1.2.3 The application in time of the new provisions
In addition, it is also necessary to consider the modalities of application in time of these new provisions. The general rule is that an application for financial years ending on or after December 31, 2010, which means that loans and guarantees entered into in fiscal 2010 are concerned since they are outside the scope of application of exemptions.
It is, again, provided an express exemption – applied especially to LBO transactions – on loans previously in a st January 2011 in connection with an acquisition of securities or refinancing. It follows that if the loan was contracted a st January 2011 or after, but it is to refinance a loan before 1 st January 2011, the interest paid correspondents remain outside the scope of application of the anti underfunding.
1.2.4 New constraints to consider
The legislature has made commendable efforts to accommodate the specific case of LBO transactions and allow them to escape the new rules in anti-cap for the portion relating to bank debt. However, it is clear that these new rules reinforce the number of constraints to be taken into consideration during the LBO.
Once the proposed transaction is beyond the simple pattern of collateral securities of the target company only, it should be studied in detail the impact of guarantees on the tax deductibility of interest. Patterns known as “double Luxco” that were established in 2010 in LBO transactions of significant size (establishment of a two-stage holdings in Luxembourg with pledge of shares in the holding in Luxembourg and the French target ) for example are challenged by this new device in, as the collateral for the shares of a Luxembourg holding company is not in the case of the derogations.
Given the amounts involved, since the bank loans would not come within the exceptions to the anti capitalization and under are included in the ratios set out above, part of the interest is likely to be non deductible immediately (during the term loans). To avoid this, it will sometimes be necessary in particular to increase the share of capital contribution to the holding company to reduce its debt ratio. A global analysis in each case should be undertaken to examine the tax consequences of LBOs on all companies in the target group.
2. Removing the cap on the share of costs and expenses to the amount of fees and expenses actually incurred
For the record, with the option of holding back for the application of the mother’s daughter, the holding company can understand the benefits of his daughter exemption from corporate income tax, subject to reinstatement in his taxable income at the rate ordinary share of fees and charges (“QPFC”) equal to 5% of the total amount of dividends or the actual amount of fees and expenses if it is lower. It is precisely this possibility of capping the QPFC the actual amount of fees and charges has been removed. Eliminations come into effect for fiscal years ending after December 31, 2010.
The actual removal of the cap is likely to cause a change in the tax structuring of some LBOs.
It should first be noted that the friction tax related to the reintegration of QPFC is neutralized when applying the scheme of the tax but only for dividends paid from the second year (Article 223 B , 2 nd paragraph of the General Tax Code).
In this context, as it was possible to cap the QPFC the amount of actual costs, it was advantageous:
- Reduce the duration of the exercise before the integration period,
- To distribute massive reserves in that year to enjoy the cap to actual costs
- Not to make the payment of dividends during the first year of integration to wait for the second year and benefit from the neutralization of the QPFC.
Because the new system, reducing the duration of the exercise before the integration and mass distribution of dividends would be as productive against QPFC subject to 5% which can not be neutralized. It will be advantageous to delay the rise in dividends from the second year of the tax to benefit from the neutralization of the QPFC because of the tax.
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