Comparability of non E.U. CIV

eAlerte Fiscale

Mid-August, the French Tax Authorities (“FTA”) rendered the first favorable decisions allowing the refund of French withholding tax to some US funds and initiated the refund of amounts for which claims were submitted several years ago.

Additionally, on August 12^th, the FTA released their amended draft guidelines related to the comparability of foreign collective investment funds (“CIV”) to now include the comparability criteria to be met by CIV located in a non E.U. country.

An amended draft RPPM form (currently only in French but an English version should be available in the future) was also released.

This opens new opportunities for non-EU investment funds which need to analyse if they are eligible to this exemption of French source dividends and take further actions to secure their rights.

Reminder on the current legislation

French tax law provides for an exemption of withholding tax (“WHT”) on dividends paid by French companies subject to corporate income tax and for a reduced 15% withholding tax on dividends paid by certain real estate entities (e.g. French SIIC and SPPICAV) when the beneficiary of those dividends is a CIV comparable to a French one.

While the criteria to assess the comparability of E.U. CIV are now well known, the FTA never took position on the criteria necessary to be met to allow a non E.U. CIV to benefit from the aforementioned WHT exemption or reduction.

Key criteria related to the comparability

In their draft guidelines, the FTA first remind that are only eligible to the WHT exemption/reduction the CIV established in a State or territory which has concluded an agreement on mutual administrative assistance with France in order to combat fraud and tax evasion.

The FTA also remind that the object of the foreign CIV should be, as for E.U. funds, to raise capital from a certain number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors.

On top of those main conditions, the FTA also require that the foreign CIV meets the following criterion to be comparable to a French one:

• Absence of control from the unit holders over the CIV.
• The CIV must be approved, authorized or registered with an administrative, banking or financial supervisory authority and must carry on its activity under the supervision of such authority.
• The CIV must issue a disclosure document to investors prior to any subscription adapted to the quality of the targeted investors (professional and/or non-professional investors);
• The CIV must be managed by fund managers (either internal or third party ManCo) having the appropriate skills and being subject to comparable regulation as the E.U. ones. They should notably be subject to a supervision of a supervisory authority as defined in point (ii).
• The CIV's assets must be entrusted to an independent custodian for safekeeping. On this topic, the draft guidelines include various conditions that need to be respected by the custodian, notably in terms of independency towards the CIV and its ManCo, of supervision of the custodian by a prudential authority and more generally, on the role of the custodian towards the CIV. It will thus be critical to ensure the legal/regulatory environment of the country of establishment of the custodian as well as the Custody Agreement could provide enough comfort to support comparability.
• The CIV should provide information on its investment and risk spreading policy (notably in its prospectus/operating memorandum).
• The CIV’s assets and financial statements must be annually examined and certified by a third-party auditor.

Reclaim process

Although a new type of so called “RPPM form” would be published by the FTA, the guidelines require that the non E.U. eligible CIV first files a claim with the FTA to subsequently rely on the said RPPM form.

A positive reply from the FTA would constitute a presumption of comparability allowing the eligible non E.U. CIV to subsequently benefit from the WHT exemption at source. It is important to note that the guidelines require that both the completed RPPM form and the first decision of acceptance from the FTA must be provided to the paying agent in charge of levying the WHT to benefit from the exemption going forward.

The proof of payment of the French WHT levied as well as the reconstitution of the chain of payment would also still be required (as for any current reclaim process).

The way forward

Now that the first views of the FTA have been provided and that the first reimbursements are starting (for US funds at this stage), it would be key to assess, on a case by case basis, whether the non E.U. fund could fit into the above mentioned criteria.

We will of course keep you informed on the final version of those guidelines, the draft being currently open to public consultation and comments until 15 September 2020.