Shares stripping

Granting conditions of the tax credit

Article 158 ter 1, 3rd paragraph of the French General Tax Code resulting from article 45 of the law no 93-1353 dated December 30, 1993 provides that in case of stripping of the shares ownership between legal persons, the right to tax credit of the beneficiary of the dividends may be suppressed when the owner of the rights, other than dividends rights, is a non-resident. A directive dated March 1st, 1996, 4J-2-96, gives comments and examples on this provision.

- Article 158 ter of the French General Tax Code provides that the tax credit ("avoir fiscal") exclusively applies to incomes of stocks, partner's shares or founder's shares, the distribution of which results from a regular decision of the company. The "avoir fiscal" is attributed to persons having their actual domicile or registered office in France.

- However, the tax credit might be granted to persons being residents of the States or territories with which France has concluded a tax treaty and when the latter tax treaty provides for it. Such tax treaties have been concluded with Germany, Australia, Austria, Belgium, Brazil, Burkina-Faso, South Korea, the Ivory Coast, Spain, the United-States, Finland, Gabon, India, Iceland, Italy, Japan, Luxembourg, Malaysia, Mali, Malta, Mauritius, Mayotte (Comoro Islands treaty), Mexico, the Niger, New-Caledonia, New-Zealand, the Netherlands, the United-Kingdom, Saint-Pierre and Miquelon, Senegal, Singapore, Sweden, Switzerland, Togo, Turkey and Venezuela.

- The provisions of these treaties linked to the tax credit cannot apply when the other State does not tax the involved dividends. Thus, for example, Venezuela does not tax French source dividends received by its residents; Brazil and Mayotte do not tax French source dividends received by their legal persons residents.

Moreover, the tax treaties reserve the profit of this transfer for persons fulfilling the specific conditions required by the treaty. In this respect, it should be advisable to refer to the text of these treaties.

Nevertheless, it is specified that, concerning legal persons beneficiaries, this transfer is submitted to a contribution inferior to a precise rate in the capital of the French distributing company.

- Non-resident companies have tried to bypass the limits provided by the tax treaties by way of a transfer of the usufruct of the shares of French resident companies to third companies which are not submitted to contractual limits, in return for a remuneration.

- The aim of Article 45 of the Amended Finance Law for 1993, appearing in the French General Tax Code as the 3rd paragraph of Article 158 above-mentioned, is to prevent and sanction the abusive use of tax treaties by way of excluding from the profit of the tax credit dividends corresponding to shares, the bare owner of which, being a non-resident in France, is not entitled to the tax credit. The present text's object is to comment the provisions of this article which are applicable to earnings distributed by French companies as of November 24, 1993.

I. FIELD OF APPLICATION

The following text is a free translation of the Administration's comments.

OPERATIONS INVOLVED

- The provisions of Article 45 of the Amended Finance Law for 1993 are likely to apply in case of stripping of shares or in case of any tax treaty having the same effect, when those shares give right to the payment of dividends to which a tax credit is attached according to the provisions of Article 158 bis of the French General Tax Code.

- The operation involved is the distribution giving right to the tax credit.

- The operations involved are those leading to a split-off between financial rights, i.e. rights to dividends, and other rights (voting rights) attached to shares, whatever the legal terminology used to qualify these operations by the laws of the States on which the companies having stripped the shares depend. This split-off may, for example, look like a sale of usufruct or bare ownership of shares.

- This measure also applies to tax treaties having the same effect as the stripping of shares. Thus it is for example directed at the setting up of trusts in which the setting up company transfers the ownership of the shares to a trustee which then has the responsibility to pay back the dividends to the setting up company or to one or several third persons designed as the beneficiaries.

- However, this measure is not directed at the techniques of temporary sale of shares resulting in a transfer of the full ownership of the shares for the benefit of the purchaser.

- Nevertheless, it should be reminded that, in the case of loans or pension of shares, the shares thus lent or placed in pension must not benefit, during the operation, from a payment of dividends giving right to the tax credit.

PERSONS INVOLVED

- Article 45 concerns any stripping of rights attached to shares and realised between non individuals. Thus are concerned any legal person and any non legal entity such as the investment funds, some "partnerships", joint venture companies, de facto entities or permanent establishments depending on a company other than an individual company.

- In this respect, it is reminded that permanent establishments located in France may have the right to the tax credit owing to the location of the registered office of the company on which they depend:
- in overseas territories and the territorial authorities of Mayotte and Saint-Pierre and Miquelon,
- in the European Community Member States,
- in the States with which France has concluded an agreement of non-discrimination linked to permanent establishments.

- However, the profit of the tax credit is not challenged by the new paragraph of Article 158 ter of the French General Tax Code when one of the interveners, a bare-owner or usufructuary, in the stripping of ownership rights is an individual.

- The person owning all or part of the stripped rights other than rights to dividends must be settled or have his registered office outside France. It especially concerns all legal persons having their actual headquarters outside France (i.e. outside France and the overseas French departments), and the establishments of branches of these persons abroad, when the shares are attached to the tax result of these establishments or branches.

The overseas territories (New Caledonia, French Polynesia, French Southern and Antarctic Lands, the Wallis and Futuna Islands) and the territorial authorities with a particular status (Mayotte and Saint-Pierre and Miquelon) having an autonomous tax regime must thus be considered as located outside France for the application of these provisions.

The effective head office is the place where strategic decisions regarding management and industrial or commercial politics and necessary to the business performance of the company. The effective head office is usually the place where the person, or the group of persons, with the highest level of decision (for example, the board of directors) takes its decisions; however, the determination of the effective head office is a de facto question. A company may have several centres of management but only one effective head office at the same time.

This criteria is often used in tax treaties in order to settle disputes of residence for companies and other legal persons.

- All legal persons, with a statutory head office located outside France are also likely to fit in the field of application of this provision.

- In this respect, it is to be reminded that according to Articles 1837 of the Civil Code and Article 3 of the law dated July 24, 1966 on commercial companies, third parties, among which the administration, may take advantage of the statutory head office but that the latter is not opposable to them by the company if the effective head office is located in another place.

Consequently, the companies which have their statutory head office outside France, must prove that their effective head office is in France.

- The above-mentioned principles also apply to all entities without legal existence, having their effective head office abroad or a statutory head office in France.

- As far as the beneficiary of the dividends is concerned, the place of his tax residency (i.e. the place of the effective head office) may either be in France or outside France.

II. SCOPE OF THE MEASURE

- In the case of stripping of shares between persons meeting the above-mentioned conditions, the holder of the right to dividends can only benefit from the tax credit if the holder of the other stripped shares could have himself benefit from the tax credit in the absence of stripping of shares giving right to dividends.

- The aim of this measure is consequently to limit the right of the usufructuary depending on the right that the bare owner non resident of France would have had should he have kept the whole ownership of the stripped shares.

- Since Article 45 above-mentioned may limit the right to tax credit of an usufructuary resident of France, it may also be likely to trigger the same consequences in the case of an usufructuary resident of one of the States or territories having concluded a tax treaty with France. Indeed, the tax treaties only possibly grant a transfer of tax credit to involved residents if the dividends give right to a tax credit, if the dividends were received by a French resident.

- Therefore, it should be advisable to analyze the situation of the bare owner as regards the tax treaty which is possibly applicable to him, in order to determine if this situation cancels or not the right of the usufructuary, resident or non resident of France, to benefit from the tax credit.

Example 1

Hypothesis: A company A has its registered office in a State E 1, which concluded with France a tax treaty providing for the transfer of the tax credit under the condition of an effective taxation in the name of the beneficiary of the corresponding dividends and tax credits and under the condition that the beneficiary holds less than 10% of the capital of the distributing company. Company A, meeting all conditions, may benefit from the transfer of the tax credit depending on the shares it holds in a company B having its registered office in France. Company A sells the usufruct of these shares to a company C having its registered office in a State E 2, which concluded with France a tax treaty, of which the article dealing with dividends, is similar to that in the tax treaty concluded between France and E 1.

Solution: Company C may benefit from the transfer of the tax credit if it is taxed depending on the French source dividends paid by the distributing company B, and from the corresponding tax credits if it holds less than 10% of the capital of the latter.

Example 2

Hypothesis: A limited company A has its registered office in a State E 1 which concluded with France a tax treaty providing for the transfer of the tax credit. It receives dividends distributed by a company B having its registered office in France. Company A may however not benefit from the transfer of the tax credit owing to its qualification of parent company with regards to the State law of which it is a resident, and which allows company A to benefit from a corporate income tax exemption depending on the dividends received.
Company A sells the usufruct of the shares of company B to a company C having its registered office in State E 1. Company C is taxable on the French source dividends received and the corresponding tax credit insofar as the law of State E 1 does not give the benefit of the parent company regime in the case of the holding of an usufruct.

Solution: C will not be able to benefit from the tax credit since A could not benefit from it in the lack of stripping.

Example 3

Hypothesis: A company A has its registered office in a State E 1 with which France did not conclude any tax treaty. A raises a loan with a bank B, having its registered office in a State E 2 with which France concluded a tax treaty providing for the transfer of the tax credit. The agreement concluded between A and B especially provides that A will give as a warranty to B the shares it holds in a company C resident of France; B will receive the dividends distributed by C, but A will still have the voting rights attached to the shares of the distributing company C.

Solution: B cannot benefit from the transfer insofar as A could not have benefited from such a transfer and insofar as the agreement concluded between A and B has the same effect as the stripping of the ownership of shares.

Example 4

Hypothesis: A company A has its registered office in a State E 1 with which France concluded a tax treaty. The latter provides for the transfer of the tax credit to companies having their registered office in State E 1 and meeting the following conditions:
- be the effective beneficiaries of French source dividends and,
- directly or indirectly hold less than 15% of the capital of the French resident distributing company.
Company A holds 25% of the capital of company B having its registered office in France. Thus it cannot benefit from the transfer of the tax credit.
It concludes a trust agreement according to which it will contribute to a trustee domiciled in State E 1 12% of the ownership of the capital of company B. The trust agreement especially provides that A is the beneficiary of the trust revenus and that at the end of this agreement, the trust assets will be attributed to A; the trustee, manager of the trust will pay the income taxes linked to the trust.

Solution: Without questioning the ability of the trustee to receive the tax credit depending on the provisions of the involved tax treaty, the latter cannot benefit from this advantage if company A could itself not benefit from the same advantage, failing to meet the condition of holding less than 15% of the capital of the distributing company and insofar as the trust agreement carries the same effects as a stripping of shares. Company A can neither benefit from the transfer of the tax credit, because in the absence of trust agreement concluded with the trustee, it could not have benefited from it.

III. CONDITIONS OF APPLICATION

- In order to benefit from the application of the reduced rate by a tax treaty and the transfer of the tax credit according to this tax treaty, the effective beneficiary of the dividends must especially produce to the French paying establishment the form duly filled in as provided for the application of this tax treaty regarding dividends giving right to the transfer of the tax credit. In the expectation of the updating of these forms taking into account the new legal system resulting from Article 45 above-mentioned, the beneficiary of the dividends being a non resident of France will have to certify on plain paper attached to the form that he not only owns the rights to dividends but also all the other rights attached to the full ownership of the shares. Such a certificate is also provided for the simplified procedure instituted by the directive dated May 13, 1994 already mentioned.

- This certificate is however only required when the creditor of the dividends is not an individual.

- This certificate concerns the requests of transfer of the tax credit made as of the date of publication of the present directive (i.e. March 15, 1996) which will be sent to the Centre des Impots des non-residents, 9, rue d'Uzes, 75094 Paris cedex 02, which is in charge of treating these forms.

- When a certificate cannot be produced, the effective beneficiary of the dividends must be able to provide, upon request from the Centre des Impots des non-residents, any useful information on the name, full address and place of tax residency of the holder of the rights other than rights to dividends and on the nature of the rights held by the latter. The centre des impots must make sure that this beneficiary meets the conditions provided by the tax treaty concluded by France with its State of residency as much concerning the taxation principle in this latter State of the dividends and the attached tax credit as the conditions linked to the maximum percentage of holding in the capital of the French distributing company and other conditions which might have been provided for by the tax treaty for the obtaining of this advantage.

- As far as the French residents beneficiaries of dividends are concerned, they must put at the disposal of the tax authorities any useful certificates on the holder of rights other than rights to dividends.

- In the two situations described hereabove, the tax authorities have to make sure that this holder would have had the right to a transfer of the tax credit in the lack of stripping of shares.

IV. TAX AUDIT - PENALTIES - COLLECTION

- The obtaining of the benefit of the tax credit contrarily to the provisions of Article 158 ter as amended by Article 45 above-mentioned triggers the following consequences.

Case of the beneficiaries being residents of France and living in France

According to Article 140 of appendix II of the French General Tax Code, the fact to ask for the allocation of a too high amount of tax credit is considered insufficient for the application of penalties provided by Article 1729 of the latter Code.

Case of the beneficiaries of dividends located or having their registered office outside France

The amount of unduly transferred tax credits will be collected by the setting up of the procedure of seizure of movable property and associate rights or the procedure of seizure attribution provided by the law no 91-650 dated July 9, 1991 and the decree no 92-755 dated July 31, 1992 as well as by means of attachment order provided by Articles L 262 and L 263 of the French Tax Procedure Book.

Moreover, these amounts may be collected by the setting up of the assistance to collection when the person having unduly benefited from a transfer of tax credit is located or has its registered office in a State or territory having concluded with France an agreement providing for the latter assistance.

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 33/78.63.72.35, Joel Fischer on 33/78.63.72.58, 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.