In France, assets securitisation can be realised through a special purpose vehicle created for securitisation of assets in France - FCC - (Part 1). Assets securitisation may also be realised outside the specific statutory vehicle (Part 2).
SPECIAL PURPOSE VEHICLE CREATED FOR SECURITISATION OF ASSETS IN FRANCE
The Law dated December 23, 1988 set up the so-called "Fonds Commun de Creances" (FCC). These funds are specific vehicles used for the securitisation of banking assets.
This Law was modified by the Law dated January 4, 1993 no 93-6 and by the Law dated December 31, 1993 no 93-1444.
Legal and tax rules applicable to the French FCC have been specified by Decrees (Decree no 89-158 dated March 9, 1989, Decrees no 89-623 and no 89-624 dated September 6, 1989, Decree no 93-589 dated March 27, 1993), the Securities and Exchange Commission (C.O.B. Decision no 89-01 dated July 1989 and Regulation dated September 1989, abrogated by Regulation no 94-01) and Tax Administration comments (I-2-89 dated June 5, 1989: withholding tax; 5I-3-89 dated October 17, 1989: tax rules applicable to FCCs and certificates; 5I-2-90 dated April 3, 1990: reduction in withholding tax; 5A-1-91 dated December 13, 1990: income tax return and certificate gains of paying institutions; 7I-1-91 dated April 15, 1991: insurance tax; 4A-17-93 dated August 16, 1993: interest and dividend income; 5I-1-95 dated December 26, 1994: reduction in withholding tax; 5I-6-95 dated May 5, 1995: reimbursement bonus of individuals).
1.1 LEGAL RULES APPLICABLE TO FRENCH FCC
The vehicle used to securitise assets ("Fondues Commun de Creances" set up by the Law dated December 23, 1988) is a mutual debt fund without legal personality, the purpose of which is to acquire receivables from credit institutions or insurance companies and to issue at the same time certificates representing the assets so transferred.
The FCC is created jointly by:
- a management company, which must be a commercial company (usually a corporation) whose exclusive purpose is to manage the French FCC. It represents the fund as regards third parties and is authorised to bring suit; the capital of the management company must, in certain cases, be between 1.5 and 5 million francs (Article 1 of the C.O.B. Regulation no 94-01 approved March 9, 1994);
- a depository company, which is necessarily a credit institution responsible for the legality of the management company's decisions. The corporation's domicile must be in France, and the depository company must have the rights and responsibilities of a legal entity. The depository company may not also be the management company. The depository company holds the assets of the fund.
The creation and the regulation of the FCC has to be approved by the COB (Commission des Operations de Bourse), the French equivalent of the SEC (Securities and Exchange Commission).
The sole purpose of the FCC is to acquire receivables previously held by credit institutions and insurance companies and to issue certificates representing these receivables. Certificates of the FCC are issued once. (Art. 34 of the Law dated December 25, 1986).
An FCC can only acquire the same kind of receivables after the issue of certificates (Article 8 of Decree no 93-589 dated March 27,1993). The fund is not entitled to borrow cash from third parties (Art. 34 of the Law dated December 23, 1993).
Receivables acquired by the FCC cannot be sold by the fund except in exceptional circumstances (Art. 34 of the same Law).
- Nature of creators of the FCC
Pursuant to Article 34 of the Law dated December 23, 1988, the credit institutions and insurance companies which may bring receivables to the FCC :
- are French credit institutions;
- foreign credit institutions which have subsidiaries or a branch in France, authorised by the Banking Regulation Committee to have financial activities in France, should be entitled to securitise their assets in an FCC.
In application of the principle of free establishment, foreign credit institutions located in the EEC should be entitled to securitise their assets in an FCC (pursuant to Article 38 of Law no 92-665 dated July 16, 1992, which transposed the Second EEC Directive dated December 15, 1989).
The Law dated December 23, 1988 does not specify the meaning of the term "insurance companies". However, pursuant to the French Insurance Code, it seems to include insurance companies over which the French State exercises control (Art. L 310-1 of the French Insurance Code).
- Nature of Receivables
Pursuant to Decree no 93-589 dated March 27, 1993, an FCC is only entitled to acquire the same kind of receivables and may not acquire:
- capitalised receivables;
- doubtful receivables;
- receivables in dispute.
Pursuant to Decree no 93-589 dated March 27, 1993, the FCC has been allowed to reinvest in the same kinds of receivables.
Since the modification of the Decree dated March 9, 1989 by the Decree dated March 27, 1993, there is no precise definition of the nature of the assets (Article 8) which may be securitised. In practice, this means that securitisation is not limited to receivables arising from credit operations but also to commercial receivables. Commercial receivables have indeed been recently securitised through credit institutions (e.g. in 1995: Indosuez discounted commercial assets of Aerospatiale before transferring these commercial receivables to a French FCC. - Option Finance no 356 dated May 22, 1995 - ).
- Procedures for Transfer of Receivables
Sales of receivables by credit institutions or insurance companies to an FCC is subject to simpler perfection rules than those normally required by the French Civil Code.
The transfer is carried out through a delivery of a specific instrument and becomes binding on third parties as of the date mentioned on the instrument. The remittance of the instrument transfers the securitised debts and renders the transfer binding on third parties without the need for any other formalities. The debtor is only informed of this sale by letter.
This mechanism of transfer of receivables is not exactly the same as a transfer by the so-called "cession Dailly" (Law dated January 2, 1981). This Law allows the sales of professional receivables (i.e. receivables that result from business activity) exclusively to banking institutions through a simplified method (the "Bordereau Dailly" procedure). The signature of a "Bordereau" crystallises the sale as regards all parties and allows recourse of the transferee against the creditor in the event of default of the debtor.
- Other Investments
The FCC may not borrow cash, but temporarily available liquidities may be invested in Treasury Bills, units of French UCITS, or securities which are listed on the stock exchange (except units of other FCCs or securities which give a right directly or indirectly to the stock of a company). These temporarily available sums are limited to 40% of the initial capital of the fund (Regulation dated November 3, 1993, JO November 11, 1993 p. 15623).
- Management of Receivables
Pursuant to Article 36 of the Law dated December 23, 1988, recovery of receivables is carried out by the seller of the assets (the original creditor). As an exception to this principle, Article 15 of the Law no 93-1444 dated December 31, 1993 has nevertheless introduced the option to appoint a third party in order to recover the receivables.
1.14 Issue of Certificates
Certificates issued by the FCC are investment securities. They are issued only once.
The minimum nominal value of certificates is fixed at FRF 5,000 (Decree dated March 27, 1993).
These certificates may entitle the investors to different interests or capital rights. They give the right to the remuneration which is fixed in the issue contract; they may also give the right to part or all of the liquidation surplus.
Investors are responsible for the FCC's liabilities within the limit of the fund's assets and in proportion to their participation in the FCC.
More than 5% of shares issued by the FCC may not be held by:
- an FCP, the management company of which is under the control of a French bank having sold receivables to the FCC;
- a SICAV, the directors of which are dependent on a French bank having sold receivables to the FCC.
In order to protect the investors, various forms of credit enhancement are allowed: outside guarantees, over-collateralisation, pool insurance, or issue of specific types of shares bearing the counterpart risk; these specific shares cannot be subscribed by French UCITS or by individuals.
1.16 Liquidation of the Fund
The management company must proceed to the liquidation of the fund within a six-month period following the extinction of the last receivable.
The decision to liquidate must be approved by the COB (the French equivalent of the Securities and Exchange Commission).
The liquidation surplus is allocated according to the provisions governing by the regulation of the fund. Part or all of the liquidation surplus may be considered as a receivable held by the credit institution which transferred the initial receivables to the FCC.
1.2 TAX RULES APPLICABLE TO FRENCH FCCS
1.21 Tax Rules Applicable to the Sale of Receivables to the FCC at the Level of the French Bank or Insurance Company
a) Corporate Income Tax
Any profit or loss resulting from the transfer of receivables will be treated as a taxable or deductible item of the bank or insurance company which sells the receivables.
The profit or loss is equal to the difference between the current value of the receivables at the date of the transfer and the book value of these receivables.
This valuation does not take into account the reduction in prices that the bank or insurance company may apply for guarantee purposes. In this case, the bank or insurance company is considered as holding a receivable against the FCC at least equal to the reduction in price of the liquidation surplus of the fund. Such receivable may entitle a reserve to be depreciated only if the guaranteed risk becomes significant. The position of the tax authorities consequently denies the right to the bank or insurance company to deduct the part of the reduction in price which corresponds to the valuation of the risk of failure at the time of the transfer.
b) Value Added Tax
Pursuant to Article 260-C-8 of the French Tax Code, profits made through transfers of receivables to an FCC as well as commissions collected by the selling institutions relating to the management of the sold receivables are VAT-exempt. Moreover, the selling institution cannot elect to be subject to this taxation according to Article 260-B of the above-mentioned French Tax Code.
c) Registration Duties
Transfers of receivables to an FCC do not entail registration duties, except for transfers made through a notorial deed or agreement voluntarily submitted to registration (Article 679 and 680 of the French Tax Code). In this case, a FRF 500 fee is due.
1.22 Tax Rules Applicable to the FCC Itself
a) Corporate Income Tax
The FCC, of which the members are joint-owners, is a co-ownership of assets and is not a legal entity. Therefore, it is outside the scope of French corporate income tax (Article 208-3-octies of the French Tax Code, Article 42-I of the Law dated December 23, 1988).
Consequently, there is no taxable profit or deduction at the level of the FCC.
b) Value Added Tax
Commissions received by the institution in charge of the management of the FCC are VAT-exempt (Article 261-C-1 -f of the French Tax Code, Article 42-V of the Law dated December 23, 1988) but may be subject to this taxation provided that the management company has opted to be subject to VAT under the above-mentioned Article 260-B of the French Tax Code.
c) Registration Duties
Subscription and sales of certificates of a French FCC are exempt from registration duties.
Furthermore, setting up a French FCC does not attract the registration duty on the value of the certificates issued by the FCC (Article 809-I-1 and Article 726 of the French Tax Code, Article 12 of the Law dated December 31, 1993).
The sale of certificates is not subject to registration duties. However, if such sales are made through notorial instruments, they are subject to a registration duty amounting to FRF 500 (Article 680 of the French Tax Code).
Finally, the liquidation of the FCC is subject to a 1% registration duty on the amount of the net assets of the FCC at the date of liquidation (Article 746 of the French Tax Code).
d) Stock Exchange Tax
Subscription and sales of certificates of a French FCC are not subject to the stock exchange tax set up by Article 980 bis-6 of the French Tax Code (Article 42-II of the Law dated December 23, 1988).
1.23 Tax Treatment of FCC Certificates
a) Tax Treatment of Individual French Investors
Individual investors should, in principle, only be taxed on income distributed by the FCC (and not income received by the FCC).
Income distributed by an FCC is normally taxed at progressive rates (up to 56.8%).
Nevertheless, the investor may claim for the application of withholding tax 19.4% (15% + 1% + 1% + 2.4%) exempting income from all future taxation (Article 125-A of the French Tax Code).
FCC certificates are investment securities. Consequently, a tax deduction pursuant to Article 158-3 of the French Tax Code (tax deduction of FRF 8,000 or FRF 16,000) is applicable.
Discount/Reimbursement Bonus :
Discounts/reimbursement bonuses result from the difference between the value to be received and the amount paid at the moment of the purchase of certificates (Article 238-septies-D and E of the French Tax Code).
Discounts linked to certificates are taxed at progressive rates (up to 56.8%) at the time of reimbursement of the certificates (Article 238-septies-E-V of the French Tax Code).
The liquidation surplus may be taxed at progressive rates (up to 56.8%) or the investor may claim for the application of the withholding tax of 19.4% (15%+1%+1%+2.4%) which exempts it from future taxation (Article 125-A-III-bis-8 of the French Tax Code).
Capital gains derived from the sales of FCC certificates by an individual are taxed differently:
- If the certificates held have a maturity of more than five years and if the total amount of the sales of securities listed on the stock exchange (including the certificates of the FCC) during the calendar year is more than FRF 336,700 (for 1994 income), capital gains are taxed at the rate of 19.4% (16%+1%+2.4%). If the total amount of sales of securities is less than FRF 336,700, capital gains resulting from the sale of certificates of the FCC are tax exempt. (Articles 92 B-I, 92 H and 200 A of the French Tax Code).
- When the certificates held have a maturity of five years or less, capital gains are taxed pursuant to the same rules as normal income (progressive rate or withholding tax, and tax deduction). (Article 124 B paragraph 2 of the French Tax Code).
b) Tax Treatment of Corporate Investors
Income derived from FCC certificates and liquidating surplus is subject to the standard corporate income tax rate (33.33% soon to become 36.67%). (Tax Administration comments 5I-3-89 dated October 17, 1989).
Discounts linked to certificates issued for more than five years, are taxed according to Article 238-septies E of the French Tax Code. Discounts and capitalised interest are taxed on an accrued basis according to an "actuarial" computation if they exceed 10% of the nominal value of the certificate or if the nominal value of the certificate does not exceed 90% of the discount. Indeed in that case, the discount or interest is taxed by annuity on the anniversary of the date the certificate owner purchased the certificate. (Tax Administration comment 4 A-17-93 dated August 16, 1993).
Due to lack of precisions it seems that the discounts linked to certificates issued for five years or less are normally taxed at the corporate income rate (33.33% soon to become 36.67%) on reimbursement.
Capital gains derived from the sales of FCC certificates by corporations are taxed at the standard corporate income tax rate (33.33% soon to become 36.67%) (Article 219-a-ter of the French Tax Code).
c) Non-Resident Investors
Subject to tax treaty provisions, a withholding tax will apply to income distributed by an FCC, the rate of which is similar to those previously described for French individuals (15%) (Article 125 A III and 125-A-III-bis-8 of the French Tax Code, Tax Administration comments 5-I-3-89).
This exemption will apply in the case where the investor may prove to the FCC that he is resident outside of France. This exemption may only apply to interest linked to the certificates of the FCC. (Article 125 A III paragraph 2 and 3 of the French Tax Code, Tax Administration comments 5-I-3-89)
d) Non-Profit Organisations
Non-profit organisations should be taxed at a 10% rate on income distributed by an FCC (Articles 219-bis-I and 238-septies of the French Tax Code).
Pursuant to Tax Administration comments 4 A-17-93 dated August 16, 1993, discounts linked to certificates are subject to the same tax regime of corporate investors as that applicable to profits (Article 12).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought for your specific circumstances. For additional information contact Claire Acard on +33 (1) 55 61 10 10 or enter text search: "Archibald Andersen ", and "Business Monitor". The members of Archibald Andersen Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar.