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WFW French Tax Leasing 2008qxp

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					French Tax
Leasing Briefing


June 2008



Whilst we are continuing      Introduction

to witness significant        The French Tax Authorities released their official comments on the
activity in the UK leasing    Article 39C Tax Lease on 4th April 2008. This clarified certain
                              pending issues. We can now expect new developments in the
market, focus has recently    French market.
been shifting to France,
                              French Tax Leases may be applied to any asset which qualifies for
where two tax-based           depreciation on a reducing balance basis, including ships, aircraft,
leasing structures are        power plants, equipment and specific real estate, as well as
                              specified "green" assets which qualify for 100% tax depreciation in
promising attractive          the first year of ownership. A briefing on the French regime for
benefits. These structures    investments in "green" assets including more detailed information
                              will be released on our website by the end of July 2008.
are the single investor tax
lease, which has an           French Tax Leases only apply to new assets and not to assets
                              which have already been delivered by the manufacturer except for
established track record,     ships where transactions including a sale and lease-back through a
and the new Article 39C       tax lease within 24 months from the delivery are allowed.

tax lease, which is rapidly   Subject to the conditions set out in the "Instruction n°4-D-1-08"
gathering interest.           released by the French Tax Authorities, currency exchange profits or
                              losses to be taken into account for the determination of the net
                              profit subject to tax can be cancelled. The absence of adverse tax
                              consequences deriving from currency exchange profits or losses will
                              simplify all transactions structured with several loans in different
                              currencies.

                              The French Tax Lease structure does not provide any tax benefit for
                              individuals similar to those existing under for example the German
                              law (i.e.the German KG model).

                              The two structures are described in more detail below.

                              Single Investor Tax Lease

                              The single investor tax lease relies on the ability of the lessor to
                              offset losses created by accelerated tax depreciation in the early
                              years of the lease against profits of other companies in its
                              consolidated tax group. Any tax deferral benefit is shared with the
                              lessee through reduced rental payments.

                              The lessor must be a special purpose vehicle that is subject to
                              French corporation tax, and which is a member of the bank's
                              consolidated tax group. The single investor tax lease can also be
                              used by industrial groups having a consolidated tax group in France
                              and available tax capacity to finance their new investments or to


                              NEW RULES FOR FRENCH TAX LEASE BRIEFING WATSON, FARLEY & WILLIAMS TAX GROUP
develop an activity of financing new investments to be leased             Article 39C Tax Lease
to companies outside of the lessor's group.
                                                                          The Article 39C tax lease utilises a tax transparent partnership
Any one of a number of French corporate entities can be                   in order to enable losses created by accelerated tax depreciation
used for this purpose. The lessor acquires the asset using                in the early years of the lease to be set against profits of the
a combination of equity contributions and bank loans, and                 members (or their respective groups). Any tax deferral benefit is
then leases the asset to the lessee by way of finance lease               shared with the lessee through reduced rental payments.
with an option for the lessee to acquire the asset at the end
of the lease. There are no restrictions in relation to the location,      The lessor in the structure must be a specific partnership,
operation or registration of the asset, or the location                   namely a société en nom collectif. Banks or non
of the lessee.                                                            bank investors or the lessee can participate in the société
                                                                          en nom collectif.
The asset is depreciated on a reducing balance basis over either
its economic life or the duration of the lease. The economic life         The lessor acquires the asset using a combination of equity
of a ship is eight years for these purposes. For some assets it           contributions and bank loans, and then leases the asset to the
may be necessary to distinguish between the structure of the              lessee by way of finance lease with an option for the lessee to
asset and its components for depreciation purposes.                       acquire the asset at the end of the lease.

In their official comments dated 4th April 2008, the French Tax           Fixed assets must be located in France or in an EEA
Authorities confirmed that ships can be depreciated as from the           country that has an appropriate double tax treaty with France1.
tax year preceding delivery subject to the condition that they            Movable assets must be operated or registered in France or in
were put into drydock before the first day of the tax year in             an EEA country that has an appropriate double tax treaty with
which they are delivered. The depreciation is calculated on the           France. From a French tax perspective an asset is operated in
basis of the installments paid on the last day of the tax year            an EEA country when it is used in that country or in the EEA
preceding delivery which do not exceed 50% of the cost price              for more than two thirds of the tax year. The control or
of the ship.                                                              management of an asset from a permanent establishment
                                                                          located in an EEA country does not result in the asset being
This will certainly lead to an enhancement of the financial benefits.     operated in an EEA country for this purpose. For example, a
                                                                          ship registered under UK flag will be considered as operated in
No limitation applies on the tax deductibility of the losses at the       an EEA country, the effective place of operation being
level of the consolidated tax group.                                      irrelevant, and a ship registered under Panamian flag and
                                                                          operated in EEA countries for more than two thirds of the tax
At the end of the lease the asset may be sold to the lessee and           year is also eligible.
the capital gain realised on the sale will be subject to
corporation tax at the normal rate in France (i.e. currently              The lessor may depreciate the asset on the same basis as
33.33%). This will impact the overall benefit resulting from the          described above in relation to the single investor tax lease.
claim to allowances. This may be mitigated by transferring the
shares in the lessor, rather than the asset, to the lessee.               The tax deductibility of losses at the member level is capped at
Provided certain criteria are satisfied, only 5% of the gain on           three times the amount of the rentals accrued by the lessor
the transfer of the shares should be subject to French                    during the first 36 months of the lease (except for the lessee if
corporation tax. Alternatively, in relation to ships, the lessor          it is also a member). However, any losses restricted in this
may join the lessee's French tonnage tax group, where                     manner will become deductible in the fourth financial year. In
applicable, which in turn will enable a partially tax free disposal       addition, the members are prevented from deducting losses in
of the ship.                                                              excess of 25% of their own (or their group's) taxable profits in
                                                                          the first 12 months.
It is not possible to gain prior approval of a single investor
tax lease from the French tax authorities, so the structure               These limitations apply as from the beginning of the lease period.
must be carefully analysed to ensure that it does not fall
within the scope of French anti-avoidance rules such as the
abuse of law principle.
1 For these purposes, the relevant countries include any member of the European Union, Norway and Iceland, but not Liechtenstein.

NEW RULES FOR FRENCH TAX LEASE BRIEFING WATSON, FARLEY & WILLIAMS TAX GROUP                                                                    02
These restrictions are not anticipated to apply to losses deriving
from the depreciation of ships during the pre-delivery period or
to losses deriving from "green" assets. However, as only
components of a leased asset will typically qualify as a "green"
asset, a proportion of the losses deriving from the leased asset
are likely to be capped.

At the end of the lease the asset may be sold to the lessee, and
the capital gain realised on the sale will be subject to
corporation tax at the normal rate in France (i.e., currently
33.33%). This will impact the overall benefit resulting from the
claim to allowances. This may be mitigated by transferring the
shares in the lessor to the lessee rather than the asset.
Provided certain criteria are satisfied, only 5% of the gain on
the transfer of the shares should be subject to French
corporation tax. Alternatively, in relation to ships, the lessor
may join the lessee's French tonnage tax group where
applicable, which in turn will enable a partially tax free disposal of
the ship.
                                                                                                                                                               Contacts
Again, it is not possible to gain prior approval of an Article 39C
tax lease from the French tax authorities, so the structure                                                                                                    Gilles Cervoni
must be carefully analysed to ensure that it does not fall                                                                                                     gcervoni@wfw.com
within the scope of French anti-avoidance rules such as the                                                                                                    +33 (0)1 56 88 21 36
abuse of law principle.
                                                                                                                                                               Nathalie Cormery
Conclusion                                                                                                                                                     ncormery@wfw.com
                                                                                                                                                               +33 (0)1 56 88 21 37
The combination of high net benefits and greater certainty in
tax legislation is making France an attractive alternative for tax-                                                                                            Michael L'Estrange
based leasing.                                                                                                                                                 mlestrange@wfw.com
                                                                                                                                                               +44 (0)207 814 8046
The net benefit arising either under a single investor tax lease
or an Article 39C tax lease when coupled with a tax efficient
exit is in the range of 10% to 15%. Without a tax efficient exit                                                                                               Watson, Farley & Williams LLP
the benefit is approximately 5% to 6%.                                                                                                                         150, avenue des Champs-Elysées
                                                                                                                                                               75008 Paris
The Paris office of Watson, Farley & Williams has been closely                                                                                                 Tel: +33 (0)1 56 88 21 21
involved in the development and implementation of both single                                                                                                  Fax: +33 (0)1 56 88 21 20
investor and Article 39C tax leases.
                                                                                                                                                               Watson, Farley & Williams LLP
For more information, please call Gilles Cervoni or Nathalie                                                                                                   15 Appold Street
Cormery in the Paris Office, Michael L'Estrange in the London                                                                                                  London EC2A 2HB
office, or your usual Watson, Farley & Williams contact.                                                                                                       Tel: +44 (0) 20 7814 8000
                                                                                                                                                               Fax: +44 (0) 20 7814 8141/2

                                                                                                                                                               www.wfw.com



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             ,
Williams LLP or a member or partner in an affiliated undertaking, or an employee or consultant with equivalent standing and qualification.
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