Draft French Financial Transaction Tax

Following the outline released by France’s and Germany’s Ministers of Finance on September 9, 2011, and the publication of a draft directive by the EU Commission on September 28, 2011, draft legislation to introduce a financial transaction tax (the “FTT”) in France was presented by the French government on February 8, 2012. This proposal will now be discussed by the French Parliament.

The scope of the FTT would not be as broad as that of the EU proposal. First, the FTT would be applicable on acquisitions of equity instruments only. Second, the FTT would be due if the equity instrument is issued by a French-listed company with a market capitalization of at least €1bn. The FTT would amount to 0.1% of the value of the equity instrument. The French government estimates that the revenues from the FTT would amount to €1.1bn per year.

Two other specific taxes would also be introduced by the same finance bill: a 0.01% tax would apply to high frequency trading operations located in France (the tax basis would be equal to the value of cancelled orders), and another 0.01% tax would apply to the notional amount of credit default swaps on EU sovereign bonds that are acquired by entities established or individuals domiciled in France.

In addition, the finance bill would repeal the recent reform of French transfer tax rules applicable to transfers of shares.

Scope

Equity instruments issued by a French listed company. The FTT would be due on the transfer of ownership of any equity instrument issued by a French listed company having a market capitalization that is higher than €1bn on the first of January of the year during which the transfer occurs.

“Equity instruments” (titres de capital) are defined as shares and other instruments giving access to the capital or the voting rights of a company (art. L. 212-1 A of the Code Monétaire et Financier). This would include convertible bonds (obligations convertibles, échangeables ou remboursables en actions) and warrants (bons de souscription d’actions). On the contrary, bonds with coupon linked to the profits of the issuer should not be subject to the FTT.

Unlike the EU proposal, the scope of the FTT would not include the acquisition of shares in non-French companies nor the acquisition of other instruments such as bonds or derivative instruments.

The FTT would be due irrespective of whether the acquisition is carried out by a company or an individual.

Transfer of ownership. The FTT would be applicable on any transfer of ownership, including acquisitions of shares upon exercise of an option, forward sales or share-for-share exchanges. The draft bill provides that equity instruments issued in consideration of contributions made to capital would also be subject to the FTT, but our understanding is that such issuance of shares would be exempt under the “primary market” exemption described below. This will need to be clarified during the discussions before the French Parliament.

Exemptions

Primary market. The issuance of shares and other equity instruments would be excluded from the FTT. This exemption will also apply when the issuance is carried out through a bought deal or a firm underwriting pursuant to L. 321.1 of the Code Monétaire et Financier.

Market making activities. Acquisitions in the course of market making activities would be exempt from the FTT. Market making activities are defined as (i) the simultaneous issue of a buy order and a sale order of similar size in order to offer liquidity in the market, (ii) the execution as counterparty of “buy” or “sale” orders issued by clients, or (iii) the hedging of positions taken under (i) or (ii) above. The exemption would also apply to transactions carried out on behalf of the issuer under a liquidity agreement.

Clearing house/central securities depositary. The FTT would not be applicable to transfers of equity instruments that are realized by a clearing house or a central securities depositary in the course of their clearing activity.

Intra-group transactions. The draft bill provides for certain exemptions applicable to intra-group transactions, including the following:

• Transactions between a company and its subsidiary, if the first company holds more than 50% of the share capital of the subsidiary (art. L. 233-1 of the French commercial code);
• Transactions between companies that are members of the same French tax consolidated group within the meaning of art. 223 A of the French tax code;
• Transfer of ownership resulting from a merger, a contribution or a spin-off, if such reorganization benefits from the favorable tax regime provided by art. 210 A and 210 B of the French tax code.

Temporary transfers. Temporary transfers of securities include stock loans and sale and repurchase agreements (“Repos”). Such transfers are excluded from the scope of the FTT.

Territorial Scope

The FTT would only be applicable to equity instruments issued by entities that have their registered seat in France. It would apply to acquisitions made by French or non-French residents, irrespective as to whether the transaction has a French counterparty.

By contrast, the EU proposal was based on the tax residence of the parties to the transactions. The principle was that the FTT would apply only if one of the counterparties is located in the EU, irrespective of the state of incorporation of the issuer of the underlying instrument.

Payment and Entry into Force

Computation. The FTT would amount to 0.1% of the value of the equity instrument.

Payment. The FTT would be due by the broker-dealer (prestataire de service d’investissement) that has executed the buy order or, if no broker-dealer is involved, by the bank in charge of the acquirer’s securities account (teneur de compte). The central securities depositary (Euroclear France) would be in charge of centralizing the collection of the tax, reporting to the tax administration and payment of the tax to the French Treasury. The FTT would have to be paid no later than on the 15th of the month following the acquisition date of the equity instrument.

Entry into force. The FTT (as well as the specific taxes described below) would be applicable to transactions carried out as from August 1, 2012.

Specific Taxes

High frequency trading. A specific tax of 0.01% would apply to high frequency trading performed by establishments located in France, which include the French branches of non-French banks and exclude the non-French branches of French banks.

The tax would be triggered when the percentage of orders that is cancelled or modified within a trading day by that establishment would be higher than a rate to be set in a forthcoming decree. Such cancellation rate shall not be less than 2/3 of the orders.

The tax would apply on the value of the cancelled or modified transactions that exceed this threshold.

Credit default swaps on sovereign bonds. A specific tax of 0.01% would apply on the acquisition of credit default swaps (or similar derivative instruments) with respect to bonds issued by a member state of the EU. Such tax would be applicable to acquisitions carried out by individuals domiciled in France, companies incorporated in France and French establishments of non-French companies. The tax would apply on the notional amount of the credit default swap.

The tax is not applicable if the acquisition corresponds to the hedging of a long position on such bonds or on other assets/instruments the value of which is correlated to such bonds.

Transfer Tax on Shares

Until the enactment of the Finance Bill for 2012, the transfer of shares in listed companies was either exempt from transfer tax or subject to a transfer tax capped at €5,000. The Finance Bill for 2012 modified the applicable rates and, more importantly, removed the €5,000 cap.

Given the significant impact of this modification on certain transactions (including block trades and bought deals), the French government now proposes to step back and reinstate the previous rules including the €5,000 cap.