Paris Tax Alert. New French Government Releases Draft Finance Bill.

July 2012 Paris Tax Alert. New French Government Releases Draft Finance Bill. After much suspense and many rumours, the new French government released its first draft Finance Bill on 4 July 2012. As expected, and keeping in line with the objective of reining in France s deficit, the bill includes several new taxes or rate increases, as well as a number of anti-avoidance rules. It also reverses certain symbolic measures that the previous majority had put in place, most notably with respect to the wealth tax (creation of a surtax to offset previous reductions), the so-called social VAT (repeal of a 1.6% increase that was supposed to enter into force on 1 October 2012) and certain reductions in gift and inheritance taxes. A number of other measures, which are described below, will also have a significant impact on companies, in particular new anti-avoidance rules and a new contribution on distributions of dividends. By contrast, the limitations on the deduction of interest charges that François Hollande, then candidate, had announced during the presidential campaign have not been included in the draft Finance Bill; we understand, however, that they may be included in the 2013 Finance Bill that will be released in September, and that they could take the form of an interest-barrier rule (interest charges would be deductible only up to a certain percentage of the taxpayer s EBITDA or similar aggregate) or an exclusion for interest on debt used to finance the acquisition of shares in a subsidiary. investment income Repeal of the withholding tax on dividends paid to certain investment funds In the recent Santander Asset Management SGIIC SA decision (ECJ 10 May 2012, C- 339/11 to C-347/11), the European Court of Justice held that EU law precludes French legislation from levying a withholding tax on dividends paid to non-french resident Undertakings for Collective Investments in Transferable Securities ( UCITS ) where similar dividends received by French resident UCITS would not be taxable. Following this decision, the French Government has proposed to repeal the withholding tax on dividends received by non-french UCITS situated in another EU member state or in a jurisdiction or territory that has entered into convention on mutual administrative assistance with a view to tackling tax avoidance and evasion, provided that said UCITS meet the following conditions: (i) they raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and (ii) they present characteristics similar to those of French UCITS such as collective investment schemes (organismes de placement collectif en valeurs mobilières), real-estate collective investment schemes (organismes Contents investment income... 1 Repeal of the withholding tax on dividends paid to certain investment funds 1 Additional 3% contribution on dividends... 2 Increase in the financial transaction tax rate... 2 businesses... 3 Accelerated payment of the exceptional corporate income tax contribution. 3 employees participation schemes... 3 Stock-options and free shares... 3 Other participation schemes... 3 Anti-avoidance measures. 4 CFC rules... 4 Transfer of tax losses... 4 Shell companies or socalled coquillards... 5 Cancellation of financial debt... 5 individuals... 5 Income from real estate properties realised by non-residents... 5 Paris Tax Alert / France to tax financial transactions 1

de placement collectif immobilier) or closed-ended investment companies (sociétés d investissement à capital fixe). These new rules should apply to dividends distributed as from the publication of the law (expected to take place in the last days of July 2012). Additional 3% contribution on dividends In order to make up for the loss in tax revenues resulting from the repeal of the withholding tax on dividends received by certain non-french resident UCITS, the Finance Bill contemplates an additional 3% contribution on earnings distributed by companies or entities subject to corporate income tax in France. This new additional contribution would be due by the distributing company, but micro, small and medium-sized enterprises (as defined by the Commission Regulation n 800/2008 1 ) as well as collective investment undertakings referred to in Article L. 214-1, I of the Monetary and Financial Code (e.g. OPCVM, organismes de titrisation, SCPI, sociétés d épargne forestière, OPCI, sociétés d investissement à capital fixe) would be exempted from such additional contribution. The additional 3% contribution would apply on the aggregate amount of dividends and constructive dividends, less the portion of those distributions benefiting parent companies within the European Union, which are exempt from withholding tax under Article 119 ter of the French tax code or parent companies in France and eligible to the parent-subsidiary regime, in each case to the extent that the recipient company owns more than 10% of the share capital of the distributing company. The distributing company would have to pay the additional 3% contribution before the last day of the second month following that of payment. Similarly, French permanent establishments of foreign companies will be subject to an additional 3% branch tax assessed on their earnings repatriated to their head office. This new contribution would apply to distributions paid as from the publication of the law (expected to take place in the last days of July 2012). Increase in the financial transaction tax rate As indicated in our previous Tax Alert, the financial transaction tax ( FTT ) was introduced in March 2012 as part of the first Amended Finance Act for 2012. Under the provisions of Article 235 ter ZD of the French tax code, the tax targets transactions involving shares and certain instruments exchangeable for shares. While the taxable base remains unchanged, Article 6 of the draft Finance Bill plans on increasing the tax rate from 0.1% to 0.2% for transactions carried out as from 1 August 2012. In addition, the bill would correct an issue with the determination of taxable securities: the FTT applies, broadly to the acquisition of taxable securities issued by French companies which, as at 1 January of the year of the acquisition, had a market capitalisation in excess of EUR 1 billion. This, in practice, would have created significant uncertainty for trades in the first days of the month of January, since market operators would not necessarily have been in a position to determine quickly enough the list of relevant companies. The date at which the market capitalisation is appreciated has therefore been brought forward to 1 December of the year preceding the year of acquisition. This measure applies to transactions realised as from 1 January 2013. 1 The category of micro, small and medium-sized enterprises ( SMEs ) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. Paris Tax Alert / France to tax financial transactions 2

businesses Accelerated payment of the exceptional corporate income tax contribution Under the provisions of article 235 ter ZAA of the French tax code, and as from financial year 2012, companies subject to corporate income tax with a turnover exceeding EUR 250 million are liable for a temporary 5% contribution calculated on their corporate income tax charge and payable at the same time as the balance payment of corporate income tax (which must be paid no later than the 15 th of the fourth month following the end of the relevant fiscal year). Article 9 of the draft Finance Bill would require certain taxpayers, for fiscal years closed as from 31 December 2012, to make an advance payment of either 75% (if their turnover does not exceed EUR 1 billion) or 95% (if their turnover exceeds EUR 1 billion) of this contribution; this advance payment would need to be made at the same time as the last corporate tax instalment, which is 15 December for companies whose fiscal year coincides with the calendar year. employees participation schemes Stock-options and free shares Stock-options and free shares granted to employees may, under certain conditions, benefit from an exemption from the employer and employee social security contributions that otherwise apply to salaries and similar forms of compensation. These options and shares, however, are subject to two specific contributions: - A contribution due by the employer and payable within the month following the date of grant, amounting to 14% of, in the case of options, either their fair value under IFRS 2 or 25% of the value of the underlying shares at the date of grant and, in the case of free shares, 10 or 14% (depending on the aggregate value of the awards received) of the value of such shares; and - A contribution due by the employee, amounting to, in the case of options, 8% of the difference between the market value of the shares upon exercise and the exercise price, payable on the sale of the shares and, in the case of free shares, 2.5% or 8% (depending on the aggregate value of the awards received) of the value of such shares. This contribution is payable upon the sale of the shares. The Finance Bill would bring the rate of the contribution owed by employers from 14% to 30%, and the employee's contribution rate from 8% to 10% (unifying the rates for stock-options and for free shares). These very significant increases, which render stock-based incentives much less attractive from a tax and social security perspective, are consistent with President Hollande s announcement during the campaign that he would repeal stock-options. Other participation schemes Certain forms of employee incentive plans and instruments, such as mandatory profit sharing agreements (participation) and voluntary profit sharing agreements (intéressement) are exempt from social security contributions. To make up (partially) for this favourable regime, the payments made on such plans and instruments are subject to an 8% flat tax (forfait social). The Finance Bill would increase this tax to 20%. Paris Tax Alert / France to tax financial transactions 3

Anti-avoidance measures The Finance Bills includes a number of anti-avoidance measures aiming at cracking down on tax optimisation schemes. CFC rules Under the French CFC rules, broadly, French companies may be subject to corporate income tax in France on the (undistributed) profits realised by their controlled foreign subsidiaries ( CFCs ) when these subsidiaries are subject to a favourable tax regime. For CFCs located outside the European Union, a safe harbour clause discards the application of the French CFC rules to profits realised by CFCs that carry on locally a genuine commercial or industrial activity. However, where French tax authorities demonstrate that the CFC s profits are composed for more than 20% or 50% of passive income, the relevant CFC is deemed not to carry out an operational activity, subject to contrary evidence brought by the French parent company. In the 2009 Amended Finance Act, the French government already strengthened these French CFCs rules by shifting the burden of proof to the taxpayer for CFCs located in a so-called non-cooperative jurisdiction ( NCJ ). As a result, since 1 January 2010, they are deemed not to carry out operational activities subject to contrary evidence brought by the French resident company. In a similar vein, the draft Finance Bill intends to shift the burden of proof in respect of all companies based outside the European Union. Consequently, in order to benefit from the safe harbour clause in respect of non-eu CFCs, French resident companies will have to prove that the main effect of the transactions carried out by such CFCs is not to locate their profits in a country where they are subject to a favourable tax regime. This proof will be deemed satisfied when an effective trade or industrial business is carried out locally. This measure would apply to financial years closed as from 31 December 2012. Transfer of tax losses The Finance Bill introduces several measures to limit the transfer of tax losses in cases of restructurings and of changes of activity. First, the draft Bill strengthens the conditions under which a tax ruling can be obtained in order to enable tax losses and deferred interest of a merged company to be carried forward to the absorbing company. In particular, in addition to the already existing condition under which the absorbing company must carry on the activity from which the tax losses originated for at least three years, the Bill provides that this activity (i) must not have been subject to any significant change at the level of the merged company in terms of customers, employees, operational means, nature and volume of activity during the period in which the loss or interest were accrued and (ii) must not be subject to any such significant change at the level of the absorbing company during the 3-year period. The Finance Bill furthermore prevents the transfer of tax losses that originated from the management of shareholdings or of real estate assets. In practice, this exclusion therefore prevents the transfer of tax losses generated by holding companies. The same conditions would apply to the transfer of tax losses in case of merger of the parent company of a tax consolidated group. By contrast to current provisions, the Finance Bill provides that these conditions would have to be fulfilled both at the level of the absorbed parent company as well as at the level of the tax consolidated subsidiaries. Secondly, the Finance Bill enlarges the situations where changes of activity will be Paris Tax Alert / France to tax financial transactions 4

regarded as a cessation d activité (discontinuance of business), which results in the forfeiture of tax losses. A change of activity would be characterised in case of (i) the loss for more than 12 months of the production means required to carry on the business of the company, subject to certain exceptions, (ii) the adjunction of an activity entailing an increase over 2 years by more than 50% of the company s turnover or of its average number of employees and of the gross amount of its fixed assets or (iii) the transfer or termination of an activity entailing over 2 years a decrease by more than 50% of the above mentioned attributes. Derogations could however be obtained through specific tax rulings. These measures would apply to financial years closed as from 4 July 2012. Shell companies or so-called coquillards The Finance Bill also buttresses the anti-avoidance measures previously introduced by the 2011 Finance Act for 2011 that target tax optimisation schemes implying shell companies, or so-called coquillards. The Finance Bill includes provisions that prevent the deduction at the level of a parent company of tax losses (such as for e.g. capital losses or provisions for depreciation) incurred in respect of a shell subsidiary, where such tax losses result from previous dividend distributions made by the shell subsidiary under the French participation exemption regime. These measures would apply to financial years closed as from 4 July 2012. Contacts For further information please contact: Edouard Chapellier Partner - Tax (+33) (0)1 56 43 59 42 edouard.chapellier@linklaters.com Thomas Perrot Partner - Tax (+33) (0)1 56 43 57 84 thomas.perrot@linklaters.com Cancellation of financial debt The Finance Bill further prevents tax deductibility of any subsidies granted by a French company to its subsidiaries, with the exception of commercial subsidies. This measure would notably prevent any tax deduction in respect of the cancellation of financial debt, by contrast to current provisions under which a tax deduction is available up to the negative net equity position of the relevant subsidiary. This measure aims at preventing companies from financing their subsidiaries through debt rather than equity. This measure would apply to financial years closed as from 4 July 2012. individuals Income from real estate properties realised by non-residents Individual taxpayers who are not fiscally domiciled in France are generally subject to personal income tax in France on their French-source real estate income (rental income derived from property situated in France or capital gains realised on the sale of French real property) but they are currently outside the scope of social contributions such as CSG (contribution sociale généralisée) or CRDS (contribution pour le remboursement de la dette sociale), which only apply to French residents. Article 25 of the Finance Bill would align the treatment of non-residents with that applicable to French residents by subjecting the former s rental income and capital gains on real estate to social contributions at an aggregate rate of 15.5%. Authors: Edouard Chapellier, Thomas Perrot, Clémentine Giannini, Jonathan Abensour This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2012 - Please refer to www.linklaters.com/legalnotices for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters and for other marketing and business communications. We use your contact details for our own internal purposes only. You have a right of access to, and rectification of, all information relating to you. Should you wish to exercise these rights, please let us know by emailing us at marketing.paris@linklaters.com. If you no longer wish to receive this newsletter or other marketing communications or if you wish to be removed from the list, please let us know by emailing us at marketing.paris@linklaters.com. Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the nonmembers who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk 25 rue de Marignan 75008 Paris Telephone (+33) 1 56 43 56 43 Facsimile (+33) 1 43 59 41 96 Linklaters.com Street, London EC2Y 8HQ, England or on www.linklaters.com. A15236383 Paris Tax Alert / New French Government Releases Draft Finance Bill 5