FRANCE Law and Practice Contributed by: Arnaud Fromion, Frédéric Guilloux and Pierre-Benoît Pabot du Châtelard, Clifford Chance
4. Tax Considerations 4.1 Withholding Tax
and scholars with respect to the potential mis - application of certain mandatory rules governing bonds and implied risks of requalification. 3.7 Junior and Hybrid Capital See 1.5 Junior and Hybrid Capital for our gen - eral remarks on junior and hybrid capital. In addition, private debt providers often take a minority equity stake in private debt trans - actions through dedicated sponsor-controlled investment vehicles. Depending on the capital structure, this may require particular attention to avoid tax issues. Preferred equity instruments are not seen in lev - erage finance transactions, but are sometimes used for fund financings, for example. 3.8 Payment in Kind/Amortisation PIK private debt is common in France, provided that that the relevant interest is due at least for an entire year, which is a legal requirement under Article 1343-2 of the French Civil Code. When the terms and conditions of the relevant bonds provide for both cash and PIK interest, it is usual that those terms and conditions provide for a PIK toggle right to the benefit of the borrowing entity. Private credit providers in France do not typically require amortisation, Debt is usually bullet and due in full on the termination date, to ease the management of cash by the group. 3.9 Call Protection Over the years, the standard call protection has reduced in length and currently stands anywhere between 12 to 18 months with make-whole pro - visions for the initial 12 months and a fixed per - centage thereafter.
Interest payments are not subject to withholding tax to the extent such payments are not made to a non-cooperative country/territory within the meaning of French tax law. Otherwise, withhold - ing tax applies at a rate of 75%. Sums corresponding to repayments of principal are not subject to withholding tax. A 25% withholding tax may be levied on fees payments, to the extent that those fees remuner - ate services provided by a non-resident having no fixed office in France. In case of withholding tax, the matter is generally dealt with (i) through double-tax treaties (provided that the recipient is entitled to the benefits of the relevant tax trea - ty) or (ii) through the legal documentation (eg, gross-up provisions). 4.2 Other Taxes, Duties, Charges or Tax Considerations Fees remunerating financial services provided by lenders are generally exempt from VAT. Where a lender holds a direct stake in the bor - rowing entity, interest payments may be qualified as deemed dividends for French tax purposes, potentially giving rise to withholding tax issues. Those matters may arise in the context of finan - cial restructurings. Enforcement of share pledge agreements taken on the shares of the borrowing entity may give rise to transfer taxes where the borrower oper - ates a real estate business. 4.3 Tax Concerns for Foreign Lenders See 4.1 Withholding Tax .
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