Main deductible charges

Main deductible charges

The main deductible charges are as follows:

  • Acquisition costs

  • Calculated charges
    • - write-down
    • - provisions 

  • Financial costs

  • Tax losses

These mainly concern the following charges

ð i.e. in general between 1 and 7% of the purchase price.

In accounting and tax terms ( article 38 quinquies of annexe III to the FTC), at the enterprise’s option (such option is irrevocable and applies to all capital assets other than securities).

These costs may be:

  • recognised as a charge and deducted immediately from the result; or
  • included in the cost price of the building (capital asset) and written down under the same conditions as the building (cf. hereunder "Depreciation").
From a practical point of view, the selection criteria for these two options lie mainly in the business plan for the assets (including an intention of release from the investment), the overall analysis of the investor’s real estate portfolio and its aims in terms of distributing the result.

In fact, the immediate deduction of acquisition costs allows an immediate reduction in the taxable result (and therefore of CT with, where appropriate, the creation of deferrable tax losses), (see hereunder carryforward of deficits) but it also reduces the accounting result and therefore impedes the capacity for distribution of the ownership structure of the building (subject to its other revenues).


This is intended to show, in the owner’s accounts, the loss of value of an asset that deteriorates (or becomes obsolete) over time. It must be booked according to the rules of commercial accounting.

Not all assets are depreciated, in particular land or building rights, as their value is not affected by the passage of time. On the other hand, constructions and fixtures and fittings can be depreciated.

Depreciation is without exception linear: it is determined in the same way throughout the lifespan of the asset. It begins on the commissioning of the asset to be depreciated. 



An asset with a value of €1 M and a lifespan of 20 years will result in annual depreciation of €50,000.

To determine the amount of depreciation, the method of depreciation by components is used, allocating the cost price of a depreciable capital property (usually constructions) between the individual components with the same lifespan and then depreciating each according to their particular lifespans.

Depreciation is a particularly sensitive item in tax terms insofar as it is a charge that can be deducted from taxable income but does not correspond to actual expenditure (a “calculated” charge): the expenditure was made on acquisition of the real estate asset, not in each year of the allocation of depreciation relating to the asset.

The owner may thus be tempted to carry out a rapid, massive depreciation of the asset in order to reduce its taxable income and thus its tax charge in the short term: the tax administration is however highly vigilant and discussions with the tax authorities are possible at several levels:

- breakdown of the overall price of a building between land (non-depreciable) and constructions (depreciable) concerning the allocations of land and buildings (constructions), the Conseil d'Etat set out three and hierarchical methods of divisions in two rulings of 15 February 2016, see our News of 23 December 2016);
- distribution of the price of the buildings between individual components;
- period of depreciation selected for all or some of the components..

In order to justify the depreciation plan chosen, it may be preferable to subject assets of significant value to an assessment by an expert in such real estate and technical matters in order to confirm the choices made for the apportionment of land and constructions between the various components.



For indicative purposes, the following matrix is the result of a study by the FSIF (French body representing SIIC) on the distribution of components:

Business premises  Retail centres Accomodation Offices


Structural work 25-50 60-90 > 40 40-60 > 50 40-50 < 40  40-60 
Façades, sealing work 20-40 5-10 20-30 10-25 20-50 5-20 20-40 10-25
General technical installations  15-30 5-15 10-25 15-30 15-30 20-30 15-30 15-30
Fixtures & fittings  7-15  5-15 5-15 10-20  5-15



These are also calculated charges that do not correspond to a cash outflow. Provisions are intended to cover losses or contingent charges in order that the company’s accounts accurately reflect its value, while at the same time observing prudent accounting principles. 

Regarding real estate, provisions are generally:

  • either upcoming expenses related to planned works;
  • or a depreciation of the building that is greater than the writedowns provided for (market value < net book value of the building). 

In tax terms, the law (Article 39, 1. 5° of  FTC) restricts the amount of provisions that can be deducted as the fact that they are not an actual outlay may encourage a “prudent” accounting policy aimed at reducing (or least deferring) the company’s tax burden.

ðFor a provision to be tax-deductible, the following conditions must be cumulatively met:

  • the provision must be intended to cover a loss or a charge that is itself tax-deductible (which does not, for example, apply to a fine);
  • the loss or charge in question must be clearly specified (which excludes lump-sum provisions);
  • the loss or charge must be probable (as opposed to merely possible);
  • the loss or charge must result from an event occurring before the end of the financial year during which the provision has been made (which in particular excludes provisions made for events occurring between the end of the financial year and the drawing-up of the accounts).

ð In practice, the key elements concerning provisions are as follows:

  • the date of the event justifying the provision;
  • the nature of the outlay covered by the provision (for example, is it a deductible charge or the replacement of an asset?);
  • the precise amount of the provision (for example, in terms of building depreciation, an expert’s report in due form appears necessary).
Provisions for depreciation of real estate

The FTA would previously refuse the deduction of provisions for the depreciation of buildings if the main purpose of the owner company was rental rather than sale (property activity rather than purchase-resale or development activities). This position was based on the fact that the buildings were not on the market and losses were only “possible”, even if the market value was less than the net book value.

In a ruling (no. 236706 of 10 December 2004), the Conseil d'Etat definitively overturned this position, holding that once the probable market value of part of a fixed asset was less than its net book value, the company was entitled to deduct the provision intended to take account of such depreciation.

In 2005 this ruling led to a legislative amendment concerning provisions made for buildings.

Pursuant to article 39, 1. 5°penultieme para of the FTC, a company may only deduct tax provisions for its buildings if an overall deferred loss exists on the total value of its real estate portfolio (whereas the accounting approach is on an individual asset basis: the prudence principle prevents a potential capital gain from compensating an equally potential capital loss), calculation being made by reference to the cost of the buildings before any writedown as compared to their market values. 

A similar rule exists for provisions intended for the depreciation of securities in companies mainly involved in real estate activities. 



  Building   Cost  

 Net Book



Deferred capital

Gain / Loss


1 500   300 450    - 50   
2 300 280  250  - 30  - 50   


700 200  800    100   
4 400 350  200  - 150   - 200  
5 600 450 900    300   
TOTAL 2 500 1 580 2 600 - 180 100 - 80


Financial Costs

The tax issues related to financial costs can be summarised by the diagram below: 

 The availability of significant intra-group funding at the expense of a capital contribution is likely to reduce the result and therefore the tax payable by the company, even though the activity and operational plans are identical and the cash transfers between group companies are similar. It is the legal characterisation of the flows that changes: dividends from a result that have been taxed / interest that has been deducted from the result.

This situation is particularly damaging to the Treasury if the lender (here, a holding company) is not located in France.

Thus, in a more general context (in particular LBO operations), the French government has limited the opportunities for a company to deduct its financial costs when determining its result for tax purposes.

As the real estate sector consumes considerable debt, real estate activities are among the primary activities affected.

Limitations on the deductibility of financial costs have been introduced in several layers, with the latest dating from the of end of 2013:

  • 2007 : reform of the thin capitalisation rules (intra-group debt)
  • 2010 : extension to bank financing guaranteed by a group
  • 2012 : reducing of financial charges
  • 2013 : non-deductibility of interest on hybrid debt

The result is the application of three different rules, whose common objective is to reduce the tax deductibility of the financial charges borne by a company. 

Introductory remarks
In addition to the following rules, under the “abnormal management actions” theory, the interest rate paid by the company and, more generally, the terms of the loan must comply with market norms.

ðThin capitalisation rules ( Article 212 of  FTC: limitation on the tax deductibility of interest paid to companies in the borrower’s group).

Scope of application : interest paid to companies considered as related to the borrower (i.e. either one directly or indirectly controls the other, or both are directly or indirectly controlled by a third-party structure).

Tax deduction of interest payable by the borrower to the lender is mainly (i.e. excepting a rate limitation), limited to the highest amount of the following three thresholds: 
- debt ratio = interest X [1,5 equity (sometimes, share capital) / Total intra-group financing] ;
- Interest coverage ratio = 25 % of pre-tax earnings, writedowns and interest subject to thin capitalisation rules ;
- Interest received from other related enterprises

The share of the interest that exceeds the highest of these three limits is not deductible.
If the amount of non-deductible interest is less than €150,000, all the interest is tax deductible under a “de minimis” rule (N.B.: this amount is a trigger threshold, not an allowance). 

Since 2010, this device has also applied to loans from outside the group (e.g. bank loans) where repayment is guaranteed by the group companies: such loans are then treated as intra-group loans under the thin capitalisation rules (with certain exceptions, e.g. the guarantee granted is limited to the borrowing company’s current accounts and/or securities).

This provision may create particular difficulties in the financing of real estate portfolios: if the bank requests cross-collateralisation on the assets held by several subsidiaries, the treatment of bank financing as intra-group financing will limit the tax deductibility of the interest (and thus increase the tax burden on the borrower).



EXAMPLE 1 // loan from group company to company A

  • €10 M at 6% interest, i.e. interest payable by company A: €600,000
  • Equity, company A: €4,000,000
  • Adjusted pre-tax earnings: €500,000
  • Interest received by company A:

Limit on rate: 6% to be verified against market rates (N.B. a different rate limitation will apply if the lender is not a related company but rather a direct and minority shareholder)  for the purposes of this example the market rate is considered to be 6%.

Limits on thin capitalisation:  

  • Debt ratio: interest X 1.5 X (equity / intra-group debt) = €600,000 X 1.5 X (€4 M / €10 M) = €360,000
  • Interest coverage ratio (adjusted pre-tax earnings): €500,000 x 25% = €125,000
  • Interest received: €0
→ €600,000 - €360,000 = €240,000 in non-deductible interest



Example 2// loan from group company to company A


  • €10 M at 4% interest, i.e. interest payable by company A: €400,000
  • Equity, company A: €5 M
  • Adjusted pre-tax earnings: €800,000  
  • Interest received by company A: Limit on rate: 4 %  → OK

Limits on thin capitalisation :

  • Debt ratio: interest X 1.5 X (equity / intra-group debt) = €400,000 X 1.5 X (€5 M / €10 M) = €300,000
  • Interest coverage ratio (adjusted pre-tax earnings): €800,000 x 25% = €200,000
  • Interest received: €0

→ €400,000 - €300,000 = €100,000

→ < €150,000 → interest fully deductible


ü Rule introducing “planing” on financial charges (article 212 bis of the FTC ): since 2012, 25% of the amount of a company’s net financial charges (including bank financing) is no longer tax deductible (25% for financial years ending before 1 January 2014).

ð This mechanism will not apply if the company’s total net financial charges are less than €3m (this too is a trigger threshold, not an allowance).

ü  Rule of non-deductibility of interest on hybrid debt (rule applies to intra-group financing article 212, I. b)  of the FTC): some loans are a mix of equity and / or loans according to the current regulations applicable to borrowers and lenders. This in particular arises from differences in interpretation of the laws in different countries.

Thus if a French company is the borrower, paying tax-deductible interest in France to a lender – usually located abroad – which is regarded as a dividend, this may in turn potentially benefit from a tax exemption. The tax benefit is clear.

To avoid such situations, as of 2013 the French borrower must be able to demonstrate to FTA that interest paid to a related company is effectively taxed at the level of the latter at a rate at least equal to ¼ of the French CT (≈ 8.5%).

The 2017 Finance Law provides a reduction of the French CT rate from 33.1/3% to 28% within 2020. 

Carryforward of deficits

When a company liable to CT records a tax loss during the financial year, this may be deferred indefinitely and be set against future results (article 209, I of the FTC). 

This situation occurs quiet often to real estate companies, particularly if acquisition costs were deducted immediately (see below).

Since 2011, chargeable tax losses have been subject to a cap; the amount of the tax loss deductible for each financial year is as follows:

  • €1 M;
  • plus 50% of the result exceeding €1m for the financial year in question (60% for financial years prior to 2013).





  • Deferrable tax losses at beginning of financial year N total €3 M 
  • Taxable result for N (before allocation of deferred tax losses): €3 M

Chargeable loss for N: €1 M + 50% X (€3m - €1m) = €2 M

Taxable result for N (after allocation of deferred tax losses): €1 M

→ €333,000 of CT for year N

Deferrable tax losses remaining: €1 M

This document and the information it contains are intended to provide as complete and accurate information as possible. It is however theoretical in nature and must undergo all necessary checking prior to its application. FiscalImmo and its authors cannot in any circumstances be held liable on the basis of this document.