France: Tax measures on gains from the sale of digital assets

Finance Bill for 2022: Tax measures on gains from the sale of digital assets

The French tax regime governing crypto-assets continues to advance. This year, many proposals were put forward to amend the tax rules through the 2022 Finance Bill. They aim to make investment in crypto-assets more attractive. Most of them were rejected, but two new provisions have been introduced concerning gains from the sale of digital assets.

The first one provides for the possibility for individuals to opt for the progressive income tax scale in case of capital gains on the sale of digital assets. Today, such gains are subject to a single flat rate of 12.8% for income tax and 17.2% for social security contributions, without the possibility of an option, unlike other types of capital gains.

The second provision modifies the tax treatment of digital asset sales when people carry out such sales on a regular basis, thus conferring a professional character on their operations. Currently, such gains are taxed as industrial and commercial profits. In order to be in line with the regime for other professional operations, the draft law provides that such gains would be taxed as non-commercial profits, as is the case for mining income. The professional nature of the activity would then be characterized as soon as “the transactions are carried out under conditions similar to those characterizing an activity carried out by a person engaging in this type of transaction on a professional basis.”

These provisions would only be applicable as of 1 January 2023, in particular to allow time for the regulatory authority to define the conditions under which the transactions will be considered as similar to professional transactions. This could, for example, concern taxpayers who benefit from preferential transaction fees in return for a commitment to trade a certain volume of digital assets per month, or who use professional tools or complex trading practices.

French 2022 Finance Act: splitting a UCI into a “side pocket” and a “mirror” fund becomes tax neutral again

Article 21 of the French 2022 Finance Act retroactively adjusts certain tax rules to re-establish the tax neutrality which, until the legal modification introduced by the PACTE Law of 22 May 2019, had benefitted shareholders and unitholders in demergers of UCIs aimed at segregating their illiquid assets.

The former scheme consisted of splitting up, then liquidating, the initial UCI and creating two new UCIs:

• a “mirror” or “replica” UCI to receive the healthy assets, which the management company could then continue to manage normally;
• a “side pocket” in the form of a specialized professional fund to isolate the illiquid assets (such assets have 3 characteristics: high transaction costs, a complexity requiring special legal or other expertise and, lastly, difficulty in finding a purchaser). Once created, this side pocket was managed in run-off mode, meaning that the management company would gradually liquidate the assets as market conditions allowed, until the pocket was completely emptied.

In exchange, holders would receive units or shares of the two new UCIs. This exchange of units or shares benefited from the tax deferral applicable to individuals or legal entities, under certain conditions.

The PACTE Law brought this illiquid asset segregation scheme into compliance with the UCITS Directive, by prohibiting UCITSs that are subject to the UCITS Directive “from being converted into collective investment undertakings [that are not subject thereto].”

Under the new legal scheme, the new fund resulting from the split-off receives the “healthy” assets, whilst the illiquid assets remain inside the original UCITS, which is placed into liquidation. This inversion of the procedure was extended to side-pocket AIFs.

The change introduced by the PACTE Law consequently eliminated the tax neutrality that unitholders/shareholders had enjoyed on true split-up transactions. Indeed, the absence of a split-up, and therefore of an exchange of securities, meant that they no longer benefitted from the tax deferral. The delivery of the new UCI’s securities constituted an in-kind distribution of investment income or a taxable profit in the result of the fiscal year.

Now, Article 21 of the 2022 Finance Act retroactively re-establishes the tax neutrality for both individual and corporate unitholders / shareholders.

For individuals, the distribution of the mirror fund’s units or shares will no longer be treated as a taxable in-kind distribution under new Article 112 8 (for Sicavs or AIFs of this form) and amended Article 137 bis I (for FCPs or AIFs of this type) of the French Tax Code (FTC).

For legal entities as well, the delivery of units or shares will not be included in their taxable income (Art. 38, 5 ter new para. 1 of the FTC).

This measure is applicable to splits carried out as from the effective date of Article 77 of the PACTE Law, i.e. 24 May 2019. UCI shareholders and unitholders who may have been taxed on a “split” carried out between 24 May 2019 and 31 December 2021 can, in our view, submit a refund claim for the personal or corporate income tax they may have paid in this respect.

For individual unitholders / shareholders, the Finance Act also provides clarifications on the tax treatment in the case of:

• distribution of capital gains by the “mirror” UCI, and
• sale, acquisition or dissolution of UCIs resulting from the split.

If you wish to discuss these topics, please contact: Fidal, Paris

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