Case Study Of Flagship Store In Paris

 Commercial Advantages of purchasing a flagship store in Paris:
 Upgrading of a brand image
 Expanding your customer base to European and Worldwide luxury spenders
 Potential capital gain the property, hedging against inflation
 Diversification of exposure to Euro-zone taking advantage of the current currency
weakness (against long term USD depreciation risks for example)

 Low business set up cost in France:

The KPMG Competitive Alternatives 2010 Report concluded that Paris is ranked ahead
of London in terms of cost competitiveness (KPMG, 2010a). This calculation is based on
their study on labour costs, tax regimes, facility costs, utility costs, transportation costs
etc). The cost index of France and London are 100.1 and 101.7 respectively. This was
based on an exchange rate of $/EUR of 1.47 and Pound/$ of 1.64. Against today’s
exchange rates of $/EUR at 1.33 and Pound/$ of 1.58, Euro zone benefits an additional
6% cost advantage.

 The myth of high taxation in France:

According to the KPMG Competitive Alternatives study (Supplement report called Focus
on Tax), France’s effective Corporate Income Tax after incentives is 15.4%, one of the
most competitive. This is substantially lower than that of UK (20.2%) (KPMG, 2010b, p.
24). The impression of France being a high tax regime is misplaced. The ‘high tax’
criticism is in fact, a result of employee related social security charges and other benefits
such as health coverage. The employer is required to pay about 60% of the net salary of
each employee as social security contribution and health care etc (KPMG, 2010b, pp.
14,17). This certainly is a burden to employers, but is acceptable in particular for
industries which are not labour intensive, such as retailing.

All information provided herewith is intended for reference only. A qualified lawyer should always be consulted regarding your tax
and legal liabilities. De Bao HK Limited bears no responsibilities on the accuracy of the information. This is not an offer or advice or
solicitation of property transaction. De Bao HK Limited disclaims any or all responsibilities for any direct or consequential loss or
damage of any kind whatsoever arising from: i) the use of the information contained herein, ii) any error, omission, or inaccuracy in
any such information.
This document is confidential, and is meant only for the intended recipient. Any unauthorized dissemination, distribution or copying
hereof is prohibited.
De Bao HK Limited
myrachanhk@gmail.com Nov 2010
Page 1

 Three aspects of tax liabilities:

I. Corporate Income Tax : This is levied on income calculated after deducting eligible
I
expenses. The list of deductions is extensive:

 Depreciation and amortization (including purchased property excluding land)
 Any Rent for buildings and equipment (if property is rented from even an intra-
group company, rents are deductible as long as the tenancy terms are set at arm-
length)
 Expenses such as Management Fee paid to intra-group companies (e.g. a HK
company. The withholding tax on management fee is 10%*)
 Social security contributions
 Energy consumption
 Advertising
 Financial expenses (including intra-company loans, as long as the terms are
property recorded and interests are based on commercial terms at arms-length)

Corporate Income Tax rate: 33.33% and for profits above €2,289,000 an additional
1.1%, hence 34.43%. After the above deductions, the effective corporate income tax
is estimated to be roughly 15.4% in KPMG studies (KPMG, 2010b).

II. Property Related Taxes post-purchase:
II
Very similar to owning residential property in France, there are two major taxes.

Property Tax (Taxe Foncière): This is based on authorities’ estimate of rental value,
multiplied by a rate depending on the location: commune, regional and department.
For simplicity’s sake, this can be roughly assumed to be 1% per annum on the
property value.

*Hong Kong –France Treaty was signed on 21 Oct 2010 and expected to be effective in 2011
subject to Parliament’s approval.
De Bao HK Limited
Page 2

The Wealth Tax (L’impot sur La Fortune, “ISF”) : As of the date of this document, the
Sarkozy government is attempting to remove this tax in 2011. Even with the existing
legislation unchanged, through the structuring of debt into the purchase, this tax can
be entirely deducted if the effective net asset value of the property falls to below
€790,000. In addition, it is important to note that the loan can be granted by another
intra-group company, e.g. a Hong Kong subsidiary. This will serve to generate
interest income for the Hong Kong company as well.

Note: Capital gain tax - capital gain tax for non-EU resident is 33.33%. There are
reductions starting from sale after the fifth year of the purchase. For individuals,
properties which have been owned for 15 years or more are fully exempted, and are
free from capital gain tax upon disposal. If the seller is subject to the corporate
income tax, specific rules apply to set the gain (sale price minus purchase price
reduced by 2% per year).

III. Taxes concerning profit repatriation:
III
Countries without tax treaties with France may risk withholding taxes on dividends
paid out from the French business. The recently proposed tax treaty reduces
withholding tax on dividend from 25% to 10% for Hong Kong*. However, with
substance and economic reasons, structuring a vehicle in between HK and France,
can effectively reduce this further to 5%. The following examples may illustrate this
point.

*Hong Kong –France Treaty was signed on 21 Oct 2010 and expected to be effective in 2011
subject to Parliament’s approval.
De Bao HK Limited
Page 3

This example illustrates a HK headquartered fashion company, De Bao Fashion,
which his buying a flagship space in Paris. The following entities are structured: i) a
holding company called HC (EU) which located in an EU country which has tax
treaties with both HK and France, ii) SCI (Paris) which is a property holding
company used to own the retail space purchased, and iii) De Bao Fashion (Paris)
Limited, which is running the actual retail flagship business, and held through the
HC(EU) company.

I Corporate Income Tax is incurred at two entities :

1. De Bao Fashion (Paris) Limited – with the rental agreement, loan agreement and
management agreement, this company will benefit from deductions on rents, interest
expenses, and management fees. Let’s assume that its effective corporate income tax
rate is 20% (standard rate before incentives is 33.33%, and KPMG’s calculation is 15.4%
after incentives).
2. SCI (Paris) Property Holding Co – this vehicle is purely used for holding the retail
property (unfurnished). With the loan agreement in place, interest expenses are netted
off against the rental income, and reduces substantially the effective corporate income
tax.
De Bao HK Limited
Page 4

II Property related taxes post-purchase:

Property taxes are only incurred at one entity: SCI (Paris) Property Holding Co –
Through borrowing from the HK subsidiary, the net asset value of the company is
reduced significantly to below €790,000 and is fully exempted from the Wealth Tax.
Property Tax is just about 1% of the property value per annum.

A 3% tax on the value of the asset can be avoided if some conditions are met (such as to
declare the ultimate individual shareholders).

Taxes concerning profit repatriation:

III Profit repatriation taxes are potentially incurred at one entity: HC (EU). It is worth
noting that some profits are already repatriated without tax based on the 1) interest
payments from De Bao Fashion (Paris) Limited to the HK; and 2) interest payments from
SCI (Paris) Property Holding Co to the HK Subsidiary (interests are free of withholding
tax if some conditions are met); and 3) management fee payment from De Bao Fashion
(Paris) Limited to the HK subsidiary (withholding tax 10%*). The remaining profit is
repatriated by way of dividend to HC (EU). Because there is no withholding tax between
France and EU, the effective withholding tax on the dividend payout can be reduced
from 10% * to 5-10%.

KPMG (2010a). Competitive Alternatives.
KPMG (2010b). Competitive Alternatives - Special Report: Focus on Tax.

* Hong Kong –France Treaty was signed on 21 Oct 2010 and expected to be effective in 2011 subject to
Parliament’s approval.

De Bao HK Limited
Page 5

Case Study Of Flagship Store In Paris

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