Financial Transaction Tax in France: an overview

This briefing provides an overview of the French financial transaction tax ("French FTT") applicable in France since 1st August 2012.

Scope of application

Transactions subject to (or potentially subject to) French FTT are: 

• purchases for consideration ("Purchases") of equity securities (shares and quasi-equity instruments) admitted to trading on a regulated market and issued by French incorporated companies whose market capitalization is over EUR 1 billion as at 1st December of the preceding year ("French Equities"). Transactions over certificates representing French Equities (such as American depositary receipts (ADR) or European depositary receipts (EDR)) or the physical settlement of derivatives having French Equities as underlying assets would fall within the scope. The purchase must result in a transfer of ownership of the French Equities within the meaning of Article L 211-17 of the French Monetary and Financial Code, i.e. in the recording of the French Equities into the securities account of the purchaser; and
• high-frequency trading transactions ("HFT") carried out by companies operating in France where these transactions relate to shares or quasi-equity instruments and are executed on own account. A HFT transaction is deemed to occur where the decisions to order, modify or cancel trades are automatically generated by a computer algorithm and the interval between such decisions does not exceed half a second. The tax is due where the percentage of orders amended or cancelled within a trading day for a relevant security exceeds 80 per cent of the total orders entered for that security in that day.

Exemptions 

French FTT on Purchases does not apply to:

• transactions made in the context of an issue of new equity securities (i.e. primary market transactions); 
• transactions by clearing houses and central depositaries in the course of their regulated business;
• acquisitions made in the context of "market making activities", noting that the law contains its own definition of the concept of "market making activities" for purposes of the FTT _{(see note 1)};
• transactions executed on behalf of issuers in order to promote the liquidity of their shares, in accordance with authorised market practices accepted by the French AMF pursuant to EU Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 and EU Directive 2004/72/EC of the EU Commission of 29 April 2004;
• intra-group transactions between companies belonging to the same group within the meaning of Article L. 233-3 of the French commercial code or Article 223 A of the French tax code and transfers of securities in the context of certain restructuring transactions (mergers, demergers and partial mergers subject to the favourable tax regimes, management buyouts and repurchases of securities for allocation to a company savings scheme);
• securities financing transactions such as securities lending, repos, buy-sell backs and sell-buy backs;
• acquisitions by certain employee mutual funds and acquisitions by employees directly via their company savings plan of shares issued by their company or by a company of the same group;
• repurchases by companies of their own shares for the purpose of reselling to employees holding a company savings plan;
• purchases of bonds that can be exchanged or converted into shares.

French FTT on HFT does not either apply to transactions made in the context of "market making activities". 

French FTT taxable basis

The French FTT taxable basis is determined as follows:

• Purchases – French FTT is based on the acquisition value of the French Equity (excluding transaction fees) set out in the contract resulting in the transfer of ownership to the buyer. Where purchases and sales of the same French Equity are carried out in the same day (or month where the deferred settlement system is applicable), only the net daily (or monthly) balance is recorded in the buyer's securities account. Only the net balance of taxable transactions is in this case subject to the French FTT.
• HFT – French FTT is calculated on the value of orders modified or cancelled which exceeds the 80 per cent modification or cancellation threshold in a given trading day. 

French FTT tax rates

French FTT is levied at different rates depending on the type of transaction.

• Purchases - 0.3%
• HFT - 0.01%

Taxable person

• Purchases - French FTT is economically borne by the buyer on Purchases.
  
  The entity responsible for collecting and paying French FTT ("Accounting Party") is, regardless of its location:
  
  • the Investment Service Provider ("ISP") which has executed the buy order on behalf of its client or traded on the buy-side on its own account; or
  • when the transaction is not executed by an ISP (e.g., OTC transactions), the custody-account-keeper of the buyer.
  
  When there is a chain of intermediaries acting on behalf of a third party, the Accounting Party that must collect the tax is the ISP who has directly received the buy order from the final purchaser.

• HFT – the tax is payable by the company operating in France which carries out the HFT transactions.

Payment of French FTT

• Purchases – Generally and provided the central depositary is established in France, information relating to the French FTT and payment thereof must be made to the central depositary before the fifth of the month following that of the delivery of the French Equities. The central depositary then transmits the information and the tax collected to the French tax authorities. In some specific cases, notably when the central depositary is not established in France, the French FTT must be declared and paid by the Accounting Party to the French tax authorities before the twenty-fifth of the month following that of the delivery.
• HFT – This tax must be reported on a specific return and paid before the tenth of the month following that during which the cancelled or modified orders are passed. 

Tax assessment, penalties, collection and litigation

The French FTT is collected and audited in accordance with the same procedures and subject to the same guarantees and liens as French VAT. Claims are submitted, investigated and judged in accordance with the rules applicable to this tax.

Penalties are similar to those applicable to French VAT but specific additional penalties are applicable, as regards Purchases, for failure to perform filing obligations, provide information, or for late payment.

Authors: Emmanuelle Pontnau-Faure, Partner, and Solène Guyon, Associate.

Note 1: Market making activities are defined as the activities of an investment firm or a credit institution or an entity of a foreign country or a local company that is a member of a trading platform or a market in a foreign country where this firm, institution, entity or company acts as an intermediary and participates in transactions on financial instruments within the meaning of Article L. 211-1 of the French Monetary and Financial Code (i) either in the simultaneous quoting of firm, competitive bid and ask prices, of comparable size, with the result of ensuring market liquidity on a regular and continuous basis, or (ii) in the course of its normal business, when executing the orders given by clients or in response to client buy and sell requests, or (iii) to hedge positions related to transactions covered in (i) or (ii) above.