France: Foreign Investors on Financial Markets

Last Updated: 27 November 1995
Since the beginning of the eighties, the financial markets of Paris have experienced a continuous movement of reforms, the aim of which was to set Paris at the same level as that of its foreign counterparts, mainly the financial markets of New York, London or Tokyo. Paris' work indeed was to allow investors to have access to the same ranges of services and financing sources as those offered in foreign countries, and thus to initiate the creation of new markets (unlisted securities market in 1983, financial futures market in 1986, traded options market in 1987), and initiate the diversification of the financial products and the introduction of the computerized continuous market. Meanwhile, foreign investors in French derivative securities and products have benefited from a more and more favorable taxation which implies, depending on the case, an exemption from withholding tax, a progressive decrease of the applicable rates or the granting of advantages in principle reserved for French residents (tax credit "avoir fiscal").


The interest of foreign investors for French securities and capital markets has increasingly developed for the last years and has experienced for ten years a high expansion which may be explained by the quality and variety of the financial products proposed, the liquidity of the markets and a very high level of security of the financial centre. Now, Paris is one of the best centres open to international dealings.

- Thus the amount of dealings increased between 1983 and 1994 from 100 to 1,100 billion of French francs for shares, and from 200 to 6,841 billion of French francs for bonds; net purchases of French securities, stocks and bonds by foreign investors which amounted to 200 billion of French francs at the end of 1993 have been multiplied by four since 1987.

- On the other hand, the number of jobbers that have come to France to set up offices increased between 1985 and 1994 from 185 to 300, to which 105 representation offices may be added. Moreover, out of 51 brokerage firms in activity in France at the end of 1994, 17 (i.e. one third) are subsidiaries of foreign groups, whereas the financial futures market itself has 40% of its members under foreign control.

Then, opening Paris financial centre to foreign investors was one of the stakes of the reforms to face the accrued competition existing between the different international financial centres. This explains the great access facility from which foreign investors now benefit.

1.1 Access to the French market of shares and bonds

The same conditions apply to foreign investors as to French ones for the access to the bond market.

The origin of the regulation for the access to the market of French shares by foreign investors is the law dated December 28, 1966, the principle of which was the following: "financial relationships between France and foreign countries are free".

Nevertheless, article 3 of the law no 66-537 dated July 24, 1966, provided that the Government would have the possibility, in order to ensure the defense of national interests and by decree, to submit to a declaration, or prior authorization or control, the foreign exchange transactions, the capital flows and any regulations between France and abroad. The latter article 3 has continuously operated until 1990, especially by the decrees no 67-78 dated January 27, 1967, which was created to rule over French investments abroad and foreign investments in France, and no 68-1021 dated November 24, 1968 reestablishing the exchange control.

The above-texts have however been annulled by decrees no 89-938 dated December 29, 1989 and no 90-58 dated January 15, 1990, i.e. 6 months before the EC directive dated June 24 1988 became effective, and which obliged the E.C. member States to withdraw the exchange restrictions.

The latter decrees dated 1989 and 1990 are now ruling over the regime of direct investments in France.

A direct investment is made up by the holding or increase of holding in an existing company, but also loans and advances, which generally "allow one or several persons to take or increase their control of a company exercising an industrial, agricultural, commercial, financial or real estate activity, whatever its form".

The purchase of quoted securities, stocks and bonds is, under certain conditions, entirely free and not submitted to this regulation, by means of article 1, paragraph 5 of the decree of 1989, modified by the decree dated January 15, 1990", the sole holding is not considered as a direct investment in the capital of a company of which securities are quoted on the stock exchange when it does not exceed 20%".

Apart from the ceiling conditions defined in the above-mentioned article, the general regime of direct investments should be applied:

- Investments realized by investors, who are nationals of the European Union or party to the agreement on the European Community, are free but submitted to a prior declaration to the French Treasury (article 11 of the decree dated January 15, 1990).

- The Minister of Economy may however permanently acknowledge that the conditions required by article 11 of the above-decree are fulfilled by an investor with seniority and who has realized turnovers superior to the ceilings fixed by circulars. This acknowledgement which allows to avoid the foreign investment declaration may only be withdrawn in case of significant modifications of the investor control (D. no 94-658, July 27, 1994, art. 3, JO July 31 modifying D. no 89-938, December 29, 1989).

- However, investments realized by investors who are not nationals of the European Union or party to the above-Agreement have to obtain a prior authorization from the French Treasury. This authorization is considered as acquired one month after the receipt of the foreign investment declaration presented to the Minister, except if the latter pronounced within the same time-limit the postponement of the involved operation (article 12 of the decree dated January 15, 1990).

- Nevertheless, the prior declaration is solely required when the amount of the investment realized by an investor who is not a national of the European Union or party to the above-Agreement, stays within the limit of an amount inferior to 50 million French francs in French companies the turnover of which added up to that of companies under their control does not exceed 500 million French francs (article 11 bis of the decree dated January 16, 1990).

However, with the wish to liberalize foreign investments in French quoted companies, the previous Minister of Economy and Finance, Mr. Alain Madelin announced on July 10, 1995 a project of reform the aim of which would be to free from any restraint of limitation of ceiling or prior declaration or authorization, the holdings by foreign investors, should they be nationals or not of the European Union.

1.2 Access to futures markets

The French international futures market has experienced a continuous expansion since its creation in 1986, thus proving the interest it shows to foreign investors: in 1994, the French financial futures market authorized five new foreign members, which increased to 42 the total number of its foreign members, i.e. 46% of the membership. The French financial futures market is nowadays the fourth futures market in the world.

After its creation in 1987, the Traded Options Market of Paris (MONEP) has become in a few years one of the biggest options markets in the world. The foreign clientele of the exchange companies having a monopoly in the trading of stocks nowadays represents about 30% of the investors of the MONEP.

The access to the French financial futures market (MATIF) and to the MONEP is entirely free for foreign investors. The access conditions are the same as those existing for any investor, i.e. the deposit of a margin cover to the intermediary member of these markets.


The savings taxation experienced, as a whole, a quite lucky period for the last ten years. The taxation of investments realized by foreign investors on French capital markets is not an exception to the rule. The successive relaxations granted by the French legislator have indeed contributed a great deal to the international magnitude of Paris financial location.

Whereas investments in movable assets were originally submitted to heavy withholdings, their tax treatment has been improved, as much by favourable provisions of successive finance laws, as by the tax agreements. As far as they are concerned, gains realized by non residents on financial futures markets (MATIF, MONEP), are not submitted to any withholdings, under certain conditions.

2.1 Taxation of the investments on movable assets by foreign investors

From a tax standpoint, a distinction may be made between the tax regime of stock earnings and financial products with a fixed revenue on the one hand, and the taxation of capital gains resulting from the sale of investments on the other hand.

2.11 Stock earnings: an evolution characterized by the expansion of the existing advantages

For a long time, stock earnings paid to non residents give rise to the application of a withholding tax of 25%. But most of the tax agreements reduce significantly the rate, when it is not totally cancelled.

About thirty agreements concluded with most of the industrialized countries, provided, besides, the transfer of the tax credit to natural persons as well as to legal persons which are not considered as parent companies.

Above all, an increasing number of these agreements allow to various kinds of investments and pension funds, which in principle cannot claim for the quality of residents, to benefit from the tax credit (American and British pension funds, Netherlander retirement funds). The tax credit is even partly refunded to certain American pension funds which are tax exempt in the United States.

2.12 Financial products with a fixed revenue: an evolution characterized by an exemption of withholding tax and a decrease of the applicable rates

The rate and field of application of withholding taxes on financial products with a fixed revenue paid to non residents have been strongly reduced. Two kinds of taxation are involved: the flat-rate withholding and the withholding tax, the regimes of which have experienced quite significant developments.

a) Flat-rate withholding

First, non residents were submitted to a withholding of 25% insofar as they received investments incomes with a fixed revenue. All kinds of investments were in principle involved without any distinction of the civil or commercial nature of the operations generating these incomes.

But this withholding has been the object of several specific exemptions for the benefit of non residents:

- bonds or securities incomes issued as of October 1st, 1994,

- debt security incomes negotiable on a regulated market and not likely to be quoted,

- interests of parts of receivable funds,

- incomes of loans raised outside France by French legal persons having the authorization from the Ministry of the Economy, Finance and Budget. This exemption especially applies to incomes of the European bonds introduced on the stock exchange to the official list of a French financial centre.

Secondly, the Finance Law for 1990 reduced to 15% the rate of withholding (originally fixed at 25%) for the bonds incomes. The 25% rate only concerns now the bonds and securities incomes issued before October 1st, 1984.

b) Withholding tax

The incomes of some bonds and comparable shares received by non residents were also submitted to the withholding tax at the rate of 10%. But the law dated December 30, 1986 placed the incomes of bonds and comparable stocks, issued as of January 1st, 1987 outside the field of application of the above withholding.

As a consequence, the incomes of bonds and comparable stocks issued as of January 1st, 1987, are no longer submitted to withholding tax nor to withholding in France, insofar as they are received by non residents. When the interests of bonds are still submitted to withholding and withholding tax (especially personal/private bonds issued before September 30, 1984), the withholding tax is charged on the withholding. But most of the applicable tax agreements significantly reduce or cancel the French tax.

To summarize, contrary to stocks earnings, the investments incomes with a fixed revenue are in most of the cases not taxable in France insofar as they are received by non residents.

2.13 Exemption of capital gains realized by non residents on French movable assets investments

The French General Tax Code provides that the persons who are not tax domiciled in France are not taxable on the capital gains realized by the sale of non voting shares in return for payment, bonds and other loan negotiable shares, shares listed on the official quotation of the stock exchange, the second market list or negotiated on the market outside the list (not taking into consideration the holdings superior to 25%). The exemption concerns individuals as well as legal persons.

2.2 Futures markets and foreign investors

Insofar as the operations performed by foreign investors are not exercised on a customary basis in France, the gains coming from operations realized on the MATIF or MONEP are not taxable in France.

As a conclusion, concerning shares, bonds or incomes operated on financial futures markets, the foreign investors benefit from a quite favourable taxation. The French withholdings, reduced by bilateral agreements, are indeed weak or nearly null for most of the investments. Such a situation might last for a while since foreign investors should normally not be concerned by the reform of the savings taxation contemplated by the Government.

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/ or Joel Fischer on 33/ or enter text search: "Archibald Andersen Profile" 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 and the Lyon Bar.

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