Focus On The Anti-Avoidance Provision Targeting Hybrid Debt Instruments

The 2014 Finance Law has implemented yet another limitation of the deductibility for tax purposes of interest payments made by a French borrower to an affiliated entity (i.e., an entity controlled by the borrower, controlling the borrower, or controlled by the same third party as the borrower), this time targeting more specifically cross-border hybrid debt instruments ("Anti-Hybrid Provision" or "AHP").

The AHP is applicable to fiscal years closed as from September 25, 2013, and may thus have an immediate impact on the corporation tax returns to be filed (and the corresponding corporation tax liability to be paid) during the upcoming months.

In essence, interest payments made by a French borrower to an affiliated entity will be deductible for tax purposes only if such borrower is able to demonstrate that the lender (be it French or foreign, even though the provision was clearly designed to target cross-border hybrid debt instruments) is subject to an income tax on