Paris Tax Alert. France to tax financial transactions.

February 2012 Paris Tax Alert. France to tax financial transactions. As announced by French President Nicolas Sarkozy on 29 January 2012, the French government plans to introduce a tax on certain financial transactions, effective 1 August 2012. In that respect, draft provisions have been adopted by the French Government on 8 February 2012 (the Bill ) and will be discussed in the coming days by the Assemblée nationale and the Sénat. While pursuing objectives similar to those set out in the draft Directive presented by the European Union Commission on 28 September 2011, the French financial transaction tax (the FTT ) is not as broad as the tax envisaged by the European Union. In particular, the FTT would apply only to securities issued by French companies with a market capitalisation of at least EUR 1 billion, and only shares and equity-linked securities would be taxable. The main features of the FTT in their current form are described below. The FTT provisions addressed in the Bill are however still at a very preliminary stage. Amendments and precisions should be expected during parliamentary discussions and we are working with professional organisations to suggest possible amendments to the French Parliament. Contents The Financial Transaction Tax... 1 Scope of the Tax... 1 Taxable Persons and Payment... 2 Entry into Force... 3 High Frequency Trading. 3 Credit Default Swap... 4 In addition to the FTT, the Bill introduces a tax on high frequency trading carried out in France and another tax on credit default swaps which refer to debt obligations of EU Member States. The Bill would also repeal, as from 1 August 2012, the recently enacted amendments to the French transfer tax levied on acquisitions of shares (the Transfer Tax ) (See our Tax Alert of 16 December 2011). The French tax authorities also issued today a ruling providing some clarification on the scope of these newly enacted amendments for transactions carried out during the interim period. The Financial Transaction Tax Scope of the Tax The FTT would apply to purchases of shares and other equity-linked instruments (i.e., transferable securities giving access to capital or voting rights (titres de capital, as defined under Article L. 212-1 A of the French Financial and Monetary Code), that are admitted to trading on a French or Paris Tax Alert / France to tax financial transactions 1

foreign regulated or recognised market and issued by companies having their registered seat in France, whose market value exceeds EUR 1 billion as at 1 January of the relevant taxable year (the Taxable Securities ). Accordingly, the FTT would not be limited to acquisitions of shares but would also apply to convertible and exchangeable bonds, share warrants or similar financial instruments. Bonds or other debt instruments which track the performance of equity securities issued by a French company would however not be subject to the FTT so long as they are not physically settled. Securities not governed by French law are also in the scope of the FTT. The tax would apply to any transfer of ownership for consideration including in particular purchases under the form of exercise of an option, forward sales, exchanges or subscription of financial instruments in consideration for contributions in kind. The following transactions would however not be subject to the FTT: > Issues of shares: purchases of Taxable Securities in the context of the issue of such securities, including where the securities are placed by banks under an underwriting agreement or a placement agreement on a firm commitment basis; > Clearing activities: transactions carried out by clearing houses or by a central depositary in the course of their regulated activities; > Market-making activities: market-making activities carried out by French or foreign investment companies, credit institutions or by enterprises members of trading venues or multilateral trading facilities, where they act as intermediaries; > Liquidity agreements: transactions carried out on behalf of issuers in order to enhance liquidity over their shares in the framework of market practices accepted by the Autorité des marchés financiers; > Intra-group transactions: purchases of Taxable Securities carried out between companies of the same legal group (as defined under Article L. 233-1 of the French Commercial Code) or same consolidated tax group; > Temporary transfers: securities financing transactions such as stock lending, repurchase or buy-sell-back transactions; > Management and employee buy-outs, and certain reorganisations that benefit from the related French favourable tax regime under Articles 210 A and 210 B of the French tax code. Taxable Persons and Payment The tax would be levied on the value of the Taxable Securities, at the rate of 0.1%. It would be due either by the investment services provider having executed the relevant order or negotiated on its own account, irrespective of its business location or in the absence of such an investment services provider Paris Tax Alert / France to tax financial transactions 2

by the institution in charge of custody and management services in relation to the Taxable Securities. The tax applies irrespective of whether the seller, the purchaser or the investment services provider is established in France or not the only required nexus to France is that the Taxable Security itself be issued by a French company. The practical implications of these rules are accordingly farreaching and their enforcement will certainly prove challenging for the French tax authorities. Where the relevant central depositary is subject to Article L.621-9 II-3 of the French Monetary and Financial Code (i.e., subject to the regulation by the French AMF this principally targets Euroclear France), it would generally be responsible for the collection of the FTT with the relevant taxpayer and its declaration and payment to the French tax authorities prior to the 15th of the month following the month of acquisition. Where the relevant central depositary is not subject to these provisions, the taxpayer (i.e., the investment services provider) would be responsible for the payment and reporting of the FTT within the same time limit. In order to enable the central depositary to comply with its obligations in respect of the FTT, the Bill imposes information requirements to be provided to it by the relevant parties to the financial transaction. This information would have to be provided prior to the 5th of the month following the month of acquisition. These information requirements would be set out in more detail in a decree to be adopted at a later stage. The failure to comply with these information requirements or payment obligations in respect of the FTT would carry specific penalties and late payment interest to be borne by the person failing to its reporting or payment obligations. Entry into Force The FTT would apply to purchases of Taxable Securities carried out as from 1 August 2012. High Frequency Trading The Bill also introduces a tax on certain high frequency trading activities. This tax would apply to French and foreign companies carrying on high frequency trades in France over shares and securities giving access to capital or voting rights where the number of orders cancelled or amended during a relevant day exceeds a certain threshold (to be set out by a coming decree without being lower than two thirds of the orders submitted by the relevant company). This tax would be equal to 0.01% of the amount of the cancelled or amended orders exceeding this threshold. Market making activities would however be exempt. Paris Tax Alert / France to tax financial transactions 3

The tax would be declared and paid to the French tax authorities prior to the 10 th of the month following the month of acquisition. It would apply to orders cancelled or modified as from 1 August 2012. Credit Default Swap Another tax would be introduced on purchases of credit default swaps (CDS) and similar derivatives over EU Member States. It would be due in respect of acquisitions made by French resident individuals, enterprises carrying on activities in France or any legal entity established or incorporated in France (which would include French banks, whether acting from France or from foreign branches, as well as French branches of foreign banks) where the beneficiary of the CDS does not hold a long position over the relevant State s debt or does not hold assets or undertakings whose value is correlated to that of this debt. Again, market making activities would be exempt. The tax would be equal to 0.01% of the notional amount of the CDS and would be declared and paid upon the filing of the taxpayer s VAT returns. It would apply to CDS entered into as from 1 August 2012. Amendments to the Transfer Tax on the Sale of Shares Following the adoption of the 2012 Finance Act (no. 2011-1977) dated 28 December 2011, the Transfer Tax applicable to the sale for consideration of shares and interests in the capital of French companies, codified under Article 726 of the French tax code, had been substantially amended. Broadly: > the territorial scope of the Transfer Tax had been extended to include sales of French shares where the contract evidencing the transfer is executed outside France (this was only relevant for shares in listed companies); > the tariff of the tax had been increased for sales of shares in joint-stock companies (actions): whereas the rate was previously 3% with a cap of EUR 5,000 per sale, the 2012 Finance Act increased it to (i) 3% for the portion of the purchase price not in excess of EUR 200,000, (ii) 0.5% for the portion of the purchase price between EUR 200,000 and EUR 500,000,000, and (iii) 0.25% for the portion of the purchase price in excess of EUR 500,000,000. The cap was also repealed. For shares listed on a regulated financial market within the meaning of Article L. 421-1 of the French financial and monetary code admitted to a multilateral trading facility within the meaning of Article L. 421-1 of the French financial and monetary code, the Transfer Tax applies only where the sale of shares is evidenced by a contract (acte), that is, a written instrument, or a combination Paris Tax Alert / France to tax financial transactions 4

of written instruments, that can be used against the parties to evidence the transfer of the shares. Such a broad and vague concept, combined with the change in territorial scope and increase in rates, stirred considerable concerns among market participants. This led the representative bodies for banks and professionals working in the securities industry and financial markets in France to seek clarification on the scope of this Transfer Tax from the tax authorities. A ruling (no. 2012/07 (ENR)) published on 9 February 2012 addresses some of these concerns by confirming that temporary transfers of shares (transfers of shares as collateral under Articles L. 211-38 et seq. of the Monetary and Financial Code, stock-lending or borrowing transactions effected under Articles L. 211-22 et seq. of the Monetary and Financial Code, and repos) should not be regarded as taxable transfers. The same applies to dividends paid by way of issuance of shares. The tax authorities, however, have not clarified the treatment applicable to many other trades in listed shares. Contacts For further information please contact: Edouard Chapellier Partner - Tax (+33) (0)1.56.43.59.42 edouard.chapellier@linklaters.com Thomas Perrot Counsel - Tax (+33) (0)1.56.43.57.84 thomas.perrot@linklaters.com The amounts at stake, fortunately, should be reduced significantly since the Bill presented on 8 February 2012 provides that the amendments introduced by the 2012 Finance Act (in particular the increase in applicable rates) will be repealed with effect as from 1 August 2012. The Transfer Tax applicable as from that date will accordingly be capped at EUR 5,000 per transfer. Authors: Edouard Chapellier, Thomas Perrot, Clémentine Giannini 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 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. 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 non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this 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.database@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.database@linklaters.com A14569282 25 rue de Marignan 75008 Paris Telephone (+33) 1 56 43 56 43 Facsimile (+33) 1 43 59 41 96 Linklaters.com Paris Tax Alert / France to tax financial transactions 5