French tax rules for expenses relating
to share transactions (corporate
income tax and VAT)
Client note
Further information
If you would like further information on the
new French tax rules for expenses relating to
share transactions, please contact a person
mentioned below or the person with whom
you usually deal.
Contact
Hervé Israël
herve.israel@lovells.com
Bruno Knadjian
bruno.knadjian@lovells.com
This note is written as a general guide only. It
should not be relied upon as a substitute for
specific legal advice.
Contents
INTRODUCTION
1
REMINDER OF THE RULES APPLICABLE UNTIL 31 DECEMBER 2006
2
NEW FRENCH TAX RULES FOR EXPENSES OF ACQUIRING SUBSTANTIAL SHAREHOLDINGS
APPLICABLE SINCE 1 JANUARY 2007
3
VAT DEDUCTION FOR EXPENSES OF ACQUIRING AND DISPOSAL OF SHAREHOLDINGS:
LATEST DEVELOPMENTS 2008/2009
6
ANNEXE
7
Lovells Tax
Introduction
French holding companies that buy or
sell substantial shareholdings in target
companies incur costs and expenses
that may be very significant (advisers'
and experts' fees, the costs of finding
purchasers, valuation and due diligence
costs, etc.).
In this context, the question of whether
the VAT on these expenses can be
recovered is important from a financial
perspective. Positions taken recently on
the subject by certain French tax courts
prompt a review of the question.
Further, for the purposes of corporate
income tax, the 2007 French Finance
Act abolishes, from a tax perspective,
the choice between making an
immediate deduction of expenses
incurred in acquiring substantial
shareholdings and incorporating them
into the acquisition base cost of the
shares 1 .
Thus, expenses incurred in financial
years ended after 31 December 2006
and relating to acquisitions of
substantial shareholdings during those
financial years must be incorporated
into the base cost of the shares. They
are then deducted over five years.
This rule, which applies independently
of the accounting option selected, gives
rise to reprocessing outside the
accounts for calculation of the taxable
result.
In French tax authorities' guidelines
4 H-1-08 of 4 January 2008, the tax
authorities comment on this measure
and fill in the detail.
Finally, it is necessary to distinguish
expenses of acquiring substantial
shareholdings from the costs of
increasing share capital and issuing
loans. A table in the Annexe
summarises the tax treatment of each
of these types of expense.
1
Law 2006-1666 of 21 December 2006 art. 21
1
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2
Reminder of the rules applicable until 31 December 2006
For the record, Regulation 2004-06 of
23 November 2004 of the French
accounting regulation committee (CRC)
on the definition, valuation and
accounting of assets, applicable to
financial years beginning after 1
January 2005, changed the accounting
treatment of expenses of acquiring fixed
assets.
Thus, for accounting purposes (art.
321-10 and 321-15 of the General
Accounting Plan), transfer duties, fees
or commissions and notarial costs
relating to the acquisition of a fixed
asset may be added to the base cost of
a fixed asset or alternatively accounted
for as charges.
The option selected is irrevocable and
applies to all tangible and intangible
fixed assets acquired. However,
different options apply to long-term
investments, including substantial
shareholdings, and to investment
securities.
Taxwise, this new accounting treatment
of the costs of acquiring fixed assets
was implemented in article 38 quinquies
of annexe III of the French Tax Code. In
this regard, it is recalled that it was not
possible to exercise a different tax
option from the accounting option
chosen.
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3
New French tax rules for expenses of acquiring substantial
shareholdings applicable since 1 January 2007
The 2007 French Finance Act stops it
being possible for companies liable to
corporate income tax to deduct the
expenses of acquiring substantial
shareholdings in the year in which they
are incurred.
It now provides for compulsory
incorporation of these expenses into the
base cost of the shares and for their
depreciation over five years starting
from the date of acquisition.
SCOPE OF THE NEW RULES
Businesses concerned
The measure only covers companies
automatically or optionally liable to
corporate income tax and all persons
liable to this tax on all or part of their
results (associations, foundations,
state-owned companies, public
establishments, permanent
establishments of foreign companies,
etc.), whatever the tax rules applying to
them (normal real regime or simplified
real regime).
However, the choice in article 38
quinquies of annexe III of the French
Tax Code ("FTC") between
incorporating into the base cost of
substantial shareholdings the expenses
incurred acquiring them and deducting
them as charges remains valid for
"transparent" businesses liable to
income tax.
the substantial shareholdings
account or in a special subdivision
of another section of the balance
sheet corresponding to their
accounting classification.
The expenses covered
For the purposes of this measure,
acquisition expenses include transfer
duties, fees, commissions and notarial
costs relating to the acquisition of
substantial shareholdings, however the
acquisition is made, including by public
purchase or exchange offer.
The acquisition expenses concerned
are the same as those covered by the
choice in article 321-10-1 of the General
Accounting Plan, between incorporation
of the expenses into the base cost of
the shares and their immediate
deduction as charges. In this regard,
the emergency Committee of the
national accountancy Council stated in
opinion 2000-D of 21 December 2000
on the accounting treatment of costs of
issuing and acquiring shares that
acquisition expenses are external costs
relating directly to the operation carried
out by the company, and include:
•
advisers' costs: fees for accounting,
legal, tax, strategy, market study,
environmental and HR advice;
•
bank costs: fees for advice,
commitment commissions,
performance bonds;
Shareholdings concerned
The compulsory incorporation of
acquisition expenses into the base cost
of the shares applies only to
substantial shareholdings defined at
paragraph 18e of article 39, 1-5° of the
FTC.
According to this article, substantial
shareholdings are:
•
company shares with this character
from an accounting perspective;
•
shares acquired pursuant to a public
purchase or exchange offer when
the business makes the offer, and
the shares giving the right to the
rules for parent companies, if such
shares or securities are recorded on
the link between these latter
expenses and the acquisition,
particularly for publicity expenses
where only publicity carried out
between the launch date and the
end of the transaction ought to be
taken into account, and provided
that the message relates explicitly to
the financial transaction concerned.
•
legal formalities and related
expenses: legal formalities,
prospectuses, printing costs,
licences from regulatory authorities
and market undertakings;
•
communications and publicity costs.
In practice, demonstrating the direct
link required between the expenses
incurred and the acquisition of
shares ought to be relatively easy
for expenses relating to advisers'
fees, bank charges and legal
formalities, including transfer and
registration duties, unlike
communication and publicity
expenses. This is why analysis on a
case by case basis appears
necessary to establish the nature of
From a tax and accounting perspective,
the costs of acquiring shareholdings
must be distinguished from costs of
establishment and costs of issuing debt.
Thus, according to article 361-1 of the
General Accounting Plan, the only costs
of establishment are costs of
incorporation, conversion, first
establishment, increase of capital,
merger and demerger. In accounting
terms, costs of issuing debt within the
meaning of article 361-3 of the PCG are
all costs generated by the issue of the
various categories of bond or bank
debt. In practice, bank charges invoiced
by a credit institution to a business at
the time a loan is made can be
assimilated to costs of issuing debt on
the double condition that:
•
the costs exclusively cover payment
of the credit institution in relation to
a financing, to the exclusion of any
other service that may also have
been provided by the credit
institution;
•
including these costs in calculation
of the effective interest rate of the
loan does not lead to an interest
rate that is obviously not market
practice (opinion 2006-A of 7 June
2006 of the emergency Committee
of the national accountancy Council
on the accounting treatment of the
costs of acquiring shareholdings
and the costs of issuing debt in
individual accounts).
For tax purposes, it is necessary to
refer to the accounting definition of the
costs liable to be treated as costs of
establishment or debt issue (Inst. 4 A13-05 n° 45 to 49).
In these conditions, the details provided
by the national accounting Council of
the definition of the costs of issuing
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4
debt, as recalled above, apply for tax
purposes.
Staggered deduction of acquisition
expenses
Generally, the costs of acquiring a fixed
asset can therefore be assimilated
neither to costs of establishment nor to
the costs of issuing debt for the
purposes of acquiring the fixed asset.
The portion of the expenses of
acquiring the substantial shareholding
corresponding to the acquisition
expenses that are compulsorily
incorporated may be depreciated over
five years from the date of acquisition of
the shareholding.
However, as doubt had appeared as to
the accounting treatment of acquisition
expenses in leveraged buy-outs (LBO)
before adoption of opinion 2006-A,
businesses that had wrongly
assimilated the expenses of acquiring a
fixed asset to costs of establishment
and applied to them a tax treatment
different from the one normally
applicable to costs of acquiring a fixed
asset will therefore have to redeclare
their results in order to apply to these
costs the tax treatment that in principle
is reserved for them.
APPLICABLE RULES
Incorporation of expenses into the
base cost of the shareholding
Now, companies liable to corporate
income tax are required to incorporate
into the base cost of substantial
shareholdings the total expenses
incurred in the acquisition.
These companies can no longer
immediately deduct the costs of
acquiring substantial shareholdings
from their taxable profits.
However, these provisions do not in
principle call into question the option
that has been exercised, either in
accounting terms in relation to the
substantial shareholdings, or in
accounting and tax terms, in relation to
shares other than substantial
shareholdings. The option thus
exercised is irrevocable, unless a
revision is authorised in accounting
terms.
When the business has opted in
accounting terms for immediate
deduction of the expenses of acquiring
shareholdings, it must reintegrate into
the taxable profit for the year of
acquisition of the substantial
shareholding the acquisition expenses
thereby incurred.
Depreciation is linear and calculated
over a period of five years starting from
the date of acquisition of the
shareholding. When the acquisition is
made during a financial year, the first
annuity is reduced pro rata to take into
account the time between the beginning
of the financial year and the date of
acquisition of the shares. The period is
counted in days and, in the interests of
simplicity, a year of twelve months is
deemed to comprise 360 days. The
provision is then spread over the year of
acquisition and the five following years
with the last annuity also reduced pro
rata.
Example: A business whose
accounting year coincides with the
calendar year acquires a substantial
shareholding for 50 000 € on 1 April N.
For this acquisition, it pays transfer
duties, advisory fees and intermediary
commissions of 1 000€ excluding VAT.
The business is required for tax
purposes to incorporate into the
acquisition cost the costs incurred at the
time of the acquisition.
Depreciation of the portion of the base
cost corresponding to these acquisition
costs must be calculated and deducted
as follows:
Year N: 1 000 € × 1/5 × 9/12 = 150 € ;
therefore be accounted for in the
business' books (article 39, 1-2°) in an
exceptional depreciation account, with
no technical provision being allowed for
accounting purposes due either to the
costs being accounted for as charges or
the fact that the substantial
shareholding was not depreciable when
the costs were activated.
However, for businesses that have
exercised or exercise the option for
immediate deduction of the costs of
acquiring shares for accounting
purposes, it will be acceptable for
depreciation of the expenses of
acquiring the substantial shareholding
not to be accounted for in an
exceptional depreciation account but to
be subject to a deduction outside the
accounts. This will avoid double
deduction of these costs in calculation
of the accounting results, subject to the
deduction being taken into account in
calculating the capital gain on sale of
the shares in any subsequent sale.
In this case, the depreciation provision
will be directly added by the business
into table 2058 A for calculation of the
taxable result (in box XG « various
deductions »).
Depreciation of shareholding
In the event of depreciation of
substantial shareholdings when the
business has opted for accounting
purposes to incorporate the acquisition
expenses into the base cost of the
shares, this provision can be deducted,
subject to compliance with the law, up
to the fiscal base cost of the substantial
shareholding less depreciation allowed
to be deducted or deductions made.
Year N + 1: 1 000 € × 1/5 = 200 € ;
CONSEQUENCES OF SUBSEQUENT
TRANSACTIONS
Year N + 2: 1 000 € × 1/5 = 200 € ;
Sale of shareholding
Year N + 3: 1 000 € × 1/5 = 200 € ;
Capital gains or losses on sales of
substantial shareholdings the costs of
acquiring which were compulsorily
incorporated into the base cost of the
shares must be calculated in
accordance with the law based on the
net fiscal acquisition cost of the shares,
that is, the base cost of the shares
Year N + 4: 1 000 € × 1/5 = 200 € ;
Year N + 5: 1 000 € × 1/5 × 3/12 = 50 €.
Depreciation of the costs of acquiring
the shares must comply with the same
tax rules as normal depreciation. It must
Lovells Tax
including acquisition expenses,
whatever the option chosen for
accounting purposes, less depreciations
or deductions, When the sale takes
place during the five year period for
depreciation of the expenses, the
company may, for the year of sale,
make a depreciation or deduction to
take into account the time elapsed
between the start date of that year and
the date of sale of the shares.
Example: A business whose
accounting year coincides with the
calendar year acquires a substantial
shareholding on 1 January 2006 for
30 000 €.
In making this acquisition it incurs costs
(advisers' fees, transfer duties and
intermediaries' commissions) of
1 000 €.
The company has opted to incorporate
the costs into the acquisition cost of the
shares. The substantial shareholding is
recorded on the balance sheet of the
business at 31 000 € and no costs are
reintegrated at the end of financial year
2006.
However, at the end of this financial
year, the business deducts a
depreciation annuity calculated as
follows: 1 000 € × 1/5 = 200 €.
On 1 January 2007, the business sells
for 35 000 € the whole of the substantial
shareholding it acquired on 1 January
2006.
The capital gain made on sale by the
business must be calculated as follows:
Sale price - fiscal acquisition cost
35 000 € - (31 000 € - 200 €) = 4 200 €.
Capital gains or losses on sales of
substantial shareholdings covered by
this measure are taxable in accordance
with the law.
Subsequently, if the shares are sold
less than two years after being
acquired, the capital gain or loss made
is subject to the rules for operating
profits and losses.
5
Merger or similar transactions
In a merger under the special merger
regime set out in article 210 A of the
FTC between the company acquiring
substantial shareholdings and another
company not issuing securities, the
absorbing company will be permitted to
continue depreciating or deducting the
acquisition expenses incorporated into
the base cost of the substantial
shareholding over the depreciation
period still left to run. The same is true
for contributions of substantial
shareholdings placed under the same
special merger regime.
In a subsequent sale of the
shareholding, the absorbing company
will of course have to calculate the
capital gain or loss on sale on the basis
of the shareholding's value from a tax
point of view at the date of the merger
or contribution, that is, the booked value
of the shares on the balance sheet of
the absorbed company, less
depreciations (or deductions) allowed to
be made in calculation of the taxable
result of the company receiving the
contributions and of the absorbed or
contributing company.
In a merger-absorption or universal
transfer of assets, cancellation of the
shares in the absorbed company leads
the absorbing company to calculate a
merger surplus or deficit. This capital
gain or loss resulting must be calculated
on the basis of the net fiscal value of
the cancelled shares, that is the base
cost plus the expenses of acquiring
these shares, whichever accounting
option is chosen, and less depreciations
or deductions already made.
Exchange of shareholdings
In the event of an exchange of shares in
a public exchange offer, the company
making the exchange offer will be
allowed to continue to depreciate the
acquisition expenses incorporated into
base cost of the substantial
shareholding put up for exchange for
the remainder of the depreciation
period.
In a subsequent sale of the shares
received in the exchange, the company
proposing the exchange will of course
have to calculate the capital gain or loss
on sale on the basis of the value of the
exchanged shares from a tax point of
view, that is, their base cost including
the costs of the acquisition, less
depreciations (or deductions) allowed to
be deducted in calculating its taxable
result.
Lovells Tax
6
VAT deduction for expenses of acquiring and disposal of
shareholdings: latest developments 2008/2009
We know that French holding
companies that buy or sell substantial
shareholdings also incur costs and
expenses that can be very significant
(advisers' and expert fees, costs of
finding purchasers, valuation and due
diligence fees, etc.). In this context,
whether or not the VAT on these
expenses can be recovered is an
important financial issue.
DEDUCTION OF VAT ON EXPENSES
OF ACQUIRING SHAREHOLDINGS
Costs of acquiring a direct
subsidiary
2
According to the ECJ case law, to
which the French tax authorities have
given their support, the expenses
incurred by a company for the various
services it receives in connection with
the acquisition of a stake in a subsidiary
are part of its general costs. Therefore,
these expenses are normally deductible
in proportion to the receipts arising from
transactions effectively subject to VAT.
Thus, the tax authorities now accept
that the initiating holding company may
deduct the VAT paid on the expenses of
its acquisition of substantial
3
shareholdings .
Costs of acquiring an indirect
subsidiary
However, the administrative court has
more recently held that a holding
company may not deduct the VAT on
the expenses of acquiring an interest in
an indirect subsidiary when the interests
were actually acquired by its direct
subsidiary 4 .
The French Supreme Tax Court
(Conseil d'Etat) reaffirms the condition
of necessity, the general principle for
deducting VAT, in the case of a holding
company that intends to deduct the VAT
on the costs of acquiring shares in its
indirect subsidiary.
The judges concluded quite logically
that the VAT on the assistance and
advice fees could not be part of the
holding company's general expenses if
not relating to its commercial operation.
DEDUCTION OF VAT ON COSTS OF
SELLING SHAREHOLDINGS
VAT-exempted and notably the sale of
shareholdings.
The solution thus adopted by the ECJ in
relation to the expenses of acquiring
stakes in other companies, and that
commentators on administrative law
have decided to extend to all expenses
connected with share capital
transactions carried out by taxpayers
(listings, contributions to companies),
can in some situations be transposed to
the treatment of expenses incurred in
the sale of a stake.
The position held by the French tax
authorities remain however
challengeable as regards as the case
law rendered by the French Supreme
Tax Court (Conseil d'Etat) and the
European Court of Justice ("ECJ").
In a recent case decided on 14 May
2008 (SA Aventis, n°06VEO1989), the
Administrative Court of Appeal of
Versailles took this line. The judges
ruled in favour of the plaintiff, holding
that the VAT on the advisers' fees
incurred on the sale of the shares was
completely deductible as long as the
purpose of the sale was to restructure
its activity subject to VAT and therefore
had a direct and immediate link with the
whole of the selling business' economic
activity.
This ruling confirms a previous decision
by the same Court (Comepa, 29
September 2006, n°409) in a
comparable case in which the Court
allowed deduction of the VAT on the
expenses incurred by the company
during this period and relating in
particular to the sale of the shares.
In practice, deductibility of VAT needs
to be fully accepted for expenses which,
incurred to ensure through various
sources of finance, growth of the
business and thus its durability, can be
considered inherent to its functioning
and thus to fall within the category of
general expenses.
However, recent guidelines (7-A-1-09)
issued by the French tax authorities on
7 April 2009 relating to expenses
incurred in the sale of properties do not
take for granted the recent positions
held by the judges. Pursuant to their
guidelines, the French tax authorities
challenge the deduction of input VAT
related to expenses incurred for
transactions out of the scope of VAT or
The debate, which concerns very many
holding companies, should soon be
resolved. The French Supreme Tax
Court has received several appeals and
the ECJ ought also to give its view on a
point of law from the Swedish Supreme
Court 5 .
2
ECJ, 27 September 2001, Cibo Participations
3
Administrative instruction 3-D-1-06, 2 January
2006
4
EC, 6 October 2008, SA Axa, Req, n°299265
5
Cf. OPJEC of 29 March 2008, case C-29/08,
Skatterverket. The General Advocate M Paolo
Mengozzi released on 12 February 2009 his
conclusions claiming the non-deduction of VAT
of costs and expenses. This deduction refusal
would appear however challengeable and the
final decision of the Court is then highly
expected.
Lovells Tax
7
Annexe
Applicable
provision
Expenses of
acquiring
substantial
shareholding
Expenses of
increasing
share capital
Expenses of
issuing debt
Article 209, VII
of the French
Tax Code
Article 38
quinquies of
annexe III
to the French
Tax Code
Article 38
quater of
annexe III to
the French Tax
Code
Article 39, 1-1°
quater of the
French Tax
Code
Article 2 D
annexe III to
the French Tax
Code
Expenses
Tax treatment
- Advisers: fees for accounting, legal, tax,
strategy, market study, environmental and HR
advice;
- Banks: fees for advice (structuring
transactions...); engagement commissions;
performance bonds (e.g.: L191-1 type
guarantee of the law of 24 July 1966);
- Legal formalities and related expenses:
legal formalities, prospectuses, printing costs,
licences from regulatory authorities and
market undertakings;
- Communication and publicity: cost of
communications campaign (newspapers, TV,
radio ...); printing costs; organisation of
information meetings; commissions for the
financial
communications
agency
and
purchase of media space...
Compulsory incorporation of these
expenses into the base cost then
depreciation over five years starting from
the date of acquisition of the shares
- Advisers: fees for accounting, legal, tax,
strategy, market study, environmental and HR
advice;
- Banks: fees for advice (structuring
transactions...); engagement commissions;
performance bonds (e.g.: L191-1 type
guarantee of the law of 24 July 1966);
- Legal formalities and related expenses:
legal formalities, prospectuses, printing costs,
licences from regulatory authorities and
market undertakings;
- Communication and publicity: cost of
communications campaign (newspapers, TV,
radio ...); printing costs; organisation of
information meetings; commissions for the
financial
communications
agency
and
purchase of media space...
- Deduction of all expenses as charges
for the financial year they were incurred
in;
or
- Staggered deduction of expenses over
a maximum of five years according to a
linear depreciation plan.
- Commissions for financial intermediaries
- Publicity costs for loans necessitating a
public issue
- Cost of printing shares
- Complete deduction of expenses as
charges for the financial year they were
incurred in,
or
- Depreciation of the expenses over the
life of the loan.
The accounting choice made necessarily
entails the applicable rule for calculating
taxable results.
The accounting choice made necessarily
entails the applicable rule for calculating
taxable results.
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