The draft Finance Bill 2025: France adapts its merger tax regime to recent EU-driven corporate law reforms

Véronique Millischer

Baker McKenzie, Paris
Veronique.Millischer@bakermckenzie.com

Johanna Da Costa

Baker McKenzie, Paris
Johanna.DaCosta@bakermckenzie.com

The draft Finance Bill for 2025 was released on 11 October 2024 and is due to be examined by Members of the French Parliament from 21 October 2024.

The merger tax regime for corporate restructurings is to be adapted (Article 17 of the draft Finance Bill) following the Ordinance 2023-393 of 24 May 2023 and Decree No 2023-430 of 2 June 2023, which transposed EU Directive 2019/2121 and reformed the legal regime in regard to company law.

Background

Ordinance 2023-393 of 24 May 2023 reformed the rules governing mergers, spin-offs and partial transfers of assets to facilitate such transactions within the European Union. Notably, it introduced new types of mergers, partial demergers and demergers without share exchanges into domestic law.

The draft Finance Bill acknowledges these developments by extending the tax-neutral regime under Articles 210-0 A, 210 A, 210 B and 210 C of the French Tax Code (FTC) to encompass these new types of transactions.

New transactions within scope

The first transaction is the new simplified merger option, which applies when two subsidiaries, each owned by different parent companies in identical proportions, undergo a merger. In this scenario, subsidiary one merges into subsidiary two, with parent one and parent two maintaining their pre-merger ownership proportions in the surviving entity, shown as follows:

A more significant development is the introduction of a new partial demerger regime, allowing a contribution to be directly remunerated by allocating shares of the beneficiary company (B) to the shareholder (P) of the contributing company (A), as shown here:

Until now, current market practice was able to achieve the same result through two separate transactions:

• a contribution by a complete and autonomous branch of activity from A to B compensated by B shares (under Article 210 B of the FTC); and
• a subsequent allocation of the received shares by A to shareholder P (under Article 115-2 of the FTC).

For the merger tax regime to apply, the same conditions as for the traditional transaction structure will remain, as follows:

• the contribution will have to constitute a complete and autonomous branch of activity under tax law;
• the contribution will have to be expressly placed under the merger tax regime;
• the contributing company will have to maintain a complete and autonomous branch of activity in regard to its own post-contribution; and
• the share allocation to the shareholder will have to be executed within one year of the contribution.

The merger tax regime overview

In principle, mergers and assimilated transactions are treated as a liquidation of the business in terms of the absorbed company for French tax purposes and, therefore, prompt the immediate taxation of the profits for the fiscal year (unless a retroactive effect is provided for tax purposes), the taxation of all hidden gains and profits for which taxation has been deferred, as well as the taxation of unrealised capital gains (if any). At the level of the absorbing company, a merger triggers, as a rule, the recognition of a capital loss or a gain cancellation of the shares in the dissolved subsidiary and the inclusion of the income generated by the dissolved subsidiary during the ongoing fiscal year in regard to its own taxable income if the merger has a retroactive effect.

However, Articles 210-0-A, and those subsequent to it, in the FTC provide a special tax regime under which, upon election by the parties to the merger: (1) capital gains realised by the absorbed company upon the transfer of its assets are exempt from corporate income tax; and (2) the capital gains realised by the absorbing company upon cancellation of its shares in the dissolved subsidiary are tax exempt, subject to conditions being met and, notably, that the absorbing company takes a certain number of undertakings set forth under Article 210 A of the FTC.

As a result of the application of the merger tax regime, the merger is thus completely tax neutral from a corporate income tax point of view except in the situation where the absorbing company or the absorbed company has carry forward tax losses. Tax losses may be carried forward with no time limit and can be offset against taxable profits within standard limitations (€1m plus 50 per cent of taxable income above this threshold).  

Carry forward tax losses at the level of the absorbing company

The tax losses of the absorbing company realised prior to the merger may be carried forward to the extent that such company maintains the same activity and remains subject to the same tax regime after the merger. However, whether the merger triggers a substantial change in the activity of the absorbing company should always be reviewed.

Pursuant to Article 221-5 of the FTC, a change in activity is deemed to occur where either:

• there is a material change to the company’s business purpose; or
• there is a deep change in the economic activity performed by the company and, notably, there is an addition/termination of activities triggering, for the fiscal year of the addition/termination or the following fiscal year, an increase/decrease of more than 50 per cent of (1) the company’s turnover (gross income) or (2) the gross value of the company’s fixed assets and the average headcount of the employees.

According to French administrative guidelines, the addition of an activity that is strictly identical to the activity already performed by the company (notably in terms of operating resources and target customers) will not be regarded as a ‘change of activity’ (even though one of the abovementioned 50 per cent increase thresholds is reached). The 50 per cent threshold is assessed by comparing the amounts of turnover, the gross value of the company’s fixed assets and the average headcount in terms of employees (1) declared in respect of the fiscal year preceding the one in terms of the addition/termination of activities with (2) the ones declared in respect of the fiscal year of occurrence of the addition/termination of activity or the following fiscal year.

The main consequence of a total or partial change of activity as a result of the merger will be the forfeiture of the carry forward tax losses of the absorbing company.

There is a tax ruling procedure available to preserve the tax losses in situations where (1) the 50 per cent test is met and (2) the activities are not strictly identical, but the company is subject to very strict requirements and, in particular, the company must be able to demonstrate that the transaction is ‘essential for the continuation of the business that is causing the tax losses, and for safeguarding jobs’ (Article 221,5 – 2° of the FTC). In practice, this tax ruling procedure is rarely used.

Particular situations may further affect the analysis, as follows:

• in the presence of a tax group: a partial change of activity, if characterised, at the level of a member of the group would only result in the forfeiture of the tax loss carry forwards generated by this member of the group prior to the creation/joining of the French tax group. Tax losses generated during membership of the tax group would not be affected, as they are considered to belong to the head of the tax group. A partial change of activity, if characterised at the level of the tax group head, should only result in the forfeiture of its own tax losses generated before and during the tax group; the tax losses generated by the group members during the tax group and transferred to it should remain available; and
• in the presence of tax losses carried forward transferred to a company following a tax neutral transaction (such as mergers, dissolutions without liquidation, etc) based upon a tax ruling granted by the tax authorities (see below): the transfer of tax losses carried forward are subject to several conditions, one of which is that the beneficiary company continues to carry on the activity that generated the tax losses, without any change, for a period of three years following the completion of the transaction. Any change in the way the activity is carried out during this three year period may have an impact on the tax ruling and may result in the forfeiture of the transferred tax losses.

Carry forward tax losess at the level of the absorbed company

In principle, the merger would trigger the forfeiture of the net operating losses (NOLs) of the absorbed company except if (1) they are lower than €200,000 and, if not, (2) a tax ruling is requested and granted by French tax authorities (FTAs) for the transfer of the tax losses of the absorbed company to the absorbing company. The tax ruling request is subject to the following conditions (Article 209, II of the FTC):

• the merger is implemented under the French merger tax regime;
• the merger is justified by a business purpose and is not mainly tax driven;
• the activities of the absorbed company that have generated the tax losses did not undergo any significant change in the period during which the tax losses have been generated, notably in terms of clientele, head count, operating assets, nature and volume of activity;
• the surviving company maintains the activities that have generated the tax losses for at least three years, without any significant change notably in terms of clientele, head count, operating assets, nature and volume of activity; and
• the tax losses were not generated by a pure holding company (ie, a company without any operating activity) or real estate-oriented companies.

The tax ruling request must be submitted to the FTAs before the implementation of the merger. The conditions to benefit from the transfer of NOLs are highly scrutinised by the FTAs, which apply the conditions very strictly. However, there is a recent, but constant, trend in case law in favour of the taxpayer, consisting in rejecting a literal reading of the criteria set out in Article 209, II of the FTC, and instead favouring an economic assessment of maintaining the business activity giving rise to the tax losses. For instance:

• the French Supreme Tax Court ruled (17 October 2023, Case No 464667) that a significant decrease in the absorbed company’s turnover and head count during the period in respect of which the tax losses were generated does not automatically constitute a change of activity justifying the denial of the request. The assessment of a significant change must take into account all the factors characterising the company’s activity during the period in question, as well as the economic context;
• the Tax Court of Appeal of Lyon ruled (final decision 9 March 2023, Case No 21LY01810) that a reduction in the sales and workforce of an absorbed company is not sufficient to justify a significant change in the company’s business and, thus, prevent the transfer of its tax losses to the absorbing company, if such a decrease may be explained by the structurally cyclical nature of the company’s business; and
• the Tax Court of Paris ruled (10 May 2023, Case No 2002922) that losses incurred by an absorbed company as an active holding company may be transferred to the absorbing company. The Tax Court of Paris indicated that, absent any other legal clarification, losses resulting from the management of ‘movable assets’ should be considered only as losses resulting from the acquisition, holding, management or disposal of interests, and not as losses arising from (1) management services provided by an active holding company or (2) services provided by a mixed holding company to its subsidiaries.

Implementation timeline

Article 17 of the draft Finance Bill will apply retroactively to transactions registered with the Commercial Court from 1 July 2023. The French Parliament is expected to finalise and vote on the bill by the end of December 2024.