TAX NEWS - January 2010

France Tax Alert: Anti-avoidance rules strengthened

The Amended Finance Bill for 2009 passed on 30 December 2009 in France includes provisions that strengthen France's anti-avoidance rules where transactions are conducted with entities located in "non-cooperative" tax jurisdictions.

The new anti-avoidance rules restrict tax benefits for income flowing to or from a non-cooperative tax jurisdiction and reinforce France's controlled foreign company (CFC) rules. Effective dates, which vary, are noted below.


Non-cooperative jurisdictions: Article 238-O A of the French tax code defines a "non-cooperative" jurisdiction as one that: is not an EU Member State; has been subject to an official audit by the OECD with regard to transparency and information exchange; as of 1 January 2010, has not signed at least 12 treaties on mutual administrative assistance in tax matters (in accordance with OECD standards); and as of 1 January 2010, has not entered into a treaty on mutual administrative assistance in tax matters with France. (France recently signed such agreements with Andorra, the Cayman Islands, Guernsey, Jersey, Liechtenstein and San Marino, amongst others.)

On the basis of these four cumulative criteria, the Ministry of Finance will issue a list of non-cooperative tax jurisdictions. The following countries are expected to be on the list: Anguilla, Belize, Brunei, Costa Rica, Dominica, Grenada, Guatemala, Cook Islands, Marshall Islands, Liberia, Montserrat, Nauru, Niue, Panama, Philippines, St. Kitts and Nevis, St. Lucy, St. Vincent and Grenadines, Uruguay and Vanuatu. The list will be updated annually on 1 January based on the effectiveness of the cooperation as assessed by the French tax authorities.


Limitation on tax advantages: Amended Finance Bill 2009 provides that amounts flowing from or to non-cooperative countries will be subject to the following rules:

- As from 1 January 2011, dividends paid by an entity located in a non-cooperative country to a French resident company will not benefit from the 95% exemption under the French participation exemption, and capital gains on the sale of a participation held in a company located in a non-cooperative country will be excluded from the 95% exemption;

- As from 1 January 2011, interest payments made by a French entity to a company located in a non-cooperative country will be disallowed for tax purposes regardless of compliance with the arm's length principle and thin capitalization rules; and

- As from 1 March 2010, a specific withholding tax of 50% will be imposed on dividends, interest (unless the loan agreement is signed before 1 March 2010 or it can be demonstrated that the relevant transaction does not have the main purpose or effect of localizing such income in a non-cooperative country) and royalties paid to beneficiaries located in a non-cooperative jurisdiction.


Strengthening of CFC rules: France's amended Finance Bill 2009 makes the CFC rules more stringent. As from 1 January 2010, the withholding tax levied on passive income received by a CFC from an entity located in a non-cooperative jurisdiction may not be offset against the French corporate income tax due by the French parent company. In addition, the French company, which previously could avoid the application of the CFC rules when a foreign entity located in a non-cooperative tax jurisdiction carried out effective industrial or commercial activities, will now bear the burden of proving that the entity is engaged in industrial or commercial activities and that no more than 20% of the profits of the CFC are derived from passive income or that no more than 50% of the profits are derived from passive income and income from intragroup services.