IPAG 1 Ipag Finance & Taxation Jan 18th, 2010

IPAG 2 Ipag – 3-International Tax – Direct operations abroad – SUMMARY previous

IPAG 3 Ipag – 3-International Tax – InDirect operations abroad – Internal Law A – Principle: A French company can have one or several indirect operations abroad, and can own several shares or participation within companies having their effective headquarter in third party countries….>means having indirect operations This time, the company doesn’t manage directly, but depending the numbers of shares own within Board of Directors… It often happens that Groups own the majority of Shares, as such, they are dealing with those Indirect operations as sub’s…..> Distribution of Dividends What should be tax relation between a French company which own shares within a foreign company and the other way, a foreign company, member of a french company ? The rule of territory will apply to companies, but foreign companies being in the same case would be treated in the same way, since they accounted based on their HQ…. B- French Companies, owning shares/investments within a foreign company: B.1 Taxation Of Results Results or Capital Gains are taxable in the country where is based the effective headquarter. Losses, depreciation, and provisions are deductible from results of that company. They are related to results corresponding to main operation: revenue from Liabilities, Dividends, interests, Royalties….have as original other structures and are usually taxable after « Retenue à la Source »

IPAG 4 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) B- French Companies, owning shares within a foreign company (…) B.2 Provision for losses of Participation: … Participation own in a company is evaluated or depreciated, depending results Vs a Unit company where results are part of global value of the company. As such and as far as Internal law or International law are concerned, if the daugther company results are positive, the value of share (participation ) will then increase, if results are negative, the value of share will be depreciated. In case of Capital Gains, this would note be accounted in the books or in Tax. But in case of Capital Loss, that could accounted for creation of provision.. If the participation is not significant > « placements », Capital loss recorded > provision, which will be in deduction of results. If the company has a number of shares, « titres de participations » more important (= > 10% of Capital stock of a company, = 5% of Capital Stock (accounting definition ) or 22,8 M (tax definition) …..when loss of values > depreciation, also called LT« moins-values », which could be compensated since 2005 with LT « plus-values….not deductible, since 2007 Tax regime of Titres de participation and « Titres de placements » is applicable internal operation in France, but also international. It is a certain way to take into account losses of foreign companies in France, even marginally.

IPAG 5 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) B- French Companies, owning shares within a foreign company (…) B.3. Reults split: 2 separate accounting when 2 independant companies…. But need to take into account link accounts, especially when we are in a group with sub’s own at 100%, in order to split some shared charges, also called inter-vention costs. As opposite to Convention law, Internal law doesn’t note have particular rules called « comany associated » or « entreprises associées », which aim to protect against Tax evasion, but as all countries, France put in place particular disposition, as art. 57 CGI B.4. Other Consequences: Intervention Costs: (shared services, such as Audits costs, Financial charges,etc …), must be invoices and paid…due to two independent companies. World Benefice and Consolidated. Dividends distribution: between two companies, results distribution will be made via Dividends distribution + Financial + Royalties Credit Notes blocked abroad:

IPAG 6 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) B- French Companies, owning shares within a foreign company (…) B.5 Regime of subvention inter-company:  Principle: - Nature : loans without interests, subvention, sales or acquisitions on lower price, etc … - Deductibility: -The subvention or advantage given should not be an abnormal management act -Must be considered as a normal Management : advance W/o interest granted to a company with objective of commercial integration, or a subvention granted to a company B within which the Company A own a minor participation, but both controlled by same shareholders, the Company B was the representing an important issue when the risk of Liquidation was there… -Abnormal Management when granting advance of payment and/or deposit W/o guaranty, or re-payment to a company with whom there is no commercial relation (CE 14 mai 1980 ) -Creditors renunciation should not be an item of participation price in the company having received that subvention. -Company interest Vs Group -More focus on Industry and Hand-made sector Vs Services

IPAG 7 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) B- French Companies, owning shares within a foreign company (…) B.5 Regime of subvention inter-company (...):  Subvention between Head/Sub’s: In the 80’s, with two cases: Philips (« 30 avril 1980 ») and Kronenbourg ( 27 novembre 1981)  Commercial acts : … if normal Management…. > Deductible  Financial acts: If an act is under interest of Head, and further more to maintain its Leadership or credit …> Financial renunciation, which will be Deductible  At Head Level >> Deductible, for Net Situation of the Sub’s  At Sub’s Level >>>Renunciation act will be taxable (except for the part deductible from the Head  International Regime: internal law was set up little by little, but for companies having sub’s abroad, international law was implemented even slower, especially financial acts >>due to territory rules (Tax evasion suspicion)…. … After several cases, Today Deductibility rules seems, for Commercial acts seems to be well accepted. …Need to wait the case of « 11 février 1984 » (Jean-Claude Lattes), for a better accepted Deductibility.

IPAG 8 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) C- Foreign companies, owning shares within a french company No tax obligation, if such company doesn’t have, company, sub’s or properties in France IN case of Dividend distribution, reversal of a Net amount after « Retenue à la Source » of 25%, except Conventional rate.

IPAG 9 Ipag – 3-International Tax – InDirect operations abroad – Internal Law (…) Examples : Exemple 1 – Dépreciation des titres de « Pérou-Corp » « La Comptable décide toutefois une provision dépréciation des titres de participation pour la totalité de leur valeur, qui viendra en déduction des résultats français qui sont positifs. Il explique au Président que c’est une précaution, et que l’on pourra toujours, extourner la provision si les résultas sont meilleurs. » Exemple 2 – Frais d’intervention « Compte tenu de l’éloignement de sa filiale la SACDT, a pris l’habitude de centraliser certaines opérations au Siège: gestion de Trésorerie, Audits dans les différentes entités, Contrôle de Commercialisation locale…Normalement le comptable devrait assurer une répartition de ces frais entres les différentes unités en fonction de leur C.A.Toutefois, le comptable décide de ne rien facturer à Lima: compte tenu de sa situation financière. » Exemple 3 – Aide Inter-Entreprises « Compte tenu de la Situation Financière de l’entreprise de Lima, Le Conseil d’Administration a décidé d’allouer une subvention de Eur, remboursable en cas de retour à meilleure fortune. Il est indispensable pour la Sociéte de Thiers de concerver un débouché sur ce marché. Si la situation se détériore encore, le Conseil a donné son accord pour que soit racheté 10 à 15% des actions appartenant aux autres actionnaires, les actions ayant une faible valeur. Le comptable a décidé de passer en déduction le montant de la subvention. Quant au rachat des actions par la société française, il pense qu’il n’ya pas de problème. » - Lors du Conseil suivant le Président déclare que ce qui compte surtout pour lui, en plus des débouché, c’est le renom de son entreprise en Amérique latine. Il demande que le procès-verbal du Conseil précise que cette aide a surtout un caractère financier, et doit être présentée comme telle: ce qui ne gênrea pas le rachat des actions ultérieurement

IPAG 10 Ipag – 3-International Tax – Taxability of Other revenues A- PRINCIPLE: Excluding revenues from main activity, companies could received other revenues: - From Properties, Royalties, Licences, Income from services, etc …  Received from a french company …> Taxable in France (« IR ») :  Provided to foreign company …> after « Retenue à la Source » 2 types Financial flows: 1) industrial income and 2) Services B- TAXABILITY RULES: B-1 Company having Headquarter in France Nature of Revenue: Property (revenue from building), Trademarks, Licences, Dividends, Interest, Capital Gains B.2 Company having Headquarter Abroad: …Applicability of « Retenue à la Source » Rules: - Taxable basis: Gross amount paid -« retenue à la Source » should e paid by the non-resident -Rate : 33 1/3%, and 50% if Debitor take at charge the « retenue à la Source »

IPAG 11 Ipag – 3-International Tax – Taxability of Other revenus - Examples Example 4 – Other Incomes « La Société Alpha dont le Siège est à Clermont-Ferrand, spécialisée dans le travail des métaux précieux, a enregistré au cours de de l ’année N les opérations suivantes: -La partie du matériel dont elle est propriétaire à Lima (Pérou) inscrit à l’actif de la Société Alpha à Clermont-Ferrand a été louéee ç une société locale eur, pour l’année, n’étant plus utilisée. -Un compte reste ouvert dans une banque de Lima, qui encaisse les loyers. Ce compte est rémunéré, soit un montant d’intérêts de eur pour l’année. - Pendant l’année N, afin de garder des contacts au pérou, la Société Alpha a fait une étude, facturée eur. À une société locale. Example 5 –Other Incomes « La Société Alpha, a également des relations professionnelles avec une société de Bogota (Colombie): elle exploite une Licence de cette entreprise pour traiter les métaux: redevances annuelles eur, payés par quart le premier jour de chaque trimestre, et reçoit des études de cette même entreprise qu’elle utilise pour sa production. Pour l’année N, elle lui a versé, à titre de redevances, une somme de eur en deux fois: &er mars et 1 er septembre pour la licence et eur pour le paiemen,t de l’étrude »

IPAG 12 Ipag – 3-International Tax – Role of Tax Convention for companies A – Avoidance of double taxation: A.1 Method of « Exemption »: A.2 Method of « Imputation » B- Fight against Fraud and ax evasion (more detail in future section…), but all countries are putting means to fight against Tax evasion and Fraud, especially industrial countries, taking into increasing volumes year after year… :  Clear definition of operations and conditions of taxation:Residence of Taxation, Dividends….  Articles related to associated companies, …Measures incl. In all Conventions and signed by France are limited, since each countries are using own Measures…  Amicable procedure (…combination between nego. and intervention of the courts)  Information plate form, which allow authorities to get enough information to apply measures… C-Criteria of linkibility of companies « Siege de Direction effective » Vs « Siège Social »