Financing of vessels under the system of article 39 C of the CGI

Apart from direct financing in the form of a mortgage loan for a vessel taken out by its owner, indirect financing methods are currently put in place through setting up ad-hoc companies generally held by financial institutions in order to provide financing for the purchase of a vessel. As a general rule, the vessel is purchased by the ad-hoc company enjoying some form of fiscal transparency by way of a senior loan and a subordinated loan; the vessel is then made available to the shipping company in the form of a bareboat charter with a purchase option at the end of the contract. The benefit of this type of scheme is that it allows the costs of the refinancing to be reduced insofar as the financial institution let the lessee/shipping company benefit from part of the tax saving made thanks to the accelerated depreciation of the vessel in the form of a reduction in the lease amount or in the amount of the purchase option.

Lawmakers did, however, restrict the deductibility of the depreciation of the tangible property and property held by a company, joint ownership or grouping subject to the tax system applicable to partnerships covered by article 8 of the CGI by introducing some provisions in II of article 39 C of the CGI.

Under these provisions, the depreciation of tangible property such as a vessel will be deductible from the taxable income of the legal entity subject to fiscal transparency provided by article 8 of the CGI provided that it is located, used or registered in France or in another State which is part of the European Economic Area and which has a tax agreement with France containing an administrative assistance clause aimed at fighting tax fraud or tax evasion. These States are Member States of the European Union plus Iceland, Norway and Lichtenstein [1].
A vessel registered in one of these States can take advantage of these favourable provisions ipso jure. The administration has, however, made clear that they would also be applicable to any vessel which, whilst it may not fly the flag of one of these States, anchors or moves within the European Economic Area more than three-quarters of the time in any given financial year.

Although deducting the depreciation performed by the transparent entity is accepted in principle, it is still subject to certain restrictions that are limited in time.

First of all, the depreciation allowance related to the first thirty-six months of the lease of the vessel is only deductible, in a same financial year, within the limit of three times the amount of the rentals accrued over the same period.

Moreover, the proportion of the tax loss of the transparent entity that corresponds to the depreciation deducted is only deductible up to the amount of one quarter of the taxable profits at the tax rate on corporations that each partner or member derives from the remainder of their activities.

These limitations are temporary, however, and any depreciation that could not be deducted from the income of a financial year can be carried forward on the income of subsequent financial years under the same conditions and with the same limits.

In the event of a lease of assets (vessels) located, used or registered in a State which is not a member of the European Economic Area, the amount of depreciation is only deductible from the taxable income in the same financial year for the amount of accrued rentals less the amount of other charges pertaining to the relevant property. This highlights that depreciation allowances cannot be accounted for in the initial years of use and must be deferred to the subsequent years.

Use of the provisions of article 39 C of the CGI for financing vessels allows syndicated loans and tax bases.

It should be noted that a vessel can also be financed by a subsidiary that is at least 95% owned and is integrated with a financial institution for tax purposes. None of the restrictions or limitation stated above is therefore applicable but this presupposes that a single investor is involved.

Within the framework of certain financing structures the lessee/ship owner company has an option to purchase the shares of the owner / lessor of the vessel in addition to the option to purchase the vessel included in the lease contract.

In the current state of the law the gains made on the sale of qualifying shareholdings (shares that have this qualification from an accounting point of view) and held for more than two years are exempt from corporation tax subject to a quota of fees and charges equal to 10% of the amount of the gain (i.e. an implicit tax rate of 3.44%).

Source: study carried out with the assistance of Stéphane Salou and Alain Gautron of Stephenson Harwood - Paris