Application of the ATAD Financial Expense Cap
In an unprecedented context due to Covid-19, the establishment of the tax bundles for fiscal year 2019, provided an opportunity to re-examine the new general ceiling on the deduction of net financial expenses (ATAD planer) which was a result of the European directive to combat tax evasion practices known as the “ATAD directive”.
Under articles 212 bis and 223 B bis of the General Tax Code (CGI), and transposed by the finance law for 2019, the ATAD planer limits the deduction of a company’s net financial expenses to the higher of the two following ceilings:
- €3 million or 30% of its fiscal Ebitda respectively €1 million
- or 10% of the Ebitda tax in case of undercapitalization.
This new regime poses some practical difficulties, which are listed below with some explanation :
“Overamortization” and the Ebitda Tax
The calculation of EBITDA (“earnings before interest, taxes, depreciation, and amortization”) tax requires adjustments to be made, such as the reintegration of deducted depreciation and amortization into taxable income.
The first version of the BOFiP (Bulletin Officiel des Finances Publiques) on the ATAD plan only specified that “all depreciation allowances deducted for tax purposes ” should be taken into account. It was unclear if the “excess depreciation” should be reintegrated for the determination of the fiscal Ebitda.
A later BOFiP update added that « the exceptional deductions » (referred to in Article 39 decies and following the CGI [which includes the overamortization mechanism]), do not constitute depreciation allowances from an accounting point of view, and therefore should not give rise to any restatement for the determination of the EBITDA tax.
Deferral of the unused deduction capacity of an undercapitalized company
When the net financial expenses for a fiscal year are lower than the highest of the deduction limits, the ATAD plan provides for the positive difference, known as the unused deduction capacity, to be carried forward to the next five fiscal years.
This carry forward is reserved for companies that are not undercapitalized. An undercapitalized company benefiting from the safeguard clause, entitling it to a waiver of the application of the €3 million and €3 million ceilings, and 30% of the Ebitda tax, should be able to benefit from the carry-over of unused deduction capacity.
Application of the additional deduction of 75% of non-deductible financial expenses to a tax consolidation group with a scope equivalent to that of the consolidated group
When a tax consolidation group has financial expenses in excess of the higher of the two deduction ceilings, it may deduct 75% of the financial expenses exceeding this ceiling if its equity/assets ratio is greater than or equal to 98% of the same ratio calculated at the level of the consolidated group.
In practice, it is not uncommon for certain integrated groups to have a scope of integration that is identical to the scope of consolidation. In such a situation, and in agreement of the legal text, the safeguard clause should be systematically applicable, which the BOFiP does not invalidate.
Negative indexed interest rates
An interest rate, when it is indexed, can become negative. In this case, it is the borrower who is remunerated at the rate of the sums placed at his disposal. The question then becomes is whether such interest constitutes financial income for the borrower and a financial burden for the lender.
It is a question of flows “relating to the sums left or made available to the enterprise”; it may be considered that when an amount is paid in application of an interest rate, the negative loses its nature of interest and corresponds to the remuneration of a service. Lenders and borrowers may find it advantageous to align their tax treatments, to avoid asymmetry effects, and to increase the information exchanged between them in the event of a correction of the result of one of the parties.
Reimbursement of a non-conversion premium
According to the BOFiP, the amortization of a non-conversion premium attached to a bond issue should only be recognized as an expense when the non-conversion into shares becomes certain. So that “if the premium is amortized by the company issuing the bonds, this amortization should not be included in the net financial expense base, regardless of the accounting option used to record this expense”.
This position is not necessarily favorable to the issuer, as it may lead to the inclusion of a higher amount than would have been required if the premium had been recognized as amortization had it been recorded in the financial statements.
Moreover, it should be noted that if a position has been taken by the administration with regard to the determination of financial expenses with regard to a non-conversion premium, this is not the case for the determination of the Tax Ebitda, for which there are arguments both for taking into account on a « run-of-the-mill » basis and in respect of the financial year in which non-conversion becomes certain.
Notion of “application fee”
The BOFiP specifies that « all of the administrative costs incurred in the context of a financing transaction must also be deducted from the net financial expenses subject to the capping system ». In practice, the administration defines this notion of « administrative fees » by reference to the notion referred to in the Consumer Code for calculating the total effective rate (TEG), and expressly excludes fees paid or due to intermediaries involved in any way whatsoever in the granting of financing, including consulting fees due to outside service providers (in particular lawyers).
In practice, this reference is not totally enlightening, as both practice and doctrine seem hesitant about the amounts to be taken into account in the TEG for administrative costs.
It seems to that both the letter of the regulatory texts of the French Consumer Code and the BOFiP should lead to the exclusion of fees invoiced by entities other than the lending entities, including when the sums in question are, for example, qualified as arrangement fees and invoiced by entities related to the lenders. More generally, borrowers should pay particular attention when establishing their tax bundles on the amounts taken into account or not taken into account by the lenders to determine the TEG.
Amortization reversals, from which the depreciation allowances were deducted before the implementation of the ATAD plane
The EBITDA tax must be reduced by depreciation write-backs. Some write-backs are the corollary of allocations made before January 1, 2019, so that the EBITDA tax would be reduced by a depreciation that never increased it (since the ATAD plane did not exist). Nevertheless, the tax authorities have indicated that, despite the potentially inequitable nature of this position, the wording of the text left little room to depart from it, reserving the case of scrapping.
Amortization of debt issuance costs and the EBITDA tax
When a company elects to amortize its debt issuance costs over time for accounting and tax purposes, the GAAP provides for the amount amortized in a fiscal year to be recorded in an amortization account.
The BOFiP provides that “all depreciation allowances deducted for tax purposes ” are taken into account in the Ebitda tax. A borrower may wonder whether it is possible to increase its EBITDA tax by the amount of the amortization of the loan issue costs. However, that this favorable solution would nevertheless be the cause of a dissymmetry insofar as the amortization of the loan issue costs is never taken into account, the fiscal EBITDA would never be reduced.
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