TAX NEWS - January 2010

France Tax Alert: Scope of 5% transfer tax extended

In a significant change to France's transfer tax territoriality rules, the transfer of shares in a foreign entity owning mainly French real estate assets is now subject to the 5% transfer tax. The new rules, included in the Amended Finance Bill for 2009, apply as from 1 January 2010 and will have a major and detrimental impact on the real estate funds sector.

Previously, the transfer of shares in a foreign entity were subject to French transfer tax only when a deed was executed in France (based on a provision in the French tax code under which the transfer of foreign movable assets is subject to registration in France when a deed is executed in the country). Although this was contrary to administrative guidelines, the French courts had held in a number of cases that the territoriality rule prevailed over another provision in the tax code that was interpreted by the French tax authorities as meaning that the transfer tax would apply if the foreign entity qualified as a "French real estate company," i.e. a company deriving its value mainly from French property. The amended rules legalize the position of the French tax authorities.

Under the new rules, the 5% transfer tax will apply to the sale of shares in a company - whether French or foreign - to the extent the company qualifies as a French real estate company, even if no deed of transfer is executed in France. Listed companies are excluded from the scope of the 5% transfer tax. The transfer tax now applies to the sale of shares of either French or foreign companies, but only to transfers qualifying as sales, disposals, etc. (i.e. not to contributions and mergers).

The new rules are expected to affect, in particular, the sale of shares in Luxembourg holding companies whose sole assets are shares in a French real estate-owning subsidiary; these transfers will now be subject to the 5% transfer tax.