France’s non-cooperative states and territories list for 2013 includes Botswana, Brunei, Guatemala, Marshall Islands, Montserrat, Nauru, Jersey, Bermuda and the British Virgin Islands (BVI). The tax consequences related to this list will apply from 1 January 2014.
On 21 August 2013, the French government published a new list of “non-cooperative states and territories” (NCSTs) for French tax purposes that included, inter alia, Jersey, Bermuda and the British Virgin Islands (BVI). The French tax consequences resulting from this inclusion will apply from 1 January 2014.
The French NCST List
An NCST is a jurisdiction that is not an EU Member State and has not concluded with France, or with at least 12 other States as of 1 January 2010, a treaty that includes an administrative assistance provision regarding tax matters. A jurisdiction with which France has signed such a treaty may also become an NCST if the treaty is not ratified, or if the administrative assistance provision is not effectively applied by the other contracting jurisdiction.
The French government publishes the list of NCSTs on an annual basis. Jurisdictions that are included in the NCST list for the first time will be treated as NCSTs from 1 January of the year following the first listing, while jurisdictions that are removed from the NCST list cease to be treated as NCSTs as of 1 January of the year of the delisting.
The NCST list for 2013 includes Botswana, Brunei, Guatemala, Marshall Islands, Montserrat, Nauru, Jersey, Bermuda and the BVI.
The Adverse French Tax Consequences Resulting from Inclusion in the NCST List
The French tax rules regarding NCSTs are designed to discourage taxpayers from doing transactions with those jurisdictions, by, inter alia, drastically increasing taxation on payments made directly in an NCST (i.e., to a bank account opened in an NCST or, if the payment is not made through a wire transfer, to a person or entity whose domicile or main office is located in an NCST) and on investments made, directly or indirectly, in an NCST.
Payments to NCSTs or to NCST Residents
Higher Withholding Tax Rates. Pursuant to French domestic tax rules, portfolio income derived by a non-French-resident person or entity, from a French-resident person or entity, is subject to a withholding tax of 30 per cent for dividends; 0 per cent for interest; 33.33 per cent for service fees, including royalties; and 45 per cent for capital gains where the seller held more than 25 per cent of the financial rights in the French target at any point in time during the five years preceding the sale (except if the French target is a real estate entity for French tax purposes, in which case the withholding tax is imposed at a rate of 33.33 per cent, irrespective of the stake held in the French target).
However, where the payment is made directly to an NCST, or, with respect to capital gains, where the seller is a person or entity that is domiciled or formed in an NCST, the withholding tax is increased to 75 per cent.
As regards interest payments and service fees, the 75 per cent withholding tax rate does not apply in specific circumstances (e.g., to listed debt instruments), or if the French-resident debtor is in a position to demonstrate that the main purpose and effect of the transaction is not to locate income in the relevant NCST, which in practice may prove difficult.
Non-Deductibility of Payments. In addition to the above, interest payments and service fees paid, or due, by a French-resident person or entity to a person or entity domiciled or formed in an NCST are not deductible for French tax purposes, unless the French-resident debtor demonstrates that the main purpose and effect of the transaction is not to locate income in the relevant NCST.
Investments in an NCST
Non-Application of the Participation Exemption Regime. Pursuant to French domestic tax rules, dividends and capital gains derived by a French-resident company in respect of a qualifying participation held for more than two years are partially exempt from corporate income tax (up to 95 per cent, as regards dividends, and 88 per cent, as regards capital gains), but this participation exemption regime does not apply where the relevant participation is held in a company that is domiciled in an NCST.
Strengthening of Controlled Foreign Corporation (CFC) Rules. Pursuant to French domestic tax rules, CFC rules do not apply if, inter alia, the CFC entity can demonstrate that it carries out a commercial or industrial activity in the jurisdiction where it is either domiciled or has its main office, which in practice may prove difficult if the relevant CFC entity is domiciled in an NCST.
More Burdensome Transfer Pricing Documentation. Pursuant to French domestic tax, French-resident companies which (i) are required to prepare transfer pricing documentation and (ii) have entered into transactions with entities located or formed in an NCST must provide to the French tax authorities the full accounting data that would be required from the relevant NCST entities if they were domiciled in France.
NCSTs and the 3 Per Cent Tax
French and foreign entities that own, directly or indirectly, real estate properties located in France are liable for an annual tax that is equal to 3 per cent of the fair market value of their direct or indirect share in the French properties, unless they benefit from a specific exemption. In particular, entities that (i) are domiciled in France, in an EU Member State or in another state with which France has signed an agreement including a non-discrimination or an exchange of information provision (a treaty-protected state), and (ii) disclose, or commit to do so, the identity of their shareholders, are exempt from this 3 per cent tax.
Those entities that are domiciled in a treaty-protected state are eligible for the above 3 per cent tax exemption even if the relevant treaty-protected state is, or has become, an NCST, unless the relevant agreement is terminated either by France or by the treaty-protected state.
Considering the above adverse tax measures applicable to NCSTs, international corporate groups and private equity funds with a presence both in France and in any of the newly listed NCSTs (such as Bermuda, Jersey and the BVI) should examine their structure to determine whether they are affected by these measures.
It also should be noted that NCSTs are likely to become an even greater area of focus by the French tax authorities in the future. The initial draft of the act on tax fraud and financial crime provided for a new definition of NCSTs, effective from 1 January 2016, which would include any jurisdiction outside the European Union that did not implement, or commit to doing so, an automatic system of exchange of information with France, prior to that date. Considering the fact that, to date, there is no international consensus regarding information exchange procedures, this provision was considered disproportionate by the French Constitutional Court and was therefore deleted from the final act voted on by the French Parliament. The French tax authorities could, however, make new proposals on the subject in the next few years.