Anti-Tax Haven Measures to be Introduced in France Draft Legislation Would in Particular Impose a 50% Withholding Tax on Interest Paid in Uncooperative Jurisdictions. SUMMARY The Draft Amended Finance Bill (Projet de loi de finance rectificative pour 2009) provides that interest paid by a French tax resident outside France in jurisdictions that do not cooperate with France in respect of exchange of information would be subject to a 50% withholding tax. Such interests are currently exempt from any withholding tax under certain conditions. To date, the draft legislation does not include any grandfathering rule for loans or notes currently outstanding. It provides only for a deferred entry into force under certain conditions. In light of the gross-up provisions included in most existing loan agreements or note terms and conditions, the cost of the reform if any will effectively be borne by French borrowers or issuers. With respect to future borrowings, it is advisable that gross-up provisions as well as tax redemption clauses be modified to take into account the new legislation, if enacted. The bill also provides for the non-deductibility of interest paid to creditors established in uncooperative jurisdictions. Other anti-tax haven measures would also be enacted, as further described below. These measures are currently under discussion before the French Parliament and may be significantly amended. INTEREST PAID IN UNCOOPERATIVE JURISDICTIONS Pursuant to Section 125 A III of the French Tax Code ( FTC ), as such provision is currently applicable, interest paid by a French resident borrower to a non-french resident lender is in principle subject to an 18% withholding tax. However, Section 131 quater of the FTC provides for a very broad exemption, subject to certain conditions that are generally met by French borrowers. Such exemption also applies to lenders established in uncooperative jurisdictions. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
Under the proposed draft legislation, the scope of the withholding tax provided by Section 125 A III of the FTC would be restricted to interest paid abroad in uncooperative jurisdictions, and the rate of taxation would be increased to 50%. Accordingly, the general exemption provided by Section 131 quater of the FTC would be abolished. Uncooperative jurisdictions would be defined as jurisdictions which (i) are not Member States of the European Union, (ii) are included in the OECD grey list with respect to exchange of information and (iii) have not signed a tax information exchange agreement with France. A list of such jurisdictions will be made public and updated annually by the French Ministry of Finance. In particular, jurisdictions that have not implemented a tax information exchange agreement with France in a manner satisfactory to the French tax authorities may be added to such list. In addition, Article 238 A of the FTC would be amended so that interest and other payments made to beneficiaries that are established in uncooperative jurisdictions where the corporate income tax is lower than half the French corporate income tax would be deductible only if the payer can prove that (i) the payment is arms length and that (ii) the purpose of such payment is not to transfer funds in an uncooperative jurisdiction. The French tax administration will have to provide some guidance on the application of such conditions. This new legislation would enter into force on January 1, 2011 for loan agreements executed and notes issued before January 1, 2010, and immediately for loan agreements executed or notes issued after January 1, 2010. The non-deductibility provision will enter into force on January 1, 2011. Further inclusion of jurisdictions onto the list would only enter into force on January 1 of the year following such inclusion. a. Uncertainty on the triggering event The proposed provision refers to interest paid outside France in an uncooperative jurisdiction, irrespective of the tax residence of the beneficiary. As a result, payments made to a beneficiary resident in an uncooperative jurisdiction would not be subject to withholding tax if made in a bank account in a cooperative jurisdiction. Current drafting creates uncertainties whenever the flow of funds from the French borrower to the creditor is channeled through multiple intermediaries such as paying agents: Under a first interpretation, the withholding tax would apply to payments made directly by the borrower in uncooperative jurisdictions. The 50% withholding tax would apply only to interest paid directly by the borrower on bank accounts opened in the books of financial institutions (or branches of financial institutions) established in uncooperative jurisdictions. Accordingly, payments made through a paying agent established in a cooperative jurisdiction would not be subject to withholding tax, even if the paying agent subsequently pays such interest to the creditor in an uncooperative jurisdiction; -2-
Under a second approach, the withholding tax would apply to payments made by the borrower or on its behalf by its agents in uncooperative jurisdictions. In particular, payments made by foreign paying agents on behalf of French issuers would be subject to withholding tax if made outside France in an account opened in the books of a financial institution established in an uncooperative jurisdiction. However, it should be noted that the effective flow of funds through clearing organizations such as Clearstream, Euroclear or DTC is beyond the control of the French borrower or its paying agent. Given the practical difficulties for all parties (including the French tax administration) to have access to the relevant information, one could hope that the French tax administration would retain the first approach described above. b. Impact on the legal documentation for future borrowings Most credit agreements and most terms and conditions of notes are currently structured as follows: A gross-up clause provides that holders subject to a withholding tax are entitled to additional amounts from the borrower to make them whole; and A tax redemption clause provides that the borrower may repay the notes/loan if it has to pay additional amounts. A solution for French borrowers would be (i) to exclude the new 50% withholding tax from the scope of gross-up clauses and (ii) to include a tax redemption right vis-à-vis the holders established in an uncooperative jurisdiction to the extent interest is not deductible in France. The legal documentation could provide for the borrower the right to redeem only the notes subject to such non-deductibility while current tax redemption clauses generally provide that the tax redemption applies to all, but not less than all, the notes. Other approaches may be considered, such as selling restrictions or the mandatory payment of interest on bank accounts booked in financial institutions established in cooperative jurisdictions. OTHER ANTI-TAX HAVEN MEASURES TO BE INTRODUCED A 50% withholding tax would be imposed on dividends paid in an uncooperative jurisdiction even if the holder is resident in France for tax purposes, as from March 1, 2010; The withholding tax on fees paid in remuneration for services to a person established in an uncooperative jurisdiction would be increased to 50% under certain conditions, as from March 1, 2010 (note that the criterion is not the payment in an uncooperative jurisdiction); Dividends received from subsidiaries established in uncooperative jurisdictions would be excluded from the benefit of the French participation exemption regime, as from January 1, 2011; French CFC rules provided for by Section 209 B of the FTC would be tightened for subsidiaries established in uncooperative jurisdictions as from January 1, 2010. The draft legislation also includes an important reform with respect to transfer pricing, under which French resident companies that are part of a group realizing a turnover exceeding 400 M would have to prepare and maintain transfer pricing documentation as from January 1, 2010. -3-
LANGUAGE USED IN LOAN AGREEMENT/NOTES PROSPECTUS Under the Loi Toubon, French state-owned entities and public service entities are required to enter into agreements written in French, except for loan agreements and notes offering memorandums related to borrowings that are eligible to the withholding tax exemption provided for by Section 131 quater of the FTC. As the draft legislation contemplates to abolish Section 131 quater of the FTC, this exception will be repealed, so that certain issuers may subsequently be required to release offering memorandums and loan agreements in French. * * * Copyright Sullivan & Cromwell LLP 2009-4-
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