French Tax
Leasing Briefing
June 2008
Whilst we are continuing
to witness significant
activity in the UK leasing
market, focus has recently
been shifting to France,
where two tax-based
leasing structures are
promising attractive
benefits. These structures
are the single investor tax
lease, which has an
established track record,
and the new Article 39C
tax lease, which is rapidly
gathering interest.
Introduction
The French Tax Authorities released their official comments on the
Article 39C Tax Lease on 4th April 2008. This clarified certain
pending issues. We can now expect new developments in the
French market.
French Tax Leases may be applied to any asset which qualifies for
depreciation on a reducing balance basis, including ships, aircraft,
power plants, equipment and specific real estate, as well as
specified "green" assets which qualify for 100% tax depreciation in
the first year of ownership. A briefing on the French regime for
investments in "green" assets including more detailed information
will be released on our website by the end of July 2008.
French Tax Leases only apply to new assets and not to assets
which have already been delivered by the manufacturer except for
ships where transactions including a sale and lease-back through a
tax lease within 24 months from the delivery are allowed.
Subject to the conditions set out in the "Instruction n°4-D-1-08"
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
to companies outside of the lessor's group.
Any one of a number of French corporate entities can be
used for this purpose. The lessor acquires the asset using
a combination of equity contributions and bank loans, and
then leases the asset to the lessee by way of finance lease
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,
operation or registration of the asset, or the location
of the lessee.
The asset is depreciated on a reducing balance basis over either
its economic life or the duration of the lease. The economic life
of a ship is eight years for these purposes. For some assets it
may be necessary to distinguish between the structure of the
asset and its components for depreciation purposes.
In their official comments dated 4th April 2008, the French Tax
Authorities confirmed that ships can be depreciated as from the
tax year preceding delivery subject to the condition that they
were put into drydock before the first day of the tax year in
which they are delivered. The depreciation is calculated on the
basis of the installments paid on the last day of the tax year
preceding delivery which do not exceed 50% of the cost price
of the ship.
This will certainly lead to an enhancement of the financial benefits.
No limitation applies on the tax deductibility of the losses at the
level of the consolidated tax group.
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, rather than the asset, to the lessee.
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.
It is not possible to gain prior approval of a single investor
tax lease from the French tax authorities, so the structure
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
Article 39C Tax Lease
The Article 39C tax lease utilises a tax transparent partnership
in order to enable losses created by accelerated tax depreciation
in the early years of the lease to be set against profits of the
members (or their respective groups). Any tax deferral benefit is
shared with the lessee through reduced rental payments.
The lessor in the structure must be a specific partnership,
namely a société en nom collectif. Banks or non
bank investors or the lessee can participate in the société
en nom collectif.
The lessor acquires the asset using a combination of equity
contributions and bank loans, and then leases the asset to the
lessee by way of finance lease with an option for the lessee to
acquire the asset at the end of the lease.
Fixed assets must be located in France or in an EEA
country that has an appropriate double tax treaty with France1.
Movable assets must be operated or registered in France or in
an EEA country that has an appropriate double tax treaty with
France. From a French tax perspective an asset is operated in
an EEA country when it is used in that country or in the EEA
for more than two thirds of the tax year. The control or
management of an asset from a permanent establishment
located in an EEA country does not result in the asset being
operated in an EEA country for this purpose. For example, a
ship registered under UK flag will be considered as operated in
an EEA country, the effective place of operation being
irrelevant, and a ship registered under Panamian flag and
operated in EEA countries for more than two thirds of the tax
year is also eligible.
The lessor may depreciate the asset on the same basis as
described above in relation to the single investor tax lease.
The tax deductibility of losses at the member level is capped at
three times the amount of the rentals accrued by the lessor
during the first 36 months of the lease (except for the lessee if
it is also a member). However, any losses restricted in this
manner will become deductible in the fourth financial year. In
addition, the members are prevented from deducting losses in
excess of 25% of their own (or their group's) taxable profits in
the first 12 months.
These limitations apply as from the beginning of the lease period.
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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