Tax on corporate transactions in France: overview

A Q&A guide to tax on corporate transactions in France.

This Q&A provides a high level overview of tax in France and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

The Q&A is part of the PLC multi-jurisdictional guide to tax on corporate transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Sébastien de Monès and Marion Méresse, Bredin Prat
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

Since 2008, the French authority responsible for enforcing taxes is the Public Finance Directorate (Direction Générale des Finances Publiques (DGFiP)), following the merger of the former Tax Directorate (Direction Générale des Impôts) and the Public Accounting Directorate (Direction Générale de la Comptabilité Publique).

The DGFiP comprises different departments with national authority, such as the Large Businesses Department (Direction des Grandes Entreprises (DGE)) which is responsible for the taxation of companies with a turnover exceeding EUR400 million and their subsidiaries, and the National and International Tax Audits Department (Direction des Vérifications Nationales et Internationales (DVNI)) which is in charge of the tax audits of large companies (as at 1 March 2012, US$1 was about EUR0.7). The Tax Legislation Department (Direction de la Législation Fiscale (DLF)) prepares tax legislation and regulations and issues administrative guidelines.

Excise duties on alcohol, tobacco and oil products or other customs duties are collected by the Customs and Indirect Duties Directorate (Direction Générale des Douanes et Droits Indirects).

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

It is generally possible for taxpayers to submit a written request to the French tax authorities to obtain confirmation of the tax treatment applicable to a specific factual situation or transaction. The tax authorities' written approval (called a rescrit) is binding provided that certain conditions are met. Some such rulings are published by the French tax authorities and available online.

The French tax authorities can also be consulted through specific tax ruling procedures. For example:

  • Before completing a transaction, taxpayers can submit a written request to obtain confirmation that the contemplated transaction is not regarded as an abuse of law. If the tax authorities do not answer within six months, the abuse of law procedure will not be applicable with respect to this transaction.

  • Foreign taxpayers can submit a written application fully and precisely describing their factual situation to obtain confirmation that the activities they carry out in France do not constitute a permanent establishment or a fixed place of business within the meaning of the tax treaty between France and their country of residence (confirmation is deemed to be obtained if the tax authorities do not answer within three months).

Moreover, taxpayers must obtain specific rulings before completing certain corporate reorganisations.

In particular, a ruling is necessary in order for business contributions made to foreign companies (and for business contributions and demergers/spin-offs when all the conditions to benefit from the favourable tax regime are not in fact fulfilled) to benefit from the preferential tax treatment applied to mergers. In those situations, the ruling is granted by right by the French tax authorities, provided that both:

  • The transaction is for valid economic reasons and not intended merely for tax fraud or avoidance reasons.

  • The terms and conditions of the transaction ensure the future taxation in France of any deferred capital gains.

A prior ruling must also be obtained to transfer the tax-loss carry-forwards of a merged company to its absorbing company when the merger (or transaction treated as such) benefits from the favourable tax regime.

Finally, French or foreign companies can conclude advance pricing agreements with the French tax authorities on the method to be used for pricing their future intra-group transactions.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Registration duties

Some corporate transactions and transfers of shares or certain assets give rise to registration duties, which apply to the transfer price or to the fair market value (whichever is higher) at a fixed, progressive or proportional rate, depending on the transaction.

Registration duties are generally paid by the transferee when the transfer deed is presented for registration with the relevant tax office.

Sales of equity securities. The following registration duties are payable:

  • On transfers of shares classed as actions, unless they qualify as shares in non-listed real estate companies. This is charged at:

    • 3% for the portion of the sale price below EUR200,000;

    • 0.5% for the portion between EUR200,000 and EUR500 million;

    • 0.25% for the portion exceeding EUR500 million.

    No registration duties are due on transfers of shares of listed companies when no deed has been drawn up for the transfer.

  • On transfers of shares classed as parts sociales, unless they qualify as shares in non-listed real estate companies, the charge is 3%. For the calculation of the tax basis, a rebate equal to EUR23,000 divided by the total number of shares is applied to the value of each transferred share. Registration duties are due even if no deed has been drawn up for the transfer.

  • On transfers of interests in non-listed real estate companies (sociétés à prépondérance immobilière, that is, companies investing predominantly in real property), regardless of the legal status of the company, the charge is 5%.

The aforementioned rates apply to sales of equity securities occurring as from 1 January 2012. Previously, share disposals described in the first bullet point were taxed at 3% capped at EUR5,000 per sale. However, the current scale of graduated rates will be replaced by a single rate of 0.1% for sales occurring after 1 August 2012 (see Question 35).

Except for sales of shares issued by non-listed real estate companies, no registration duties are applicable to:

  • Acquisitions of shares under certain share buyback plans or as part of share capital increases.

  • Acquisitions of shares of companies subject to safeguard (sauvegarde) or court-supervised recovery (redressement judiciaire) procedures.

  • Acquisitions of shares where the selling company is part of the same tax consolidated group as the acquiring company (as from 1 August 2012, this exemption will be extended to acquisitions between companies within the same controlled group).

  • Transactions subject to Article 210 B of the French Tax Code (favourable tax regime for business contributions).

Other transfers. Transfers of businesses (fonds de commerce), clientele and similar transfers are generally taxed as follows:

  • 3% for the portion of the sale price up to EUR200,000 after the application of a rebate of EUR23,000.

  • 5% for the portion exceeding EUR200,000.

Regarding transfers of real estate assets located in France, a 5.09% rate duty is applied, plus notaries' fees and a 0.1% specific duty (land registry fee). However, in certain cases, these transfers can be subject to a reduced rate of 0.715% if they are subject to VAT (for instance, transfers of newly-constructed buildings completed within the last five years).

Other corporate transactions. Share capital increases or reductions, mergers, demergers/spin-offs or business contributions are generally subject to a fixed registration duty of EUR375 or EUR500, depending on whether the company's capital is less or more than EUR225,000.

Notaries' fees

Notaries' fees are generally due when deeds are drawn up before, or filed with, a notary (used mainly for transfers of real estate assets in practice).

Notaries' fees apply at a fixed, progressive or proportional rate, depending on the transaction. The amounts of certain fees are specified by law. For instance, in case of real estate transfers, the fees are 0.825% of the portion of the price exceeding EUR60,000. If the fees exceed EUR80,000, they can be negotiated for the portion of those fees exceeding this threshold.

Notaries' fees are also subject to VAT at the standard rate.

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporate income tax (CIT)

In France, CIT is based on a territoriality principle meaning that only profits generated by businesses/enterprises operated in France are liable to CIT (see Question 7).

The taxable income is calculated on the basis of the accounting statutory net income of the company, subject to specific adjustments for tax purposes.

The standard CIT rate is 33.33%, to which a 3.3% social contribution is added for companies whose liability to CIT exceeds EUR763,000.

In addition, for tax years ended or ending between 31 December 2011 and 30 December 2013, companies with an annual turnover exceeding EUR250 million are subject to an exceptional contribution of 5% on the gross amount of their CIT. As a result, the effective CIT rate is 34.43% for most companies and 36.1% for those subject to the new exceptional contribution.

Special rates apply for long-term capital gains (see below).

Companies are exempt from the 3.3% social contribution and benefit from a reduced CIT rate of 15% on their taxable profits below EUR38,120 provided the following conditions are met:

  • They have an annual turnover of less than EUR7.63 million.

  • At least 75% of the company's fully paid-up share capital is held by either:

    • individuals; or

    • companies meeting the same conditions in terms of turnover and percentage of paid-up capital held by individuals.

French tax law provides for a number of temporary CIT exemptions if certain conditions are met, in particular for certain newly-created companies or companies established in certain parts of the French territory.

CIT is prepaid in four instalments (15 March, 15 June, 15 September and 15 December), which are assessed on the previous financial year's taxable income, subject to specific provisions for the first instalment. The balance, if any, is due by the 15th day of the fourth month following the closing date of the tax year.

Capital gains

Capital gains are generally deemed to be ordinary income and therefore subject to CIT at the standard rate, except for the capital gains mentioned below.

Under the participation exemption regime, capital gains on the disposal of certain portfolio shares considered as equity securities held as long-term investments (titres de participation) for tax purposes, when held for at least two years, are exempt from CIT, except for a 10% recapture of the net capital gains (which is taxed at the standard rate of CIT), resulting in an effective taxation of 3.44% or 3.61% (depending on the company's turnover).

A specific tax regime applies to capital gains on the disposal of shareholdings in real estate companies (sociétés à prépondérance immobilière):

  • Capital gains on shares of listed real estate companies which can be considered as titres de participation for tax purposes are subject to a 19% capital gains tax.

  • Capital gains on shares of non-listed real estate companies are subject to the standard CIT rate.

Finally, a reduced 15% rate applies to:

  • Capital gains on disposals of shareholdings in certain venture capital mutual funds and investment companies (Fonds Commun de Placement à Risques (FCPRs) or Sociétés de Capital Risque (SCRs)), provided that these shareholdings have been held for at least five years.

  • Income deriving from the licensing or sale of patents, patentable inventions and industrial manufacturing processes under certain conditions.

The aforementioned reduced rates do not apply to disposals of shares in companies established in a Non-Cooperative State or Territory (NCST), as defined by Article 238-0 A of the French Tax Code (a list of these states or territories is drawn up each year by the French tax authorities).

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

Value added tax (VAT)

All goods supplied and services provided in France in the course of an economic activity which are carried on independently and for valuable consideration are generally subject to VAT. Intra-EU imports and acquisitions are also subject to VAT in France if this is where the transaction takes place.

Exports and intra-EU deliveries and similar transactions are generally exempt from VAT provided that certain conditions are met. There are various other VAT-exempt transactions that are subject to certain conditions being met, the main exceptions being:

  • Insurance and reinsurance operations.

  • Certain banking and financial transactions.

  • Medical and paramedical activities.

  • Transfers of assets as a whole (universalité totale ou partielle de biens).

The standard VAT rate is 19.6%. However, as from 1 October 2012, this rate will be raised to 21.2%. Reduced rates (7%, 5.5% or 2.1%) also apply to certain products and services (for example, food, books, press publications or medicines). Specific rates apply in Corsica and in the overseas départements (Guadeloupe, Martinique, La Réunion).

As a general rule, as VAT must ultimately be borne by the end customer, the amount of VAT due to the Treasury by every intermediary (sellers of goods or providers of services) is equal to the amount of VAT collected from its customers, after deduction of the VAT paid to its own suppliers for goods and services acquired in the course of its business.

Persons liable to VAT must comply with certain obligations, for example, issuing invoices showing, among other things, the VAT identification number of the seller or service provider, the price excluding VAT and the rate and amount of VAT.

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

There are usually no further taxes payable on corporate transactions.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

CIT

Under the CIT territoriality principle, only profits generated by businesses/enterprises operated in France are subject to CIT in France. A company is usually deemed to be engaged in a business in France if it carries on business operations there, whether:

  • Through an autonomous and permanent establishment.

  • Through dependent representatives.

  • It conducts a complete business cycle in France.

As a result, foreign companies are generally liable to French CIT when they are deemed to be engaged in a business in France, subject to the provisions of any applicable double tax treaties.

Conversely, French companies carrying on business outside France are generally not subject to CIT in France on the related profits and cannot deduct the related losses. However, under French controlled foreign corporation (CFC) rules, if French companies subject to CIT carry on business in jurisdictions where they are subject to a low tax regime (that is, a regime under which the tax effectively paid is at least 50% lower than the tax which would have been paid in a similar situation if established in France), or hold, directly or indirectly, more than 50% of a foreign entity subject to such a low tax regime, profits generated by those businesses or entities are subject to CIT in France. The participation threshold is reduced to 5% in certain situations. These CFC rules do not apply:

  • To entities established in EU countries unless the scheme is artificial and intended to avoid French tax legislation.

  • To profits derived from an industrial or commercial activity effectively operated in the low tax jurisdiction, subject to certain conditions.

Capital gains on sales of French assets by foreign companies

Capital gains on shareholdings in French companies liable to CIT are subject to CIT under the normal rules if they are held through a French branch of a foreign company. Otherwise, they are usually subject to a 19% CIT rate, but only if the foreign company holds more than 25% of the French company's capital at the time of the sale or at any time during the five years preceding the sale, subject to the provisions of double tax treaties. Under certain conditions, if the foreign company is an EU-resident, it can claim a reimbursement of the part of the tax exceeding the amount of CIT which would have been payable, had the company been a French resident. A 50% rate applies to any capital gains (irrespective of the ownership percentage in the French company) on the sale of shares in French companies by companies located in a non-cooperative state or territory (NCST).

A 33.33% tax is generally levied on capital gains generated by foreign companies (50% if located in a NCST) on the disposal of French real estate assets or shareholdings in French real estate companies, provided that certain conditions are met, subject to the provisions of double tax treaties. That 33.33% tax can be credited against the amount of CIT (if any) due by the foreign company on these capital gains.

Withholding taxes

Certain payments made by French companies to foreign companies (provided that they are not attributable to a French permanent establishment of the foreign companies) may be subject to withholding taxes in France, which may be reduced or eliminated under the provisions of applicable double tax treaties. The main withholding tax rates are 30% on dividends (see Question 8) and 33.33% on royalties. If the recipient is located in a NCST, these rates are increased to 55% and 50%. No withholding tax is generally levied on interest paid to foreign companies, except for interest payments made outside France in a NCST, which are subject to a 50% withholding tax, unless the French company proves that the main purpose and effect of the transaction is not to transfer income into a NCST.

Branch withholding tax

The after-tax profits of foreign companies' French branches are deemed to be distributed abroad, and are therefore generally subject to a 30% branch withholding tax (55% for NCSTs), which may be reduced or eliminated under the provisions of applicable double tax treaties. The tax is not levied on branches of EU-resident companies, provided that they are subject to corporate income tax in their home countries without the possibility of opting-out or of an exemption.

Registration duties

Registration duties generally apply to foreign companies in relation to transfers described in Question 3, subject to the following:

  • Sales of shares in French companies (whether actions or parts sociales), which are evidenced through a deed executed outside France, are subject to registration duties in France.

  • Disposals of shares of foreign companies evidenced through a deed executed in France are subject to registration duties in France. If the foreign company is a non-listed real estate company, registration duties are due even if the disposal of its shares is evidenced through a deed executed outside France.

VAT

Liability to VAT in France depends on where the delivery of goods is deemed to take place, irrespective of the nationality or residence of the supplier. For the supply of services, the liability to VAT in France depends on either:

  • The place where the supplier is established or has a fixed establishment (B to C).

  • The place where the client is established or has a fixed establishment (B to B).

  • For some specific items, where the services are deemed to be supplied.

For the above points, VAT applies if the place is located in France.

Accordingly, foreign companies may be required to register for VAT in France if they supply goods and services in France.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

No withholding tax is levied on dividends paid by French companies to French-resident shareholders. However, dividends are subject to CIT at the standard rate, unless the parent-subsidiary regime applies. Under this regime, dividends are 95% exempt from CIT (resulting in an effective tax rate of 1.72% or 1.81%, depending on the company's turnover), provided that the recipient has held at least 5% of the distributing company's capital for at least two years.

A 30% withholding tax is generally levied on the gross amount of dividends paid by French companies to non-resident shareholders (55% for dividends paid outside of France in a NCST) but this may be reduced or eliminated under any applicable double tax treaties.

Under Article 119ter of the French Tax Code (which has incorporated the provisions of Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive) no withholding tax applies on dividends paid by a French subsidiary subject to CIT to its qualifying EU-parent company, if the latter has held continuously (or has undertaken to hold) at least 10% of the subsidiary's capital for at least two years, provided that:

  • The beneficiary is not ultimately controlled by non-EU companies.

  • If ultimately controlled by non-EU companies, the main reason for the structure is not to take advantage of the withholding tax exemption.

Additionally, under administrative guidelines issued under the Denkavit ECJ decision (ECJ 14 December 2006, Case C-170/05, Denkavit International BV), dividends distributed by a French subsidiary to its EU-parent company are exempt from withholding tax if the parent company has held at least 5% of the subsidiary's share capital for at least two years, subject to certain conditions.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

CIT

These transactions give rise to capital gains taxation at the level of the selling company. Unless they qualify for the participation exemption regime, these capital gains are subject to CIT (see Question 4).

If the selling company is a foreign entity, see Question 7.

Registration duties

Share transfers generally trigger registration duties. The applicable tax treatment depends on the nature of the shares sold (see Question 3).

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

CIT

Capital gains qualifying for the participation exemption regime are 90% exempt from CIT under certain conditions (see Question 4).

Registration duties

Some exemptions are available (see Question 3). In addition, if no deed is executed, registration duties are not payable on the sale of shares in a listed French company (see Questions 3 and 7).

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

Frequently, registration duties on share acquisitions are lower than those triggered by asset transfers (however, a comparison of the specific registration duties should be made for each transferred asset).

The target company will generally be able to offset its future profits against its tax losses (if any), which are not disallowed through a change of control.

Under French tax rules, acquisition costs (for example, banking or adviser fees and registration duties) triggered by share disposals are normally deductible for tax purposes over a five-year period, even if they could be incorporated into the acquisition price for accounting purposes. However, please note that acquisition costs on the acquisition of assets are also usually deductible.

Disadvantages

Except for specific situations (for example, notably when a look-through partnership is acquired), share acquisitions do not allow a step-up in the tax basis of the target company's assets, which can lead to:

  • Taxation at exit on the latent capital gains if these assets have to be resold in the future.

  • Loss of deduction of capital allowances if the target company's assets are depreciable.

  • Loss of deduction of possible depreciation if provisions have to be booked in the future against the target company's shares and if such shares qualify for the 90% CIT exemption available under the participation exemption regime (see Question 4).

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

Capital gains qualifying for the participation exemption regime are 90% exempt from CIT under certain conditions (see Question 4).

Disadvantages

The disposal of shares of a target company belonging to a French tax-consolidated group results in the exit of the target company from that tax group and may therefore trigger exit costs.

The CIT and VAT treatment of costs triggered by the disposal of shares is usually less favourable than the CIT and VAT treatment of costs incurred by an asset disposal.

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

Structure used by buyers

When the share acquisition is debt-financed, buyers usually use a special purpose French holding company as an acquisition vehicle, with a view to forming a tax-consolidated group with the target company in order to offset the interest payments made by the holding company against the future operating profits of the target company.

However, some restrictions to the deduction of interest expenses must be taken into account, such as:

  • The general French thin-capitalisation regime.

  • The "Charasse Amendment" rule. Under this rule, where a French company acquires from a controlling company the shares of a French target company which is then included in the acquiring company's tax consolidated group, a fraction of the interest expenses incurred by all tax group members is disallowed for tax purposes.

  • The new "Carrez Amendment" rule, which limits the deductibility of interest expenses incurred by a French acquiring company for the purposes of the acquisition of shares qualifying for the participation exemption regime, unless the acquiring company demonstrates that it both:

    • actually makes decisions relating to the acquired shares;

    • exercises control or an influence over the target company.

Structure used by sellers

If the sale is construed as a share-for-share exchange, a specific tax roll-over regime may be available under certain conditions (see Question 26).

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

CIT

Capital gains triggered by these transactions are generally taxed at the standard CIT rate (see Question 4).

Registration duties

The amount of registration duties payable depends on the type of asset sold. Notaries' fees are also due on real estate transactions (see Question 3).

VAT

Asset disposals are usually subject to VAT. However, transfers of assets as a whole (universalité totale ou partielle de biens) are generally VAT exempt, subject to certain conditions.

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

No particular exemptions/reliefs are generally available, except for the VAT exemption for transfers of assets as a whole (see Question 14).

With respect to CIT, exemptions may be available under the favourable tax regimes applicable to certain company reorganisations, subject to certain conditions (see Question 26, Contributions of businesses).

Specific rules apply if the asset disposal is made between companies belonging to the same tax consolidated group.

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The sale triggers a step-up in the tax basis of the acquired assets. Consequently, if those assets are depreciable, the buyer can generally benefit from a full deduction of tax allowances.

Disadvantages

Registration duties and ancillary transfer costs are usually higher than those triggered by a share disposal.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

Gains triggered by the asset disposal can be offset against outstanding tax losses available at the level of the selling entity or at the level of its tax consolidated group.

Disadvantages

Gains are generally fully subject to CIT as no exemption is usually available.

In addition, depending on the factual circumstances, asset disposals can lead to a total or partial cessation of business activity or to a change of activity, which may result in adverse tax consequences, notably with respect to outstanding net operating losses (NOLs).

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

With respect to transfers of businesses, an alternative structure may involve both:

  • Contributing the business activities to a newly-created company (newco).

  • Selling newco's shares, rather than the business activities themselves.

Consequently, registration duties are calculated on the basis of the graduated rates described in Question 2 instead of being equal to 3% or 5% of the business' market value.

However, careful attention should be paid in implementing this type of structure as it has already been considered as abusive in some specific circumstances by case law.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

Corporation tax

If not subject to the favourable tax regime (see Question 20), a merger has the same tax consequences as a cessation of business activity, that is, CIT on:

  • The ordinary profits not yet taxed.

  • The recapture of outstanding provisions.

  • Latent capital gains on the assets of the merged company.

Furthermore, at the level of the merged company's shareholders, the merger may trigger a merger profit (boni de fusion), which is taxed as distributed income.

Outstanding NOLs of the merged company cannot generally be transferred to the merging company.

Registration duties

A merger generally triggers registration duties at a fixed amount (EUR375 if the merging company's share capital is below EUR225,000 following the merger, and EUR500 in other cases), which must be paid by the merging company within one month from completion of the transaction.

The transfer of the merged company's real estate assets may trigger a specific duty (land registry fee) equal to 0.1% of the real estate assets' market value. Usually, notaries' fees are also due.

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

French companies can apply for the favourable tax treatment available under Article 210 A of the French Tax Code, which provides for the tax-neutrality of the transaction if the following conditions are met:

  • The companies involved in the merger are subject to CIT.

  • The merged company must transfer all its assets and liabilities to the merging company.

  • In consideration for the transfer, the merged company's shareholders receive shares in the merging company and, as the case may be, a cash payment not exceeding 10% of the nominal value of the shares received.

With respect to cross-border mergers, the favourable tax regime is only applicable if a prior ruling has been granted by the French tax authorities (see Question 2).

Under the favourable tax treatment, the aforementioned taxes (see Question 19) can be avoided to the extent that the merging company undertakes, in the merger agreement, to:

  • Assume in its own balance sheet the merged company's provisions.

  • Compute the capital gains which may be realised on a subsequent transfer of non-depreciable assets by reference to the tax value these assets had in the merged company's balance sheet.

  • Add-back the capital gains generated by the transfer of depreciable assets to its own taxable profits over a five-year period (15 years for gains arising from real estate).

  • Assume at its own level the tax value of the non-fixed assets.

In order to avoid the loss of outstanding NOLs (see Question 19), a specific ruling can be sought, subject to specific conditions (see Question 2).

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

The parties usually try to qualify for the favourable tax regime (see Question 20).

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

No specific tax regime governs JVCs under French tax law.

However, depending on the way the JVC is structured and the economic features of the contemplated transaction, the rules applicable to share or asset disposals and to contributions of businesses may be applied (see Questions 10, 15 and 26).

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?
 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?
 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Share or asset disposals

See Questions 9 and 14.

Mergers

See Question 19.

Contributions of businesses

If not subject to the favourable tax regime (see Question 26), contributions of businesses generally trigger the same consequences with respect to CIT as asset disposals (see Question 14).

In certain circumstances, contributions of businesses may lead to a total or partial cessation of business activity or to a change of activity, which may result in adverse tax consequences, notably with respect to outstanding NOLs.

Registration duties

If no liabilities are transferred and provided that the consideration is limited to the issuance of shares in the beneficiary company, only registration duties at a fixed amount are generally triggered (see Question 19).

However, if liabilities are transferred, the transfer would be treated as valuable consideration up to the amount of the liabilities transferred and therefore subject, on this portion of the consideration, to the registration duties applicable to asset disposals (see Question 14).

Demergers/spin-offs

If not subject to the favourable tax regime (see Question 26), demergers/spin-offs trigger the same consequences with respect to CIT as asset disposals (see Question 14).

At the level of the demerged company's shareholders, a possible demerger profit (boni de liquidation) may be taxed as distributed income.

Registration duties

See above, Contributions of businesses.

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

Share or asset disposals

See Questions 10 and 15.

Mergers

See Question 20.

Contributions of businesses

When a company transfers part of its assets and liabilities to another company in exchange for shares, that transfer can benefit from the favourable tax regime available for mergers, provided that:

  • The transfer relates to an autonomous and complete business division.

  • The contributing company undertakes both:

    • to keep the shares received in exchange for the transfer for at least three years;

    • to calculate the capital gains which will arise on a subsequent sale of these shares by reference to the tax value the transferred assets had at its own level.

In short, an autonomous and complete business division is a set of assets and liabilities of a company's business which is able to operate independently. A contribution of shares can be treated as a transfer of an autonomous and complete business division if the transferred shares represent a shareholding of more than 50% (and even less in certain situations) in the capital of the company whose shares are transferred, subject to certain conditions.

If one of the aforementioned conditions is not met, the benefit of the favourable tax regime is subject to a prior ruling from the French tax authorities (see Question 2).

Demergers/spin-offs

The favourable tax regime described above generally applies to demergers/spin-offs provided that both:

  • The demerged company has at least two autonomous and complete business divisions and each beneficiary company receives at least one business division.

  • All shareholders of the demerged company holding at least 5% of the voting rights in this company undertake to hold the shares in the beneficiary companies for at least three years, provided that the voting rights held by those shareholders represent together at least 20% of the demerged company's capital.

If one of these conditions is not met, the benefit of the favourable tax regime is subject to a prior ruling from the French tax authorities (see Question 2).

 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?

Share or asset disposals

See Questions 13 and 18.

Mergers

See Question 21.

Contributions of businesses

Companies usually try to qualify for the favourable tax regime described above (see Question 26).

Demergers/spin-offs

Companies usually try to qualify for the favourable tax regime described above (see Question 26).

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

Even an insolvent company subject to an insolvency procedure remains subject to tax (there are three insolvency procedures under French tax law: sauvegarde, redressement judiciaire and liquidation judiciaire, the latter resulting in the cessation of the business and the sale of its assets to repay its creditors).

However, some specific rules may apply. For instance, companies subject to the insolvency procedures listed above can request an early reimbursement of their carry-back receivables (if any) as from the date of the court judgment which opened the procedure.

If the insolvent company is liquidated, its business is considered as terminated upon completion of the liquidation procedure, which principally results in the taxation of all profits and deferred profits (if any) provisions and capital gains derived from all of the company's assets. Those profits and gains can be offset against the insolvent company's tax-loss carry-forwards (if any). The remaining tax losses are lost.

As from 23 March 2012, the cessation of activity must be declared within a 45-day period from completion of the liquidation procedure. Within a 60-day period, a CIT return must also be filed with the tax authorities, and the corresponding CIT paid. However, VAT must be paid and declared within a 30-day period following a cessation of business activity.

Tax implications for the owners

The shareholders may recognise a loss equal to the cost basis of the shares they hold in the company when those shares are cancelled. However, that loss will not be deductible if related to long-term equity securities (titres de participation).

If the cessation of activity results in a reimbursement to the shareholders of the insolvent company, the liquidation profit (boni de liquidation) is taxed as distributed income. However, the liquidation profit may be 95% exempt if the parent-subsidiary regime is applicable (see Question 8).

Subject to certain conditions, a temporary CIT exemption is also available to companies which are created to take over the business activity of industrial companies in financial difficulty.

In addition, acquisitions of shares of companies under sauvegarde or redressement judiciaire procedures are exempt from registration duties.

Tax implications for the creditors

Depending on the nature of the waiver of their debt (that is, whether for commercial or financial reasons), waivers granted by creditors to insolvent companies may be deductible from their taxable income under certain conditions.

 

Share buybacks

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

CIT

At the level of the issuing company, no tax is generally due. However, note that no deductible tax loss can be recognised if the buyback purchase price is higher than the shares' par value.

At the level of the corporate shareholders whose shares are bought back, the transaction generally triggers a distribution of income and/or a capital gain (or loss), depending on the implemented buyback procedure:

  • If shares are bought back for allocation to the company's employees, or within the framework of a buyback offer (Articles L 225-209 to L225-212, French Commercial Code), proceeds paid to the shareholders are only taxed as capital gains.

  • If shares are bought back for the purpose of a share capital reduction not motivated by losses, the transaction triggers:

    • a distribution of income, equal to the difference between the buyback purchase price and the amount of the shareholder's contribution comprised in the value of each repurchased share (however, note that the amount of this deemed distribution is limited to the actual profit made by the shareholder if the contribution repaid is lower than the tax basis of the repurchased shares at the level of the shareholders); and/or

    • a capital gain (or loss) equal to the difference between the amount of the shareholder's contribution comprised in the value of each repurchased share and the tax basis of the repurchased shares (if lower).

Registration duties

Depending on its structure, the share buyback may trigger either only fixed registration duties or fixed registration duties plus duties applicable to share transfers (see Question 9). Since 1 January 2012, some exemptions are available (see Question 3).

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

If the share buyback triggers a distribution of income, the shareholder may be 95% exempt under the parent-subsidiary regime (see Question 8).

Similarly, if the share buyback triggers capital gains, the shareholder may be 90% exempt under the participation exemption regime (see Question 4).

 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

No specific structure is commonly used to minimise the tax burden.

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

With respect to CIT, VAT and registration duties, there is no specific tax regime for MBOs, except that a specific tax credit and an exemption from registration duties may be available where companies are repurchased by their employees (see Question 33), subject to certain conditions.

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?

A specific tax credit can apply to holding companies created to acquire a target company if the holding company's voting rights are held by at least either:

  • 15 employees of the target company.

  • 30% of the target's employees if the target company has less than 50 employees.

In addition, the target company must not belong to the tax consolidated group of the holding company and both companies must be subject to CIT. The acquisition must be implemented under a company-wide agreement complying with the provisions of Article L 3332-16, 2 of the French Labour Code.

The tax credit is equal to the amount of CIT paid by the target company for the preceding tax year, proportionately to the shares held indirectly in the target company by the employees. It is annually capped at the amount of interest expenses paid by the holding company to reimburse the acquisition debt.

Provided that the above conditions are met, the acquisition of the target company's shares is exempt from registration duties.

 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

A special purpose holding company is generally created by the managers of the target company in order to benefit from the above tax credit (see Question 33) if more favourable than tax consolidation leverage, provided that the conditions for this regime are met.

Otherwise, the holding company will set up a tax consolidated group with the target company so that the future target's profits can be offset against the holding company's losses.

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

Tax on financial transactions

Recently, the first Amended Finance Law for 2012 has introduced a new tax on financial transactions (TFT). Effective as of 1 August 2012, the TFT, at a rate of 0.1%, will apply to any acquisition for valuable consideration (acquisition à titre onéreux) of equity and quasi-equity securities issued by companies listed on a regulated market, whose registered office is located in France and whose market capitalisation is greater than EUR1 billion on 1 January of the relevant tax year.

However, some transactions will be expressly exempt from the TFT, for example:

  • Acquisitions carried out by a clearing house or a central securities depository.

  • Acquisitions carried out as part of market making activities (activités de tenue de marché) or as part of a stabilisation and liquidity agreement.

  • Intra-group share transfers.

  • Temporary transfers of securities.

  • Acquisitions of convertible bonds and bonds exchangeable for shares.

As from 1 August 2012, rates of registration duties on the acquisition of shares classed as actions will be harmonised with the TFT rate (0.1%). In addition, a new exemption will apply to acquisitions of those shares subject to the TFT to avoid double taxation.

2012 French presidential elections

In the current context of the French presidential elections, the tax reform proposals of the main candidates notably focus on limiting the tax deduction of financial expenses.

 
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