On examination of the draft Finance Law for 2012, three amendments, adopted at the finance committee stage, caught our tax specialists' attention. They are:

  1. Increase in registration fees payable on disposals of securities in companies whose assets consist mainly of real estate ('sociétés à prépondérance immobilière' or SPIs)

Although subject to registration fees at a rate of 5%, disposals of SPI securities generally offer a significant saving in registration fees compared to disposals of the buildings themselves (which, with some exceptions, are subject to registration fees of 5.09%). This is because, for SPI securities, the taxable base for the fees is equal to the disposal price of the securities, i.e. the commercial value of the buildings is reduced by the debts of the SPI.

The amendment proposes that, in determining the taxable base for registration fees, only the liabilities of the SPI related to the acquisition of the buildings (rather than all debts of the SPI) should be deductible. It would therefore no longer be possible to reduce the amount of the registration fees by means of the SPI's other debts. These include debts related to the financing of works, supplier debts and distributions of dividends booked to the current account.

As the draft stands, its impact should be limited except in special cases (e.g. where the SPI has had to resort to significant debt not related to the acquisition of buildings). In the present context, however, it cannot be ruled out that the text will be tightened up during the debates on the bill so as to exclude all debts of the SPI, without distinction. The cost as regards registration fees would then be the same, irrespective of whether the acquisition relates to SPI securities or directly to a building held by the SPI, a situation which already exists in Spain and Germany.

At the moment, no date has been specified for the introduction of this reform. However, looking at previous reforms affecting registration fees, this measure should only relate to disposals made from 1 January 2012 onwards.

In any event, it is advisable to take this amendment into account - and the possibility that it might be tightened up - during any current negotiations on the acquisition or disposal of securities in SPIs.

An illustration of this possible reform is available here.

  1. Removing the tax benefit on dividends of listed real estate investment companies (sociétés d'investissement immobilier cotées or 'SIICs') received by individuals

Two restrictions are proposed with the aim of removing the tax benefit enjoyed by shareholders who are individuals (as opposed to body corporates):

  • abolition of the allowance of 40% on dividends distributed by a SIIC to those of its partners who are natural persons;
  • non-eligibility of SIIC securities for securities savings plans (PEA). A transitional period is envisaged.
  1. Restriction on the deduction of charges related to the acquisition and holding of equity shares

At this stage, the real estate sector is not affected by this measure but, given the current climate, it is possible that the sector will in future also be targeted on conclusion of the current debates.

This amendment proposes to exclude the deduction of charges incurred for the acquisition, management and holding of equity shares in a subsidiary where managerial decisions are made by a management located outside France. The subsidiary companies concerned are those whose equity shares permit almost total exemption of the capital gains on disposal (90% of the capital gain realised since the amended Finance Law for 2011 introduced on 20 September this year, as compared to 95% previously).See Article 219 I. a quinquies, 3rd subparagraph, of the General Tax Code for more information.

Deduction of such charges would only be allowed if the company can show by all means necessary that operations related to the equity shares are actually decided in France. Also, that as appropriate, that the control or influence over the management of the company whose securities are held is actually exercised from within France.

The authors of the amendment state that their targets are those subsidiaries located outside France and held via a French company, while the group parent company, the management or the investors are established abroad. Nevertheless, the current draft law is much wider in scope; it can be assumed that subsidiaries and French sub-subsidiary companies of foreign groups would also be affected.

This reform could have a very significant impact on conventional LBO (Leverage Buy Out) operations. This is because it could deprive such operations of tax leverage by excluding financial charges related to the takeover of the target company, as well as acquisition costs (consultancy, due diligence, etc.) and management fees. The question would then arise of whether each time a foreign investor takes a majority stake in a holding company that is conducting a takeover and then appoints directors to the board of the holding company or the target, it is in fact allowing the managers to exercise genuine managerial power in France, therefore permitting the deduction of such costs for tax purposes.

The question of the compatibility of this draft with Community freedoms also arises, in particular the free movement of capital with regard to third countries. This measure would apply to financial years beginning as of 13 October 2011.

An example of the scheme concerned by the reform is available here.

Among the other amendments introduced (by various political factions) it may be noted that some aim to further tighten the planned rules as regards thin capitalisation.