Movable property leasing (Article 259A of the French General Tax Code)

Renting of tangible property and means of transport by means of a leasing contract is subject to French VAT when the recipient of the service is established in a EU member state where the lease is assimilated to a delivery and not a hire. This provision applies to rentals outstanding at 1 January 1995, with the exception of those relating to goods imported before 1 January 1993.

Securities exchange and conversion (Article 38-7 of the French General Tax Code)

The scope of the deferral of the taxation of capital gains arising on take-over bid when stock is exchanged for stock (OPE) and debt conversions has been enlarged. In future (for periods beginning on or after 1 January 1994) the following can benefit: share exchanges in respect of shares resulting from share stripping (non-voting preference shares...), conversion of ordinary shares into priority dividend shares (and vice-versa), debt repayment in shares under certain conditions and, normally, certain complex shares, shares with attached share subscription rights (ABSA) and shares with attached bond subscription rights(ABSO), subject to the circumstance that the value of the attached bond subscription rights (BSO) do not exceed a certain limit (for ABSO). Moreover, the limitations against abuses of the former regime are softened.

For the deferal of gain to be applicable to ABSO, the value of the BSO, which is considered as cash, must not exceed 10% of the nominal value of the shares attributed. The gain relating to the amount of the BSO itself is immediately taxable.

In the event of the subsequent sale of the shares received in exchange, the capital gain is calculated according to the original value of the shares exchanged. The length of time during which the shares were held continues to be considered according to the rules previously in force for shares (from the purchase date of the original shares).

Costs for debt issuance

In order to harmonize tax and accounting rules, the new Article 39-1 quater 1° of the French General Tax Code provides that for periods opening with effect from 1 January 1994, if companies want to use the option to amortize their costs for debt issuance, it must be done over the total term of the debt (not more and not less). However, companies have the choice between either a straight amortization, as formerly, or an amortization in proportion to the accrued compensation.

Fixed-interest securities held by a credit institution

For periods opening with effect from 1 January 1994, Article 38 bis B of the French General Tax Code, relating to fixed-interest securities held in an investment portfolio by credit institutions has been modified to take account of the repeal of the rule according to which income from fixed-interest securities is taken into account for tax purposes when cashed (outstanding coupon rule). The coupon accruing up to the purchase is henceforth offset against the difference between the purchase price and the reimbursement value, which is spread over the residual life of the share. The legislation states the method of charging this difference to the periods concerned, for negotiable debt securities and intermarket instruments (on an actuarial basis).

Dividends and provisions neutralization

For periods opening with effect from 1 January 1995, a tax consolidated group will be able to offset against its taxable income dividends received from a company of the group and cashed by another company of the group, nonwithstanding that these companies can not benefit from the participation exemption of the Article 145-1 of the French General Tax Code.

As well, if the parent company is acquired and merged or purchased at an over 95 % capital level by another company subject to corporate income tax, and if a new tax consolidated group takes the place of the former one, the cancellation of provisions following the dissolution of the former tax consolidated group can be neutralized if concerned companies belong to the new tax consolidated group.

Mergers: portfolio securities

For merger operations effective during periods beginning on or after 1 January 1994, portfolio securities of which the gain upon sale is excluded from the long term capital gains/losses regime (i.e. most of portfolio securities), are nevertheless assimilated to fixed assets, which allows them to be held at their real value whilst maintaining the deferral of the liability under Article 210 A of the French General Tax Code.

Participation exemption : merger and acquisition :

Article 145 of the French General Tax Code provides that securities held for long-term purposes (titres de participation) benefitting from the participation exemption must, if not subscribed at their issuance, be held for at least two years. Any sale before these two years leads to a retroactive cancellation of the participation exemption.

As of the current date, the tax exemption will no longer be cancelled in the following three cases : if the shares are contributed as capital under the special merger regime, if they are exchanged by the partner of the purchased company in a merger, a partial merger or a take-over bid or if they are canceled subsequent to a merger of parent and subsidiary companies benefitting from the regime of Article 210 A of the French Tax Code.

Adjustments: specific group obligations

Article 1668 bis of the French General Tax Code which provides that a group parent company must immediately settle tax arising on adjustments accepted by a group company and must file a corrected tax declaration is repealed. Groups are thus subject to common law in this respect.

Requests for prior rulings

Article 1649 nonies of the French General Tax Code relating to requests for prior rulings has been supplemented. In future, all demands for prior tax rulings which are conditional on the application of particular tax regimes must be submitted before the transaction is carried out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Claire Acard on +33 (1) 55 61 10 10. The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar.
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