The French Highest Court confirms the impossibility for a company to carry forward to its subsequent profitable fiscal years the foreign tax credits not used due to a loss-making situation.
The decision of the French Conseil d’Etat of 8 March 2023 (CE, 8 March 2023, n°456349), completes the specific tax regime applicable to loss-making companies receiving income from foreign sources. The highest administrative Court specifies that there is no treaty basis that authorizes the carry forward of tax credits not yet allocated due to a loss-making situation. Indeed, the Court had already ruled that national law does not allow the carry forward of this tax credit (CE, 26 June 2017 n° 406437), which had been validated by the French Conseil Constitutionnel (CC, 28 September 2017 n° 2017-65a QPC).
In the case at hand, Natixis, the parent company of its tax group, received, along with its subsidiaries, foreign-source income that gave rise to tax credits for the financial years ending between 2008 and 2011. The loss-making situation of the tax group prevented these tax credits from being offset during these years. As the tax group became beneficiary in 2012, Natixis filed a claim for the refund of part of the corporate income tax paid for 2012 due to the allocation of tax credits relating to income received between 2008 and 2011.
Article 220 of the General Tax Code (CGI) allows the elimination of double taxation on foreign source income from investment income received by a French company, by granting a conventional tax credit for the tax deducted at source in the foreign state. When a French company is in a loss position, the income received during the loss-making year reduces the tax loss carried forward but does not generate tax. The tax credit relating to the tax paid abroad cannot, therefore, be charged.
In its decision of 8 March, the French Conseil d’Etat explains that the silence of tax treaties on this subject does not implicitly allow the carry forward of tax credits. Indeed, and this is one of the major contributions of the decision, the Conseil d’Etat takes advantage of its decision to define the notion of legal double taxation as being the one generating an effective double taxation, which means a double payment of tax for income relating to the same period. The fact that the foreign income reduces the basis of the French company’s result and thus reduces its carry-forward deficit does not constitute double taxation even if the situation of the loss-making company has been deteriorated.
Hence, in the absence of double taxation during the same period, the conventional tax credit has no purpose and cannot be carried forward (unlike tax credits under domestic law which are intended to subsidize a particular sector of activity as decided by the legislator).
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