Financial Years ending on december 31st, 2024: Update to 5.75 procent of the deductible interest rate

published on 24 April 2025 | reading time approx. 3 minutes

1) Principle interest rate rule: the “reference” rate

WHO IS CONCERNED ?

Companies subject to corporation tax in France; indebted to partners/shareholders or so-called “related” companies who bear interest charges with regards to this debt.

IMPACT OF THIS RULE ?

The deduction of interest owed to the partner/shareholder/related entity is limited to a predetermined “reference” rate, indexed to the average effective rates applied by credit institutions and finance companies.

* Subject, in the case of a direct shareholder/partner, to the condition that the debtor company's capital be fully paid up. If not, the deductibility of all interest charges may be denied.

Interest corresponding to this rate will in principle be fully deductible, while interest more than this rate must be added back to the taxable income of the debtor company.

This rate varies every quarter and therefore changes from one financial year to the other. It is set to 5.75 percent for companies with a financial year ending on 31st December 2024.

Examples of application of this rule:

A German parent company granted an interest-bearing loan to its French subsidiary, of which it is its direct shareholder (regardless of its level of participation);
A German ultimate parent holding company has granted an interest-bearing loan to its French subsid-iary, which is 100 percent indirectly owned.
A German parent holding company has set up a “cash pooling” agreement with all its subsidiaries, including a French entity.

In these three cases, for the year 2024, the interest incurred will be fully deductible up to a rate of 5.75 percent. The excess above this rate should be added back to the taxable income of the debtor company.

PRACTICAL IMPLICATIONS ?

The deductibility of interest charges must be checked and the rate applied must be monitored annually for each financial year. The question of the rate also arises in the event of recourse to new intra-group financing during the financial year.

Special attention and vigilance must therefore be paid when drafting financing agreements and documentations.

2) Interest rate limitation rule applicable by exception: the “market” rate

In application of this rule and by exception to the “reference” rate rule, interest relating to sums left or made available by a related company may be deducted at a rate higher than the “reference” rate if the French debtor company demonstrates that the rate borne is a “market” rate; i.e. a rate that it could have obtained from independent financial institutions or organizations under similar conditions (e.g. an interest rate that would have been negotiated with an inde-pendent bank).

Examples of application of this rule:

A German parent company granted an interest-bearing loan to its French subsidiary and closed its financial year on December 31, 2024. The applied interest rate exceeds the reference rate allowed for 2024 at 5.75 percent and amounts to 8 percent.

In principle, in application of the “reference” rate rule, the interest corresponding to the rate applicable in 2024 (5.75 percent) will be fully deductible without any justification and the difference corresponding to the 2.25 percent will have to be added back to the taxable result of the debtor company.

In application of the market rate rule, if the French subsidiary can demonstrate that 8 percent was a market rate that it could have obtained under the same conditions from a bank, the full amount of interest corresponding to this 8 percent rate may be deducted.

The practical difficulty lies in demonstrating this market rate, which requires combining several pieces of evidence considering the companies’ specific features, as well as its risk profile.

A detailed legal and tax analysis of each transaction, as well as the production of comparable transactions are necessary to prove the normality of the rate applied.

3) What practical implications?

In practice, the risks incurred by French debtor companies are as follows:

Non-deductibility of interest expenses incurred that exceed the “reference” rate, unless they prove that their rate is in fact a “market” rate;
In addition, the portion paid exceeding the “reference” rate and that does not correspond to a “market” interest rate could also be analyzed by the tax authorities as a disguised distribution in the event of an audit, giving rise to the application of a French withholding tax (subject to the application of double tax treaties).

Finally, in addition to the rate rules set out above, please note that other specific limitation rules may apply, particularly when the net financial expenses of an undercapitalized group exceed the sum of one million euros.

Our teams are available to assist your group in the tax analysis of its financial flows and to offer you solutions to reduce these risks of fiscal discrepancies, such as a reviewing and adapting the group's financing documentation.