Securitisation is a powerful financial engineering tool, making it possible to transform illiquid assets into marketable securities. If understanding the key mechanism of securitisation is a first step, understanding the tax implications is crucial for both the entities that use it and investors. French law distinguishes between two main vehicles for these transactions, the fonds commun de titrisation (FCT) and the société de titrisation (ST), whose tax regimes differ considerably. Optimising a securitisation transaction depends on a detailed analysis of its legal structure and tax consequences, an area in which Solent Avocats' expertise in banking and financial law provides real added value.
Tax regime for securitisation mutual funds (FCT)
The tax treatment of securitisation vehicles depends on their legal form. The fonds commun de titrisation (securitisation fund), the oldest structure under French law, benefits from a specific regime due to its particular nature.
Corporation tax and registration fees
The FCT is a co-ownership with no legal personality. This fundamental characteristic places it outside the scope of corporation tax. It benefits from tax transparency: the income generated by the fund's assets is not taxed at the fund level, but directly in the hands of investors holding units. This tax neutrality is one of the pillars of the attractiveness of this vehicle. In terms of registration duties, the subscription and sale of FCT units are in principle exempt. This exemption facilitates the circulation of securities on the secondary market. However, if the deed evidencing the transaction is voluntarily submitted for registration, duty becomes payable. When the fund is dissolved, the liquidation surplus, i.e. the excess assets distributed after the liabilities have been settled, is subject to division duty, the rate of which is currently 2.5 %.
Case of CTFs bearing insurance risks
The legal framework has evolved to allow securitisation vehicles to be exposed not only to credit risks, but also to insurance risks. This innovation opens the way to complex financial arrangements enabling insurers and reinsurers to transfer part of their risks to the capital markets. However, despite these legal developments, the tax regime applicable to these specific CTFs has not been formally clarified by the authorities. This lack of clear doctrine is a point of caution for players in the insurance sector who are considering securitisation. The tax implications of such transactions should be analysed on a case-by-case basis, based on general principles and a cautious interpretation of the legislation.
Tax regime for securitisation companies (ST)
Introduced more recently, the securitisation company offers an alternative to the FCT, particularly for transactions with an international dimension. The fact that it is a legal entity radically changes its tax treatment. For a full understanding of its regime, it is useful to refer to the general legal framework for securitisation vehicles.
Special features and lack of a specific framework
Unlike the FCT, the securitisation company is a genuine commercial company, set up in the form of a public limited company (SA) or a simplified joint stock company (SAS). It therefore has legal personality. As a result, it is automatically subject to corporation tax. This is a major advantage for international set-ups. As a French tax resident, the securitisation company can take advantage of international tax treaties entered into by France, which make it possible to avoid or limit double taxation, in particular withholding taxes on income flows from foreign assets. However, at the time of its creation by the 2008 ordinance, no special tax regime had been put in place. While the FCT benefits from a transparency which ensures its neutrality, the ST is in principle subject to corporation tax under the conditions of ordinary law. The absence of a suitable framework, which would allow, for example, all sums distributed to investors to be deducted, resulting in a tax base of zero or virtually zero, remains a point of vigilance. Transactions must therefore be carefully structured to optimise the tax burden by using the rules of ordinary company law.
Taxation of investors resident in France
The tax regime for income and gains received by investors varies considerably depending on whether they are individuals or companies, and on the nature of the securities held (FCT units or bonds).
Individuals
For individuals, the taxable event is the date of payment of the income. Income distributed by a CTF, whether in the form of coupons or liquidation surpluses, is taxed as income from movable capital. Investors can choose between applying the progressive tax scale or opting for the single flat-rate withholding tax (PFU) of 12.8 %, plus social security contributions of 17.2 %. Redemption premiums follow the same regime. Taxation of capital gains on the sale of FCT units depends on how long the units were issued. If the term is more than five years, the gain is subject to the capital gains tax regime for transferable securities (taxed at the PFU or, if you opt, at the progressive scale). If the period is less than or equal to five years, the gain is treated as income from transferable capital. For capital gains on bonds issued by a securitisation vehicle, the general system for capital gains on securities applies, regardless of the maturity of the security.
Companies subject to corporation tax
For companies, the taxable event is also the date on which the income is paid. This income, whether from shares or bonds, as well as capital gains on disposals, is included in the company's income and is subject to corporation tax at the standard rate. A technical detail concerns the valuation of FCT units held by a company. In the past, the tax authorities have maintained that these units, like UCITS units, should be valued at their net asset value at the end of each financial year, with any difference in valuation being taxed. This position, which amounts to taxing an unrealised capital gain, remains a point of debate in the literature. Capital gains on the sale of FCT units are excluded from the long-term capital gains regime and are therefore always taxed at the standard corporation tax rate.
Special cases
Specific regimes apply to certain types of investors. Not-for-profit organisations benefit from taxation at a reduced rate of corporation tax on income from CTF units, and an exemption for capital gains on disposals. Collective investment schemes (SICAV and FCP) investing in FCT units are subject to a transparency mechanism. In their distributions, they must distinguish income from securitisation so that the end investor, a unit-holder in the mutual fund, is taxed as if he or she had held the units of the CTF directly. This breakdown ensures the tax neutrality of the interposition of the UCI.
Taxation of non-resident investors
One of the major attractions of French securitisation vehicles is the favourable tax treatment reserved for investors who are not resident in France for tax purposes.
Withholding tax
In principle, French-source income from transferable securities paid to non-residents is subject to withholding tax. However, French law provides for a significant exemption. Under article 131 quater of the French General Tax Code, income from shares and bonds issued by securitisation funds is exempt from withholding tax in France. This provision, combined with international tax treaties that may contain even more favourable provisions, makes securities issued by FCTs particularly attractive to foreign investors.
Capital gains on disposals
The general principle under French tax law is that capital gains realised by non-residents on the sale of securities are exempt from tax in France, except in special cases (substantial shareholdings, etc.). This principle applies to capital gains realised on the sale of shares or bonds issued by securitisation vehicles. Non-resident investors are therefore generally not taxed in France on any capital gains they may make, making these investments even more attractive internationally.
The taxation of securitisation is a technical area, at the crossroads of financial and tax law. Optimum structuring of a transaction requires a precise analysis of the rules applicable both to the vehicle and to future investors, whether resident or not. To secure your transactions and benefit from advice tailored to your situation, contact our team of lawyers.
Sources
- Monetary and Financial Code
- General Tax Code
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