Tax consolidation and LBO: conditions, benefits, Charasse rule

Quick answer. Tax consolidation (Tax Code art. 223 A) lets a parent company holding at least 95% of a subsidiary's capital and voting rights be the sole payer of corporate tax on a consolidated result. In an LBO, it is the lever that allows the interest on the holding's acquisition debt to be offset against the target's profit. The Charasse rule (art. 223 B) limits this benefit in a buy-from-yourself case.

The buyout of a company through debt, or LBO, rests largely on a tax mechanism: tax consolidation. It is what lets the acquisition holding have the cost of its debt absorbed by the profits of the bought company. Understanding the 95% conditions, the benefits and the limit of the Charasse rule is essential before structuring an operation.

Tax consolidation is a group regime that combines the tax results of several companies (Tax Code art. 223 A).

The parent company becomes the sole payer of corporate tax for the whole group. The results of the consolidated subsidiaries are added to form a consolidated result, on which corporate tax is calculated. The profits of some can thus be offset by the losses of others, which is the central benefit of the regime.

The group must be made up of companies subject to corporate tax in France, closing on the same date over twelve-month financial years, and the regime results from an election. It is the framework within which an LBO is structured.

The holding threshold is the strictest entry condition of the regime.

The parent company must hold, directly or indirectly, at least 95% of the capital and voting rights of each consolidated subsidiary. This 95% threshold is mandatory: below it, the subsidiary cannot enter the consolidated group. The calculation of indirect holding follows precise rules when the chain passes through several companies.

This requirement shapes the LBO structure: the acquisition holding must acquire at least 95% of the target to be able to consolidate it and benefit from the sought tax leverage.

Tax consolidation is the heart of an LBO's leverage, beyond financial leverage alone.

In an LBO, an acquisition holding borrows to acquire the target, then consolidates it for tax. The interest on the acquisition debt, borne by the holding which has no income of its own, is then offset against the target's profit within the consolidated result. This is what allows the debt to be repaid with lightly taxed profits. This mechanism extends the logic of the acquisition holding, which we illustrate in our article on the creation of a holding after a company buyout.

The dividends paid up from the target to the holding also benefit from the parent-subsidiary regime, with taxation limited to a share of costs and charges. The group's residual profit is taxed at corporate tax of 15% up to 42,500 euros, then 25% (Tax Code art. 219).

The LBO benefit has a major anti-abuse limit: the Charasse rule.

Article 223 B of the Tax Code provides that, when a company is bought from persons who control the group, a share of the group's financial charges is reintegrated into the consolidated result. The device targets the buy-from-yourself: it prevents an owner from selling their company to their own holding while deducting the loan interest. The reintegration applies in the year of the buyout and the eight following years.

To this is added the general cap on the deduction of net financial charges, limited to 30% of tax EBITDA above a threshold of three million euros, which can concern significant LBOs.

Tax consolidation is the tax backbone of the LBO, but it is anything but automatic: the 95% threshold must be reached and maintained, and the Charasse rule can neutralise part of the benefit in family or buy-from-yourself deals.

Our approach is to check eligibility for the regime upstream, structure the holding to cross the 95% threshold, and anticipate the Charasse rule when the seller stays linked to the group. The structure must also account for the cap on financial charges. Well built, the LBO with consolidation remains one of the most powerful tools of a company buyout, provided it is secured on the tax side from the outset, in connection with the deferral on the contribution of shares when it combines with it.

An executive wanted to buy out the SME that employed him through a debt-financed holding. The analysis confirmed that by acquiring 100% of the target, the holding could consolidate it and offset the debt interest against the profits, speeding up repayment. The seller being a third party, the Charasse rule did not apply. The structure was calibrated to respect the 95% threshold, optimise the dividend flow-up under the parent-subsidiary regime and stay under the financial-charges cap. The operation held on the tax side, where an improvised structure could have lost part of the leverage.