- on the one hand, take back in its assets the returned item for its accounting value at the date of the sale;
- on the other hand, record a profit and loss book entry contrary to that originally taken into account and submit it to a symmetrical tax regime; for instance, the capital gain previously recorded was taxable according to a special regime. The identical capital loss is deductible according to the same regime.
These rules result from Article 39 duodecies 9 of the French General Tax Code.
Administrative regulations dated September 30, 1996 (4 B-3-96) specify the conditions of application of this text. The main solutions retained by the Tax Authorities, concerning especially some important points not expressly settled by the law, are summarised hereafter. The tax regime of sale of shares with repurchase option is also specified at this time.
PARTICULAR CASE OF SALES WITH REPURCHASE OPTION
Sales with repurchase option of securities especially call for the following remarks.
- DEFINITION OF THE SALES WITH REPURCHASE OPTION
According to Articles 1659 to 1673 of the Civil Code, a sale including a possibility of buy-back is a sale agreement through which the seller reserves the right to get back the sold good in return for the restitution to the seller of the original price and the refund of expenses and repairs mentioned in Article 1673 above, especially sale expenses.
The exercise of the buy-back option by the seller leads to the retrospective rescission of the sale. The latter cannot be stipulated for a term superior to five years according to Article 1660 of the Civil Code.
Thus this operation is likely to be concerned by the provisions of paragraph 9 of Article 39 duodecies of the French General Tax Code, subject to the following precisions concerning the sale of securities with repurchase option.
- ACCOUNTING TREATMENT OF THE REPURCHASE OPTION OF SECURITIES
According to an opinion of the National Accountancy Council dated December 15, 1989, applicable to companies in general and according to the rule no.89-07 dated July 26, 1989 of the Committee of bank regulations applicable to credit institutions and to shares institutions, the accounting treatment of the repurchase option takes into account the true economical nature of these operations.
The accounting rules distinguish buy-back options for which there is a strong possibility of exercise of the buy-back right and other buy-back options.
- LACK OF DEFINITE REPURCHASE COMMITMENT
The sale of property without any definite commitment of buy-back leads to, from an accounting standpoint, the exclusion of the securities from the balance-sheet of the seller and their inclusion in the balance-sheet of the transferee. Correlatively, the seller and the transferee include in the appendix the commitment received or given to the price agreed per nature of security. At the time of the rescission of the sale, the accounting entries of sale and purchase are reversed by the seller and the transferee.
- POSSIBLE EXERCISE OF THE BUY-BACK RIGHT
As far as buy-back options for which there is a strong probability of repurchase right are concerned, the following accounting treatments must be followed.
* regarding the seller:
- the result of the sale is neutralised;
- the charges (part of the rescission indemnity computed prorate temporis) and the revenues (accrued securities incomes) are booked in the profit and loss;
- a provision for risks is booked if the real value of securities is inferior to the accounting value at the date of the sale.
* regarding the transferee:
- no provision for potential capital loss on securities is booked;
- the indemnity to be collected in case of rescission is booked to the profit and loss as prorate temporis.
- These accounting rules thus provide for a neutralisation of the effects of the repurchase option on the profit and loss account. The latter is motivated by the economic reality of the operation performed, which is not really a sale but a pledged loan: indeed the seller does not intend to keep the securities but only to hold them during a certain period of time as a warranty of the funds that he puts at the disposal of the seller. When the funds are reimbursed to him, the securities are returned.
- The strong probability of exercise of the repurchase option, on which depends this accounting treatment, is supposed when, for similar operations, a usual practice of repurchase of the securities by the involved companies exists.
- TAX REGIME OF THE REPURCHASE OPTION OF SECURITIES
Actual sales with buy-back options
This being a sale under rescission condition, the transfer of ownership is immediate and the purchaser may exercise all his rights of use and disposal attached to the sold item.
Afterwards, the receivable of the seller must be attached to the results of the tax year during which the sale has been concluded. If the sale with repurchase option concerns securities, the tax regime is the one applicable to the sale of securities involved.
When the repurchase option is exercised in due time, it cancels the sale agreement and the transfer of ownership which has resulted from the latter. In this hypothesis, the cancellation of the sale must be recorded in the results of the current tax year at the time of exercise of the repurchase option under the above conditions.
Deemed sales with buy-back options actually covering pledged loans
Operations of sale with repurchase option of securities realised by companies will be considered as pledged loans if the company has applied the accounting rules mentioned above and treated these operations as loans or borrowings of funds.
The income from such sales of securities with repurchase option at the closing of a tax year will have to be neutralised for the determination of the taxable income under the same conditions and rules as those provided on an accounting standpoint and mentioned above.
The provision for risk above mentioned is subject to the regime of the provisions for depreciation of portfolio securities.
The provisions of article 39 duodecies 9 of the French General Tax Code are applicable for the determination of the taxable income of the years closed as of December 31, 1992.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.
For additional information contact Claire Acard on 33/(1)/55 61 10 10, Lionel Benant on 33/188.8.131.52, Joel Fischer on 33/184.108.40.206, or Laurent Borey on 33/(1)/55 61 10 10 or enter text search: "ARCHIBALD ANDERSEN Profile".
The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.