The French tax administration published Guideline 14 H-1-07 of 2 August 2007 on the application of CFC legislation to long-term capital gains (as defined under French tax law) realised by the foreign CFC and deemed distributed to the French parent company. Details of the Guideline are summarized below.

(a) Background. The Finance law for 2005 substantially amended the French CFC legislation set out in Art. 209B of the French Tax Code (Code Général des Impôts (CGI)). The new rules, which apply on and after 1 January 2006, were commented in Guideline 4 H-1-07 of 16 January 2007. Guideline 14 H-1-07 of 2 August 2007 further clarifies the tax treatment at the level of the French parent company of long-term capital gains realised by the foreign CFC.

This clarification is relevant because (i) French tax law provides for a special regime on long-term capital gains under which certain long-term capital gains are taxed at a reduced rate, and (ii) the participation exemption applicable to dividends arising from a substantial participation (at least 5% shareholding) was progressively extended to capital gains on substantial participation. Prior to the reform, qualifying capital gains on participation shares were taxed under the long-term capital gains regime. In 2005, the capital gains on participation shares were taxed at a rate of 15% and in 2006, at a rate of 8%. From 2007, 95% of the capital gains on participation shares are exempt. The Guideline takes account of these modifications for the purpose of applying the CFC legislation.

(b) Content of the Guideline. The amount of long-term gains is computed by setting off long-term capital losses against long-term capital gains derived by the foreign CFC. The fraction to be applied to the resulting amount consists of the reduced tax rate on long-term capital gains divided by the standard corporate income tax rate. The situation of (i) participation shares and (ii) other long-term capital gains shall be distinguished.

(i) For participation shares, the fraction of capital gains to be included in the taxable base of the French parent company amounts to:

(ii) For other long-term capital gains taxed at the rate of 15% (mainly patent royalties, shares in companies the assets of which consist for more than 50% in real estate and unit of shares in qualifying venture capital shares or companies), the fraction of capital gains to be included in the taxable base of the French parent company is 45% (15 or 33 1/3).