On 21 December 2011, the French National Assembly adopted the finance bill for 2012, which contains a provision significantly modifying the rules relating to transfer taxes applicable to the sale of shares and fractional interests in French companies.
The sale of shares in French companies which are not invested principally in French real estate will be subject to a declining rate of taxation. However, the cap of 5,000 euros per transfer which previously existed for shares is abolished.
This measure comes on top of the reform of the basis of the transfer taxes (due at the rate of 5 per cent) assessed on the sale of shares and fractional interests in companies which are invested principally in French real estate.
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Increase of transfer taxes on the disposal of shares of French companies which are not invested principally in French real estate
Initially proposed by the French Senate, the modification of the regime relating to the transfer taxes applicable to the sale of shares1 in companies which are not principally invested in real estate has finally found a favourable echo within the National Assembly, although some welcome modifications to the initial provisions have been adopted.
The sale of shares will henceforth be subject to transfer taxes at the following declining rates: 3 per cent of the portion of the price which is less than 200,000 euros, 0.5 per cent of the portion of the price falling between 200,000 euros and 500,000,000 euros and 0.25 per cent for the portion of the price above 500,000,000 euros. The cap of 5,000 euros per transaction which previously existed for the sales of shares of companies has also been abolished.
The sale of fractional interests in French companies remains subject to a 3 per cent transfer tax which is uncapped and applies on the purchase price after deduction of a rebate equal, per fractional interest, to the ratio between 23,000 euros and the number of fractional interests.
This measure increases significantly the cost of registering the disposal of shares, which is compulsory for non listed companies. The sale of shares in listed companies which are not made through a written document does not trigger transfer taxes.
A few exemptions have nevertheless been granted in the new provisions and apply to:
- the acquisitions of shares and fractional interests effected in the context either of the repurchase by a company of its own shares or a share-capital increase
- the acquisition of shares and fractional interests in companies which are subject to insolvency (safeguard or judicial reorganisation) proceedings
- the acquisitions of shares and fractional interests where the transferor company and the transferee company are both members of the same tax group within the meaning of article 223 A of the French Tax Code
- the transactions which fall within the scope of article 210 B of the French Tax Code (contributions that are exempt from corporation tax).
The chances are high that structures aiming at interposing a foreign entity the shares of which are sold instead of those of the French entity, pursuant to share transfer instruments signed outside of France will become popular in cases where the burden transfer tax is prohibitive.
This new regime will apply to sales realised as from 1st January 2012. Disposals made prior to such date and for which registration formalities have not yet been effected should remain subject to the former provisions.
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Modification of the basis on which transfer taxes are assessed upon disposal of shares and fractional interests in companies which are principally invested in French real estate
Under the impetus of Gilles Carrez, reporter of the Finance Commission, the Parliament also adopted a modification of the basis on which 5 per cent transfer tax is assessed upon the disposal of shares and fractional interests in companies which are principally invested in French real estate.
At the current time, the 5 per cent rate applies to the value of the shares sold (ie, after deduction of all liabilities of the company, including those liabilities which have not been incurred for the acquisition of real estate assets).
The modification as voted, which has escaped much notice, will increase significantly the basis on which transfer tax will be assessed, as it will be based on the fair market value of the real estate assets and other real estate holdings, held either directly or held through other companies principally invested in French real estate, after deduction only of those liabilities relating to the acquisition of such real estate assets and holdings, as well as the fair market value of the other gross assets (prorated to the shareholding sold).
This measure was initially aimed at combating tax evasion schemes under which debt levels were fortuitously increased (for example by shareholder loans) just prior to the disposal of the company in order to reduce the basis for transfer tax. It is regrettable that this goal was lost sight of when the actual text of the provision was prepared, since all debt subscribed by the companies the shares of which are sold will be excluded provided that it has not been incurred for the acquisition of real estate assets, no distinction being made on the basis on the nature either of the creditor or the debt. Although the question was not raised during the parliamentary debates, there is some doubt regarding the treatment to be given to debt corresponding to the refinancing of original acquisition debt.
Only the shares of the sociétés civiles à prépondérance immobilière (SCPI) were excluded from the provisions at the last minute.
This measure will be applicable to all disposals occurring as from the day following the promulgation of the finance bill (which occurred on 3 January 2012).
It is likely that application of the provisions will trigger a number of practical difficulties with the relevant tax registration offices.
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