application of corporation tax.
The subsidiary or establishment must have as its business the marketing abroad of goods produced mainly by the company making the provision in one of its establishments whose profits are subject to corporation tax or by companies that are members of a group mentioned in article 223 A or article 223 A bis of which it is also a member.
The provisions of this I are no longer applicable to investments made after 31 December 2003.
II. - The allocation to provisions, deducted from the income for a financial year pursuant to this article, is successively deducted from the taxable income for the following financial years, up to the amount of the profits made in respect of each of these financial years by the establishment or subsidiary located abroad and, at the latest, from the income for the financial year or tax period closed during the tenth year following that of the investment which gave rise to the right to the provision. These profits are taken before deducting losses incurred in previous financial years and, if the investment was made through a subsidiary, in the same proportion as that applied to the losses used to calculate the provision.
If the proportion of the subsidiary's capital held as a result of an acquisition of securities that gave rise to the provision mentioned in this article is reduced during the ten-year period mentioned in the first paragraph, the provision(s) set aside on account of this acquisition and which appear on the company's balance sheet are carried forward to the profit or loss for the tax year or period during which this proportion was reduced. The same applies if one of the conditions stipulated in I ceases to be met or if the establishment or subsidiary is affected by one of the events mentioned in the first paragraph of 1 of article 201 and in 2 and 5 of article 221.
III. - For the application of the provisions of this article, the results of the foreign establishment or subsidiary are determined in accordance with the rules laid down by this code on the basis of the initial balance sheet drawn up under the conditions laid down by decree. However, specific legal provisions authorising special provisions or deductions or exceptional depreciation are not applicable.
IV. - The benefit of the provisions of this article may be granted, with the prior approval of the Minister responsible for the budget and subject to the conditions and limits laid down in this approval, to French companies carrying out an activity mentioned in article 34 and whose results are subject to corporation tax under the conditions of ordinary law, which establish a presence in a foreign State in the form of an establishment or a subsidiary, which satisfies the conditions of the first four paragraphs of I and whose sole purpose is the provision of services.
The approval referred to in the first paragraph is issued to companies in respect of establishments abroad whose purpose is to promote the sustainable and significant export of services.
The amount of the investment giving entitlement to the provision is limited to €3,000,000.
For the purposes of determining the results of financial years beginning on or after 1 January 1995, the provisions of this IV apply, subject to the same conditions and limits, to French companies which carry on a professional activity within the meaning of 1 of article 92 and are subject to corporation tax under the conditions of ordinary law, where the establishment carried out abroad, as referred to in the first paragraph, is for the exclusive purpose of carrying out these activities.
The provisions of the first paragraph are no longer applicable to investments that have not been the subject of an application for approval filed before 1 January 2004.
V. - The benefit of the provisions of this article may also be granted, with the approval of the Minister responsible for the budget and subject to the conditions and limits laid down in this approval, to the credit institutions, finance companies and companies mentioned in V of Article 39 octies A which carry out transactions provided for in that same V, as well as to groups of companies.
VI. - The provisions of this article apply to investments which are made as from 1st January 1992, subject to the provisions of the fifth paragraph of I quater and the second paragraph of II bis of article 39 octies A and the fourth paragraph of IV of this article.
