French Transfer Tax Reform Immediately Applicable to Transfer of Shares of Listed and Non-Listed Companies

January 20, 2012

As from January 1st, 2012, the French Finance Act has significantly increased the transfer tax applicable to the transfer of shares of non-real estate companies.[1]

Background

Before the reform, transfer tax at the rate of 3% was due on the sale of shares of French companies, with the tax capped at € 5,000 per transfer with respect to the transfer of shares in sociétés par action (i.e. mainly société anonyme (SA), société par action simplifiée (SAS), and société en commandite par action). Moreover, as far as listed shares were concerned, no transfer tax was due if there was a deed, provided that it was executed outside of France.

Operation of New Law

Investors should be aware of the following practical consequences:

• Investors purchasing shares of listed French companies will fall within the ambit of the new transfer tax (imposed at rates between 3% and 0.25% – see below) only if a deed is executed, in France or abroad;
• Investors purchasing shares of unlisted French companies will always be subject to the new transfer tax, regardless of whether a deed is executed;   
• As a result of French territoriality rules, the purchase of listed or unlisted shares of non-French companies will fall within the ambit of the new transfer tax if a deed is executed in France. Therefore, effective immediately, no share purchase agreement should be executed in France for the purchase or sale of shares of non-French companies (listed or not).

When applicable, the transfer tax is now calculated as follow:

• 3% for the portion of the purchase price lower than € 200,000;
• 0.5% for the portion of the purchase price comprised between € 200,000 and € 500,000,000; and
• 0.25% for the purchase price exceeding € 500,000,000.

When the transfer of the shares of a French company is realized through a deed executed outside of France, a tax credit is granted for any transfer taxes effectively paid in the state of registration or the state of residence of each party.

The transfer tax does not apply to instruments other than shares, such as e.g. bonds or warrants. There are also several exemptions applicable to e.g. intragroup transfers, share buy-back or share capital increase.

When due, the seller and the purchaser are jointly liable for the payment of the transfer tax to the French tax authorities.

Remaining Uncertainties

The reform raises many unanticipated uncertainties. The French tax authorities have been asked to urgently clarify such issues, which include:

• What is a "deed" for the purpose of the transfer tax reform? For example, are over-the-counter transactions implemented with respect to listed shares always subject to the new transfer tax? Does a "deed" require a written share purchase agreement, as opposed to agreements which are only evidenced through the exchange of electronic information or confirmations between financial institutions?
• What is a "taxable transfer" for the purpose of the transfer tax reform? For example, do stock loan transactions fall within the ambit of this new transfer tax or should they be exempt on the ground that such transfers are not otherwise considered taxable transfers, as we believe should be the case? How should repo transactions be treated?
• Will the French tax authorities agree to amend French territoriality rules in order to exclude from the scope of the transfer tax the purchase or sale of stocks in a non-French company implemented through a deed executed in France?

The statement of practice answering these questions should be issued in the course of February 2012.

The adverse tax consequences of this reform, which has been passed by the French Parliament despite the opposition of the French Government, could also lead the French Government to ask the Parliament to amend it to be less strict in the coming weeks.

As a related topic, President Sarkozy has announced his desire to have the French Parliament adopt a "Tobin tax" which would apply to financial transactions in the course of 2012. The draft bill of this tax should be presented in the course of February 2012.

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[1]   The transfer of real estate companies is not affected by the reform and remains subject to a non-capped 5% tax.

The transfer of shares that are considered "parts sociales", a concept mainly relevant for the société à responsabilité limitée (SARL), société civile (SC) and société en nom collectif (SNC), is not affected by the reform and remains subject to a non-capped 3% tax.  Before the adoption of the U.S. entity classification regulations in 1997, many French entities were formed by U.S. investors as SARLs in order to retain the flexibility for partnership tax treatment in the U.S.  The combination of additional forms of French entities such as the SAS and the more flexible entity classification regulations have reduced the use of SARLs, and thus reduced the possibility of enhanced transfer taxes, where U.S. investors are involved.