Frequently asked questions

There are three types of transactions that are liable to French Financial Transaction Tax (FTT):

• Purchasing transactions in French equities or comparable securities (Equity FTT),
• High frequency-trading transactions in equities (HFT FTT), and
• Purchasing transactions in uncovered CDS in European Union sovereign debts (CDS FTT).

The tax rate is between 0.01 percent and 0.3 percent of the transaction amount and is depending on the type of transaction:

• The tax rate on purchasing transactions in French equity trades will be the equivalent to 0.3 percent of the value of the shares of listed French companies named by the French Ministère de l’Economie et des Finances.
• The tax on high-frequency trading will be the equivalent to 0.01 percent of the amount of cancelled or modified orders exceeding a threshold to be set by decree.
• The tax on naked trades in Credit Default Swaps (CDS) will be the equivalent to 0.01 percent of the notional value of CDS contracts of a European Union member state.

Finally, the person is liable to tax, who has initiated the transaction:

• The Equity FTT is payable by the buyers regardless of their nationality or place of residency and regardless of the trading venue;
• The FTT on high-frequency trading will be payable by French companies engaging in proprietary HFT;
• The tax on transaction in naked CDS is payable by French individuals or legal entities that acquire these contracts for reasons other than to hedge existing assets or commitments.

An accountable party is an institution which is legally obliged to provide the declarations and
to pay the financial transaction tax, and which is

• the investment service provider or broker that has executed the transactions on its own behalf or on behalf of its clients, or
• the securities account holder of the investor (when the transactions are not executed by brokers, e.g. OTC transactions).

In the view of French market participants the accountable party is the account holder of the final investor.

The tax rate is 0.3 percent of the transaction amount.

Affected are capital instruments ("titres de capital") and assimilated securities (mainly equities), listed on a French or foreign regulated market, issued by companies whose headquarter is located in France, and capitalisation exceeds one billion Euro on the 1st of January of the fiscal year.

Five conditions have to be met which are written in French Tax Code Article 235 ter ZD, I, 1:

“An acquisition for consideration of shares and other equity instruments (“assimilated equity securities”) admitted to trading on a regulated market issued by a French company with a market capitalisation of more than €1 billion resulting in a transfer of ownership.”

This means shares of any kind: ordinary shares, preferred stock, twin shares, profit-sharing certificates, preferred dividend shares, etc., traded not only in France, also in a European or foreign regulated market.

According to the law, equity securities and assimilated instruments (including securities issued under foreign law) are defined as:

• Equity securities, also instruments covering shares, and securities that give, or may give, access to equity or voting rights
• Investment certificates and voting rights certificates
• Certificates representing French equity shares (e.g. ADRs or GDRs, from 1 December 2012 on)
• Bonds representing French equities, for example bonds convertible into equity shares or bonds with redeemable share subscription warrants (OBSAR).

French Tax Authorities will publish yearly a list of the affected companies, which will be completed by French data providers with the ISINs. This list remains unchanged for the entire year, unless

• A new company will be listed, or
• A company’s headquarter will be moved abroad.

Only such purchasing transactions in French securities with the named ISINs are subject to tax and are subject to reporting. Purchasing transactions in French securities with other ISINs are neither subject to tax nor subject to reporting.

As we know, several data suppliers will provide identifiers that could be used as a basis for the selection of related transactions.

Transactions in equities are subject to tax, no matter where the transaction took place, whether the transaction has been executed by the accountable party for its own account or following a client order, no matter where the transaction settles.

Only purchases are liable to tax, sales will not be taxed. Purchasing transactions are mainly:

• The purchase on a market
  
• The exercise of a financial derivative, that results in the transfer of ownership of the underlying securities to one of the parties to the transaction
  
• The conversion of a bond representing equities
  
• Certain corporate actions (details have to be published yet).
  

The transaction is taxable if it is for value, regardless of the amount, so, gratuitous transactions (e.g. the transfer of securities without payment) should be out of scope (this was not announced finally).

Although OTC transactions are not processed on a regulated market, they are subject to tax when the purchased stock will be traded on a regulated market.

Transactions are taxable if and when they generate a transfer of ownership (“acquisition”), that means:

• The transfer of ownership takes place by crediting the shares in the purchaser’s securities account
  
• Tax is applicable based on settlement date
• Intraday transactions are subject to tax only for resulting net buying position at the end of the day
  

The transfer of an equity or assimilated instrument as collateral is not subject to tax.

In principal, equity purchasing transactions are subject to tax unless one or more of the nine exemptions to the financial transaction tax in equities named in the law are met:

1. Purchases linked to an issue of securities (primary market) — no matter if the new issue
   will be purchased directly or via an investment service provider
   
2. Purchases made by a clearing house or a CSD
   
3. Purchases linked to Market-Making activities
   
4. Purchases linked to liquidity contract
   
5. Intra-group transactions
   
6. Securities lending and repos
   
7. Acquisitions by employee mutual funds, employee open-ended investment funds or by employees directly
   
8. Acquisitions for employee saving schemes (including purchase of company shares)
   
9. Acquisitions of bonds exchangeable or bonds convertible in shares (the purchase of the bonds is tax-exempt, the conversion of the bonds into shares is taxable)
   

Foreign persons who carry out activities or transactions governed by foreign law may be exempted if they are similar to exempt transactions carried out by French persons or governed by French law.

To avoid double taxation, Market-Making activities are exempt from financial transaction tax in equities. Thus, the FTT shall not apply to activities of an investment company or a credit institution or an entity in a foreign country, or a local company that is a member of a trading platform, or a market in a foreign country when the company, institution or entity in question acts as intermediary and participates in transactions on financial instruments.

Two conditions have to be met:

• The company named above must act as an intermediary party on a financial instrument as defined in article L. 211-1 of the French Monetary and Financial Code.
  
• The “Market Maker” must
  • either by the simultaneous quoting of firm and competitive bid and ask prices of comparable size, resulting in the supply of liquidity to the market on a regular and continuous basis:
    • provide liquidity on a securities trading platform
      
    • supply liquidity to the market within the framework of OTC activities
      
  • or within the framework of his usual activity to the execution of orders made by clients or in response to their request for buy or sell orders,
    
  • or the hedging of positions relating to the carrying out of the abovementioned transactions.
    

The Article L. 211-1 of the French Monetary and Financial Code defines financial instruments as:

• Financial instruments include both financial securities and financial contracts.
  
• Financial securities include:
  • equity securities issued by joint-stock companies
    
  • debt securities, with the exception of bills of exchange and interest-bearing notes
    
  • units or shares in undertakings for collective investment.
    
• Financial contracts, also referred to as "financial futures", are futures contracts that appear on a list established by decree.
  

The tax shall not apply to transactions executed on behalf of issuers in order to promote the
liquidity of their shares within the framework of authorized market practices accepted by the
French Autorité des marchés financiers.

This requires the compliance with the rules of the French Financial Market Authorities based on the EU Directive 2003/6/EC of 28 January 2003 and Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC.

This exemption is similar to the exemption for market making transactions; the only difference is that the market participant is acting on behalf of the issuer and not on its own account.

All temporary transfers of ownership that are similar to the specifications in articles L. 211-22
and L. 211-27 of the Monetary and Financial Code should be exempt because they are
deemed to be a temporary transfer of ownership. So, the financial transaction tax shall not apply to securities financing transactions cited in No. 10 of Article 2 of the EU Commission Regulation (EC) No 1287/2006 of 10 August 2006, namely:

• Securities lending or borrowing (as defined in article L. 211-22 of the MFC)
  
• Sale and repurchase agreements (as defined in article L. 211-27 of the MFC)
  
• Securities purchase/resale or sale/purchase transaction
  

Legally responsible for providing the tax declaration, assessing and paying tax is the accountable party, which is

• The investment service provider or broker (regardless of its location) which has executed the transaction on behalf of its clients, or traded on its own behalf, or when offering underwriting or placement services.
  
• The securities account holder of the investor (regardless of its location), when the transaction is not executed by a broker.

Liable for the financial transaction tax where a chain of intermediaries is involved in a particular transaction, the first investment service provider who receives the purchase order from the purchaser is deemed to be the taxpayer.

The above named entities are responsible for ensuring that the tax is paid. In fact, the respective buyers are responsible to provide the account holder with the necessary information.

The tax is assessed:

• in case of a cash purchase, on the price paid for the security’s purchase
  
• in case of exercise of a financial derivative, on the exercise price set in the contract
  
• in case of conversion or exchange of a bond, on the price set in the issue price
  
• in other cases, including swaps based on the value expressed in the contract or, failing that, on the price traded on the most relevant market in terms of liquidity on the market’s closing day proceeding the day on which the trade took place
  

The crucial date for determining the net long position has not been finally defined. At many points it is spoken of the "transfer of ownership".

Outline of a possible process of evaluating the taxable amount (the evaluation proceeds on all transactions, regardless of transaction on own behalf or on behalf of others):

• First, all tax-exempt transactions (purchases and sales) have to be eliminated.
  
• In the next step, the sale transactions have to be subtracted from the sum of taxable transactions.
  
• After this, the average price of shares of all purchase transactions has to be calculated and multiplied with the numbers of shares (net position of taxable transactions).
  
• On this basis, the tax amount has to be calculated.
  

Mainly the investment provider that executed the purchasing order or, alternatively, the custody-account keeper for the buyer (in this case it is up to the buyer to provide the custody-account keeper with the relevant information) is responsible for the tax assessment.

Both taxable and non-taxable acquisitions must be declared. The accountable party must provide the exoneration reason for non-taxable acquisitions.

Clearstream Banking has created a reporting platform, where its customers could upload the tax reports. Clearstream Banking will forward these reports to Euroclear France.

Euroclear France is responsible for the following tasks:

• Collecting the tax declarations
  
• Collecting the tax from Euroclear France members
  
• Paying the tax to the French fiscal authorities
  
• Implementing some controls
  

Euroclear France has set up a domestic marketplace working group to define the operational
workflows and procedures.

Euroclear France is not involved in the following processes:

• Identification rules for taxable ISINs
  
• Market practice for intra-day and end-of-day netting positions
  
• Accounting and calculation of the tax for end investors
  
• Relationships between Accountable Parties and other players (settlement agents, custodians etc.)
  
• Financial transaction tax part of the law related to the credit default swaps and high frequency trading
  
• Direct declaration and payment to the French Treasury
  
• Detailed application for exoneration
  
• Corporate actions impact assessment
  

Transactions must be declared to Euroclear France until a date before the

fourth calendar day of the following month, the tax payment will also happen on the fourth
calendar day (or next business day) of the following month.

The tax has to be paid by the accountable party after reporting the taxable transactions. Hence, Eurex Clearing will not tax any transaction.

The French law defines high-frequency trading as "a transaction carried out by a company operated in France in equity securities executed on their own behalf through automated processing".

Only French companies are liable to tax. This means companies, customarily doing their business in France, within the framework of an independent establishment, or, via representatives with no independent professional personality, or resulting from operations that form a full business cycle.

All high-frequency trading transactions in equity securities are affected without any regional or capitalization restrictions. Only transactions for Market-Making activities are tax-exempt.

A computer algorithm determines whether to issue, modify or cancel orders and determines price and quantity parameters, and orders for a given security produced by the algorithm are issued, modified or cancelled according to a time period set by decree, which "may not exceed one second".

If the system is used in order to optimize the conditions for executing orders or transmitting orders to one or more trading platforms, or to confirm orders, then the system is not seen as a trading system for the purposes of the law.

In contrast to the financial transaction tax on equities, only a French market participant who is French tax resident and performs the high-frequency transactions is liable to tax.

The tax shall be declared and paid before the tenth of the month following the transmission of the orders described above, on a declaration whose model shall be established by the administration. The tax shall be paid when the declaration is filed. Market-Making activities are tax-exempt.

Three decrees on the tax on high-frequency trading are scheduled to be adopted after the law comes into force, defining:

• the general implementing measures of the provision on HFT transaction
  
• which delay an automated transaction is considered HFT
  
• the threshold beyond which cancellation or modification of orders will be charged
  

According to law, five conditions have to be met: "A swap on credit default of a Member State of the European Union that is purchased, uncovered, by a French resident".

With a credit default swap the holder acquires the right either to receive the sum corresponding to the difference between the par value of a reference bond asset and its market price (cash settlement), or to deliver this reference asset in return for payment of a price corresponding to its par value (physical delivery).

Only the purchases are tax liable when the position is not conducted to cover assets or commitments correlated to the value of the debt of the state covered by the credit default swaps.

The buyer of the credit default swaps must be established in France for tax purposes. This means, the French market participant who is French tax resident and purchases the uncovered credit default swaps is liable to tax.

The tax liability is paid by the taxpayer to the Treasury at the same time as VAT payment and is reported in the VAT return (monthly for companies subject to the normal VAT regime, quarterly for companies subject to the simplified regime).

This document is for informational purposes only. It is provided to Eurex Clearing’s clients informally, does not constitute legal or tax advice, is governed by our Terms and Conditions Of Use, and we are not acting as attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained.

Legal advice regarding the French Financial Transaction Tax must be tailored to the specific circumstances of each case and the information provided to all Eurex Clearing clients may not be an appropriate fit in an individual case. Nothing contained here should be used as a substitute for the advice of competent legal or tax counsel.

Gruppe Deutsche Börse will not be liable or responsible to you for any breech of law, claim, loss, injury, liability, or damages related to use of this information.

In the event that individual parts of or formulations contained in this Disclaimer are not, or are no longer, legally valid (either in whole or in part), the content and validity of the remaining parts of it are not affected.

The information is based on the relevant French legislation, the draft letter to this application and different information of operational units (the “Blueprint for Financial Transaction Tax, Version 1” of Euroclear France) and French Financial Market Associations (“Financial Transaction Tax (FTT) – Preliminary assessment of the measures in the 2012 Supplementary Budget Act” of AMAFI).

Although the regulations refer to the transactions, from 1 August 2012 be made, are still unresolved questions of application. Despite of this, we have tried to summarize the key points based on the current state of play.

Section 871(m) IRC and the regulations thereunder impose a tax on DEAs paid or deemed paid pursuant to a derivative contract [such as a notional principal contract ("NPC") or other equity-linked instrument ("ELI")] that references (a) U.S. equity security(s).

Warrants, convertible bonds, certificates, structured notes, indexes, Repos, Securities Lending and listed derivatives fall within the scope of Section 871(m) IRC, if:

• the underlying securities are U.S. equities (regardless of the issuer's country of residence),
• these U.S. equities pay a dividend during the lifecycle of the derivative contract and
• the derivatives have a delta equal to 1 (from 1 January 2019 onwards delta greater or equal to 0.8) or meet the 'substantial equivalence test'.

• Equity Derivatives (Single Stock Futures and Equity Options)
• Futures and options on non-qualified indexes

Eurex Clearing AG received acceptance of its request for the status as Qualified Derivatives Dealer (QDD) by the U.S. Internal Revenue Service (IRS). This status was granted retroactively as of 1 January 2017.

Where Eurex Clearing AG is receiving or treated as receiving DEAs as Long Party, Eurex Clearing AG represents that it does not employ any combined transaction strategies despite potentially entering into multiple transactions over the same underlying security. Therefore, withholding agents should not subject any transactions in which Eurex Clearing AG is the Long Party to the combination rules under the presumptions of Treasury Regulations § 1.871-15(n).

It is the responsibility of each Clearing Member to adhere to its responsible party obligations to the extent applicable to them.

Eurex Clearing AG is not a responsible party within the meaning of Treasury Regulations § 1.871-15T(p) and hence is not required to provide its Clearing Members with any information regarding the identification of potential Section 871(m) IRC transactions, the applicable delta, dividend equivalent amount or the timing of withholding.

• Acting either as a primary withholding Qualified Intermediary (QI-A) or as QDD has become a legal prerequisite for the clearing of potential Section 871(m) IRC transactions.
• As outlined in the previous circulars 028/17 and 074/17, all Clearing Members are requested to monthly provide Eurex Clearing AG with all information required for the purposes of Form 1042/1042-S Reporting and Reporting Reconciliation.

• Long Party Clearing Members

Information is required from Long Party Clearing Members for the purposes of Form 1042/1042-S Reporting and Reporting Reconciliation.  

Long Party Clearing Members are obliged to determine whether a transaction is a Section 871(m) IRC transaction and the amount of any DEAs [see Treasury Regulations § 1.871-15(c)] that Eurex Clearing pays or is treated as paying to such Long Party Clearing Members.

• Short Party Clearing Members

Information is required from Short Party Clearing Members for the purposes of Reporting Reconciliation.
In order to reconcile the DEAs received by Short Party Clearing Members with the DEAs paid to Long Party Clearing Members, Short Party Clearing Members need to provide information

a) whether a transaction is a Section 871(m) IRC transaction and

b) the amount of any DEAs [see Treasury Regulations § 1.871-15(c)] that Eurex Clearing AG receives or is treated as receiving from such Short Party Clearing Members.  

Eurex Clearing AG is expecting its Clearing Members to provide all information required via the standard 871(m) IRC Template, which can be found under Rules & Regs > Regulations > U.S. Taxation. 

Please send all information to reporting871m@eurex.com

Long and Short Party Clearing Members must provide all information in form and substance on a monthly basis by the 10^th day of the following month at the latest (i.e. for August 2018 on 10 September 2018 ).

We kindly refer to our Clearing Conditions Chapter II Part 1 Provision 1.7. All amendments have become effective as of 3 April 2018.

Legal advice regarding Section 871(m) IRC must be tailored to the specific circumstances of each case and the information provided to all Eurex Clearing clients may not be an appropriate fit in an individual case. Nothing contained here should be used as a substitute for the advice of competent legal or tax counsel.