Hollande Transaction Tax Drives Investor Quest for Loopholes

Hollande Transaction Tax Drives Quest for Loopholes
French President Francois Hollande. Photographer: Balint Porneczi/Bloomberg

French President Francois Hollande’s transaction tax is set to take effect Aug. 1. Not all investors will be paying it.

To escape the tax, many institutional investors will turn to so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares. Traders have used it successfully to skirt the U.K.’s stamp duty.

“We’ve never purchased U.K. stocks without using a CFD,” said Fabrice Seiman, co-chief executive officer of Lutetia Capital, a merger-arbitrage fund in Paris that oversees $100 million. “Now we’ll do the same for French stocks. It is individual investors who are going to pay.”

France will become the first European country to impose a transaction tax on share purchases, including high-frequency trading and credit default swaps. The levy, aimed at curbing market speculation, will be paid on transactions involving 109 French stocks with market values of more than 1 billion euros ($1.2 billion), including Pernod Ricard SA and Vivendi SA.

The U.K., home to Europe’s biggest financial center, has a stamp duty while opposing a transaction tax. German Chancellor Angela Merkel said on June 22 that she and the leaders of France, Italy and Spain agree on the need for such a levy. The other countries have yet to put one in place. Investors buying U.K. shares pay a stamp duty of 0.5 percent on their purchase.

‘Too Much’

France’s imposition of the levy may drive investors to search for loopholes, said Fabrice Couste, chief executive officer of CMC Markets France in Paris, which sells CFDs and has operated in France since 2010.

“People will see the bill and say ‘it’s too much, we have to find a way to avoid it,’” he said. “The stamp duty in the U.K. made a success of spread betting. France’s transaction tax can do the same for CFDs.”

The Hollande government is planning to double the levy to 0.2 percent from the 0.1 percent tax initially advocated by former President Nicolas Sarkozy. It will be applied to transactions resulting in “a transfer of property” of companies trading in Paris, regardless of where the buyer or seller is based, and may be expanded next year along with some European partners.

France is banking on the tax to bring in 170 million euros in 2012 and 500 million euros next year. The receipts will be used to fund research for AIDS, Hollande said yesterday.

“It’s in that sense we are putting the financial transaction tax in place as of Aug. 1,” he said.

Investors Out

The tax will be imposed on French stock purchases both within France and beyond the country’s borders, although fund managers said they can’t see how it will be applied to transactions outside the country.

“How are they going to collect it?” said Dietmar Schmitt, chief executive officer and chief investment officer of Sam Capital Partners Ltd. in London, a hedge fund that oversees a little less than 100 million euros.

“If you trade a good offshore, who can charge a tax?” he asked. “Nobody. The law has a big problem. It can only capture the tax in France.”

The new tax will only exacerbate the flight of traditional investors from the French market since the subprime crisis in the U.S., said Jerome Vinerier, market strategist at IG Index in Paris, another seller of CFDs.

“This measure will discourage the long-term investor and encourage speculation,” he said. “This will push individual investors out of stocks.”

CFDs Rise

France’s benchmark CAC 40 index has declined by 48 percent from 1999, its highest ever year-end level. The index has dropped 14 percent over the past two years as policymakers struggled to control Europe’s sovereign-debt crisis.

The average volume of shares changing hands on the CAC 40 over the past 200 days has fallen 11 percent from the high in 2008, according to data compiled by Bloomberg.

Those who want to stay invested in France will find a way to avoid paying the tax, said Sam Capital’s Schmitt.

“There will be enough options to avoid the stamp duty in France,” he said. “There are many loopholes. The people who are making the laws don’t understand the business.”

According to Investment Trends, an Australian research firm, 98,000 people used spread betting, another way of betting on a stock’s direction, or CFDs last year. That’s up from 91,000 in the previous year. In the firm’s first research report on CFDs in France it said 16,000 people used this type of investment tool in the 12 months to February 2012.

‘Just Worse’

Still, some traditional fund managers such as Philippe Joly of Societe Privee de Gestion de Patrimoine in Paris and Amandine Gerard, president of Financiere de L’Arc in Aix-en-Provence, said they don’t plan on using CFDs or other derivatives.

“We will function as before, with maybe a bit less movement,” said Gerard, who oversees $233 million. “Most of the stocks concerned are ones that make up the base of a portfolio so aren’t bought and sold several times.”

Joly, who manages $61 million in two funds, said the tax coming on top of a deteriorating economic environment won’t have a visible impact.

“If we’re taxed more, we’re taxed more,” he said. “We’re set for five years of austerity and anti-capitalism. Things weren’t all that good before. Now, we’ll just be a little worse off.”

At CMC Markets, the seller of CFDs is priming for more sales of the derivative product.

“The higher the tax, the more people will transfer traditional trading to CFDs,” CMC Markets’ Couste said. “It’s not hedge funds or dark pools that will pay.”

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