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The amended Finance Act for 2009 changes the restrictive rules originally established to bring the regulations into line with the decision of the European Court of Justice. This reform is the logical continuation of the Papillon Case (ECJ 27 November 2008 n° 418/07).

The French tax group consolidation scheme will be developed in order to include the integration of French subsidiaries held through a foreign company. Several adjustments were made to the overall result so that the integrated income will not be subject to a double deduction or double taxation.

For the years ended between 1er January 2005 and December 30, 2009, groups may claim back the overpayment of French corporate tax by entering tax litigation. Do not hesitate to get in touch with us for that purpose. You must file a tax claim as soon as possible.

The French Consolidated Group Tax scheme will be amended, mainly to take into account the effect on French domestic tax law of the ECJ decision ("Papillon") which held the French non-compliant with EU law. This section also provides various facilities to the tax consolidation regime.

It points out that, under section 223 A of the Tax Code, a tax group can be formed by a parent company and companies subject to corporation tax of which it holds at least 95% of capital directly or indirectly through group companies. This rule prohibits therefore integrating a French subsidiary held through a non-resident company.

But the Court of Justice ruled that these provisions constitute a restriction on the principle of freedom of establishment which are not justified by the distribution of taxation powers between member states or by the need to ensure coherence of the tax (ECJ Case 27-11-2008. 418/07, Papillon).

This article accordingly adjusts the tax consolidation regime for the determination of results for years ending after December 31, 2009.

For years ended between 1er January 2005 and December 30, 2009, groups may claim back the overpayment of Corporation Tax through contentious claim.

COMPOSITION OF FRENCH CONSOLIDATED GROUP

Section 223 A of the Tax Code will be amended to allow the integration of a French company subject to corporation tax whose at least 95% of the shares are held by a French parent company through a foreign subsidiary called "intermediate company”. This intermediary company, which could not itself be part of the tax group, should meet the following conditions:

- Be resident in a State of the European Community or of a State party to the Agreement on the European Economic Area which has concluded with France a tax treaty providing administrative assistance to tackle tax fraud or tax evasion;

- Be held, directly or indirectly, for 95% at least by the head of Group Company;

- Be subject to a tax equivalent to the French corporate tax.

In addition, the Agreement This company will be required to include the sub-subsidiary in the French group's business.

It should normally be made not later than the deadline for filing the declaration of result of the previous year. For the application of the group and changed to the period beginning before 1er December 2009 and ending after December 31, 2009, the agreement of the intermediary company may however be filed on or before February 28, 2010.

DETERMINATION OF CONSOLIDATED GROUP NET INCOME

The net Income Results of French sub-subsidiary member of the group through a non-resident company will be taken into account in determining the overall result. Under the new Article 223 B of the CGI, several adjustments will then be made to prevent the double deduction of losses from the sub-branch or the double taxation of profits.

Generally, these adjustments will be subject to substantial formalism, integral to the company providing the evidence of the feeds within the group. In addition, the corrections made to the overall result should be referred to in a schedule attached by the parent company to the declaration of results, otherwise the fine prescribed by section 1763 of CGI will be applicable (fine equal to 5% of sums omitted in respect of which the offense is highlighted, reduced to 1% when the corresponding amounts are deductible).

> Waivers and subsidies within the group

The waivers of direct or indirect subsidies made between group companies are not taken into account in determining the overall result. The amounts deducted from individual result of a company that made the abandonment are disallowed for the determination of the group overall result while the amounts included in the profits of the company that received the benefits are deducted from the group net income.

Similarly, this article establishes the principle that waivers or grants made by a group company to an intermediary company should be neutralized. Subsidies to the interposed company should be reported to the overall outcome if they were deducted from the individual result of the company paying. No reprocessing will however be made to the overall result if such aid were donated to another group company during a subsequent period, provided that the parent company provides evidence that no link between these subsidies and losses of companies in the area.

> Financial charges

This section will extend the application of "Amendment Charasse" if a member company acquires shares of a sub-French subsidiary, Already a member group through a foreign company, with the same company.

It recalls that under the current regime, "the amendment Charasse" applies when a group company has bought a controlling shareholder outside the group or with a company that controls the shareholder within the meaning of Article L 233-3 of the Commercial Code, the securities of a company joins the same group.

Moreover, when a company member status underfunding pays interest to a related company of the same perimeter, the fraction of the interest which is related to the individual result of the borrowing company under section 212 of the CGI is offset to establish the overall result. This rule will be extended to cases where a sub-subsidiary group member pays interest to a foreign intermediary company provided that the parent provides evidence that the interests in question are returned in the same year a group company.

> Capital gains on intergroup sale

The neutralization of plus or minus capital gains under section 223 F of CGI will be applicable in the case where a group company sells securities of another company member to a foreign intermediary. The sale of securities by that company to a company outside the perimeter will end this circumvention, as well as the release of the group of companies whose securities have been sold.

> Deficits prior to integration

Section 223 I, 4 of the Code provides for a measure to cap the offset of profits or long-term capita gains against deficits incurred by the member companies before entering the group. Should also be deducted from earnings imputation subsidies and waivers of debt made to a member firm by a foreign intermediary, as well as capital gains arising on sale of securities in such a society, since these aid and these profits are neutralized at the overall result.

> Other amendments

In addition to changes to the tax consolidation regime in conformity with Community law, various adjustments are made to current arrangements.

In particular we note that the solution that a permanent establishment may include a group as a subsidiary will be legalized.

Furthermore, attendance fees and royalties distributed by the subsidiaries of the group will be added to the overall result that they were deducted from the individual output of these companies. It will be terminated, with respect to attendance fees that give rise to any deduction for the subsidiary to, a double taxation.

Finally, when a group has the mechanism of allocation to a broad-based under Article 223 I, 5, CGI, part of the loss suffered by a company that had contributed to the deficit due on that basis continue to be deferred if leaving group resulting from its merger with another company group as part of an operation under the concession system.

These arrangements will apply in determining the outcome of periods beginning on or after 1er January 2010.

JJ Michallon - French Tax Attorney - Former Tax Inspector