France: History Of Capital Gains Taxation

Last Updated: 20 March 1995

From Claire Acard, lawyer, Law Firm Arthur Andersen International

The regime of long term capital gains on shares is shrinking away every year. As the reduced rate is increasing, the field of application of the regime becomes restricted: the only thing coming out of these measures seems to be the wish to punctually show tax profits. The 1995 Finance Law acts the same thus raising the rate from 18% to 19% and excluding shares not considered as equity shares from the field of application.[QQ]
An eventful story

Several steps may be distinguished in the disruption of the long term regime.

The field of application had already been reduced once by the 1992 Finance Law excluding securities different from shares or company shares (and other similar values), so to have them subjected to the common law of corporate income tax. The regime assessing these securities was then modified by the 1993 Finance Law which applied to some Undertakings for Collective Investment in Transferable Securities (UCITS) the mark-to-market rule.

The 1995 Finance Law, following the Senat's initiative, finally excludes the long term capital gains regime shares and social securities not constituting equity shares, i.e. securities that cannot be used.

The company's activity, in line with an opposing perspective of return on equity within a more or less short term, also excludes company shares, the asset of which is mainly composed of the same excluded shares, or the activity of which mainly consists in the management of the latter securities for their own behalf.

Uncertainties linked to definitions

The new rate and the other provisions of the 1995 Finance Law apply for the determination of the results of tax years opened as of January 1st, 1994.

The field of application of the long term capital gains regime is restricted to some securities of the "FCPR" (risky mutual fund) and "SCR" (risky capital company) and to equity shares. Equity shares are unfortunately not defined by the law, which however provides that shares purchased by way of take-over-bids or public offer of exchange are considered as equity shares, as well as shares giving a right to the tax regime of parent companies (even though the company gave it up).

This is a simple assumption which may either be challenged by the Tax Administration or by the taxpayer. Generally speaking, as definitions and assumptions relating to tax and accounting law are quite similar, it is likely that the Tax Administration will often consider as equity shares those booked as such in the accounts.

However, in the lack of strict definitions and criteria for the expression "equity shares", there is a significant exposure that the Tax Administration argues that such securities should be booked in the accounts as "equity shares".

Specific provisions are also added to the field restriction and precise the consequences of transfers which might occur between the equity shares accounts and the other balance-sheet securities accounts.

The general principle as defined by the law may be summarised as follows: the transfer of an equity shares account to another account of the balance-sheet, and vice-versa, from a tax standpoint, triggers a sale result which is only taken into account at the actual sale of the securities concerned.

Thus an equity share transferred to another share account of the balance-sheet will be taxed at the date of the sale, partly at a reduced rate, and partly at the normal corporate income tax rate.

The law also provides for the consequences of these transfers on loss allowance accounts, making a difference between the allowances existing at the date of the transfer and those created afterwards.

Schematically if allowances existing at the date of the transfer are not recovered for this reason, the regime applicable to a later recovery depends on the qualification of the values (equity shares or investment securities) before the date of the transfer.

The consequences of a higher rate on capital losses and allowances are traditional. However, long term capital losses linked to securities excluded from the long term regime to be carried forward will only be charged on long term capital gains subject to the 19% rate. On the contrary, for the same securities, the allowances deducted at a 18% rate will have to be added back at the full rate. As a consequence, this system is twice penalising.

Finally, it must be noted that this system includes new provisions for the filing of tax returns by companies.

A penalising tax system from an international standpoint

The increase of the rate to 19% might penalise French companies as regards their foreign competitors.

For instance, in Belgium, capital gains on shares are exempted if the company the shares of which are held is subject to Belgian corporate income tax, or for a foreign company to a similar tax.

In Great-Britain, capital gains are taxed at a normal rate but is computed in function of the actualised cost price of the transferred asset, thus reducing the taxable margin.

In the Netherlands, capital gains on equity shares are exempted if the beneficiary meets some conditions. Finally in Germany, the principle is that capital gains on shares are taxed according to the German corporate income tax rate. But, from 1994 onwards, capital gains realised by a resident company on the shares of its foreign subsidiary are exempted subject to specific conditions.

This is the reason why the French Senat offered to maintain the 18% rate for any asset "useful" to the company's activity and to exclude from the long term capital gains regime other financial assets. The French Government took this idea and moreover increased the global rate to 19%. So companies lost on both counts.

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 or Lionel Benant on 33/ 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.
© Mondaq Ltd 1995 Tel +44 171 820 7733.

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