Category: Legal news

The French Treasury’s Directorate General (“DGT“) has published its first guidelines to assist investors and their advisors to comply with the French foreign investment screening process.

These guidelines set out the scope of this control, including its key concepts, the conduct of the procedure and the follow-up of authorizations issued by the Minister in charge of the Economy.

1 – Clarification on the concept of “foreign investor”

A “foreign investor” is an individual of foreign nationality, an individual (even of French nationality) not resident in France for tax purposes, or a legal person (entity) governed by foreign law, regardless of its legal form or location (including investment funds and investment vehicles).

The DGT has clarified that all persons and entities in the same chain of control (as defined by Article L. 233-3 of the French Commercial Code) are investors under the regulations. Control therefore applies as soon as one member of the chain of control is foreign, even if the ultimate investor controlling the entire chain is a French entity or person.

Investment funds may be foreign investors, regardless of their management company. The guidelines indicate that the analysis of the chain of control of investment funds is carried out on a case-by-case basis and must take into account the specificity of each structure and the way the fund is managed. Furthermore, the transfer of an interest in an entity of an investment fund to another fund controlled by the same management company is not exempted from authorization, provided that this management company does not hold more than 50% of the capital or voting rights of these two funds.

2 – Clarification on the different forms of investment

Investment transactions are diverse, and the regulations do not list them. Only transactions carried out by a foreign investor on a French target entity operating in sensitive activities require a prior authorization.

Therefore, investment transactions in French branches of foreign companies are not subject to screening, because these branches are not considered French targets.

The DGT also confirms that “greenfield” investments – corresponding to the creation of an entity in France by a foreign investor to develop an activity in that country – are not subject to foreign investment screening.

Finally, the DGT recalls that a transaction which consists in the direct or indirect acquisition of a portfolio of sensitive contracts, a significant number of intellectual property rights (including software or know-how) or materials, vehicles, furniture, or equipment necessary to operate a sensitive business (asset deal), may be analyzed as the acquisition of part of a business, and thenbe subject to screening (see §3 below).

3 – “Sensitive” activities

The Guidelines remind the three types of activities that are “sensitive”:

• Activities listed in Article R. 151-3, I of the French Monetary and Financial Code (“Code monétaire et financier”, “CMF”) are eligible by nature (so-called “objective” eligibility).
• Activities that are likely to harm national defense interests, public order, or the exercise of public authority (Article R. 151-3, II CMF) are subject to a “sensitivity test” to assess their essential nature. Among the key criteria are the target’s customers, the nature, specificity and applications of the products or services provided, or the associated know-how, the substitutability of the activities or their dangerousness.
• Research and development (“R&D”) activities are eligible when they are intended to be implemented in one of the activities listed in the abovementioned paragraphs (Article R. 151-3, III CMF).

The sensitivity of the activity is therefore determined on a case-by-case basis (see reminder below). The targets carrying out subcontracting or supply activities for the benefit of an operator of vital importance (also known by the French acronym “OIV“) are strongly presumed to be sensitive. However, as the list of OIVs is protected by national Defense secrecy, the DGT will not be able to confirm or deny the presence of an OIV among the customers/partners of a French target.

4 – Exceptions to the authorization requirement: intra-group operations

Foreign investors are exempted from the authorization requirement when the investment is made between entities that all belong to the same group, as defined in Article L. 233-1 of the French Commercial Code.

However, a simple control relationship of a shareholder over different entities is not sufficient, as it does not imply the ownership of more than 50% of the capital or voting rights. Similarly, if 50% of the capital or voting rights of entities are held by several shareholders acting jointly, the investment is not exempt from authorization.

Reminder of the principles applicable to foreign investments

Regardless of the amount of the transaction, any investment – whether direct or indirect – made through the acquisition of shares (takeover of a company, or for non-EEA investors, acquisition of more than 25% – or, until December 31, 2022[1], 10% of the voting rights of the target company) or acquisition of goodwill or assets (all or part of a branch of activity of a company) of a French company performing critical activities is subject to a prior authorization by the Minister of the Economy, under penalty of nullity and heavy financial fines.

Since October 11, 2020[2], foreign investments must also be notified to the European Commission and to other Member States. This screening mechanism reinforces the protection of activities and essential assets of the Union and coordinates the responses brought to the investors. In 2021, just over 1,500 cases were notified. Nearly 73% of the cases analyzed were authorized. 23% were conditionally authorized, 3% were abandoned and only 1% were refused[3].

For European and non-European investors, the controlled sectors include (i) activities likely to affect national defence, public order, or public safety (war materials and similar, dual-use goods, national defence secrets, information systems security, encryption, sensitive data storage, etc.) or (ii) the same activities when they concern essential infrastructures, goods or services (energy, water, transport, space operations, communications, integrity, security and continuity of a vital operator, public health, agricultural products, press) and (iii) R&D activities in the above-mentioned sectors and related to the critical technologies defined in the order of December 31, 2019 (including cybersecurity, robotics, 3D printing, energy storage and renewable energies), as well as to dual-use goods and technologies.

[1] French Decree No 2021-1758 of 22 December 2021

[2] Date of the entry into force of UE Regulation 2019/452 of 19 March 2019

[3] See report of the Commission of 1 September 2022 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52022DC0433

For any additional information, please contact the Compliance and Regulatory team.

Frédéric Saffroy, Partner, and Alice Bastien, Associate.

On April 23, 2022, almost a month to the day after the adoption of the provisional political agreement on the Digital Markets Act (DMA) on March 24, 2022, an agreement was finally reached between the European Parliament and the Council of the European Union on the Digital Services Act (DSA) to modernize the rules applicable to digital services.

This legislation, which has yet to be formally and finally adopted, sets a new standard for the liability of online platforms for illegal and harmful content.

The European Union’s intention is to put into practice the principle that what is illegal offline is also illegal online. Thus, the DSA aims to put in place a new liability framework for large digital platforms.

More broadly, the objective is to better protect the fundamental rights of users on the Internet by setting rules with which actors meeting the conditions set out in the DSA will have to comply, in a manner commensurate with their capacity and size, when providing their services to EU nationals.

The obligations of the various actors can be classified into three categories:

• The fight against illegal content. In this perspective and as an example, marketplaces will have to better trace sellers and better inform consumers. In addition, although these online platforms retain the qualification of hosters limiting their liability for published content, they will have to offer a tool allowing users to report illegal content and products and to designate a “contact point” in each Member State that will serve as a privileged interlocutor with the judicial institutions.

• Online transparency. In this respect, platforms will be obliged to explain the algorithms they use to recommend certain advertising content based on users’ profiles and will have to make available to the public a register of advertisements containing various information.

• Risk mitigation and crisis response. The very large platforms and the very large search engines, i.e., those used by more than 45 million Europeans per month, which will be listed by the European Commission, will have to carry out independent risk mitigation audits every year, under the control of the European Commission.

In terms of personal data, the DSA provides new guarantees for the protection of minors and limitations on the use of sensitive personal data for targeted advertising.

The substantial penalties, which can go up to 6% of global turnover or even a ban on activities in the European Union’s single market in the event of serious and repeated violations, should encourage online platforms to comply and thus put an end to the opacity in which they have been operating until now.

Once finally adopted, the DSA will be directly applicable in all Member States and will be enforced fifteen months after its entry into force or from January 1, 2024, whichever is later. For very large online platforms and search engines, the DSA will apply earlier, i.e. four months after their designation.

The year 2022 marks the European Union’s involvement in the digital economy and the development of digital technology. Indeed, in addition to the DSA, other important texts have been initiated within the European Union, such as the aforementioned Digital Market Act, but also the Data Governance Act and the Data Act, which aim to develop a single market for data.

European Union law is intended to be a complex law, in order to effectively protect the rights and interests of the various operators, whether companies or consumers, and also to ensure freedom of the press, with the recent adoption of the Media Freedom Act. These regulations are in particular a response to a strong political expectation of the French government, which wants to see the European Union promote its own model. Through these different texts establishing common rules for the Member States, the European Union reinforces its digital sovereignty and there is no doubt that these provisions will have a real impact in France, between prevention and repression. 

Corinne Thiérache, Partner

The French tax authorities released in June 2022 their comments on several mechanisms introduced by Budget Laws and related to the restitution of certain withholding taxes (“WHT”) paid by non-resident companies. 

The Finance Law for 2020 and 2022 introduced the possibility for non-resident legal entities or organizations in a loss-making position to obtain a temporary restitution of WHT paid in France on dividends, royalties, fees, or capital gain (art. 235 quater of the CGI – French tax code), which can be assimilated to a tax deferral.

The deferral is ended in certain circumstances (for example when the company becomes profitable again) making the WHT concerned definitively due. The French tax authorities explain that when the tax deferral is ended because of a profit, the amount of income in respect of which the deferral is ended is limited to this profit.

The Finance Law for 2020 and 2022 also introduced the possibility for beneficiaries of certain incomes subject to the WHT to claim a refund. The amount of this refund is equal to the difference between the WHT paid and the WHT determined from a basis net of costs directly connected to this income (article 235 quinquies of the CGI – French tax code).

To benefit from this refund, the taxation rules in the State of residence as well as the provisions of the applicable international tax treaties must not have allowed the beneficiary to offset the WHT in that State. The French tax authorities specify that if the offsetting of WHT in the State of residence is allowed but limited, the restitution is possible but will also be limited to the part of the WHT that cannot be offset.

All the comments on these new mechanisms for restitution of certain WHT are available on the French tax administration’s website “Bulletin Officiel des Finances Publiques – Impôts” (www.bofip.impots.gouv.fr).

Philippe Pescayre, Partner, Mathilde Colonna d’Istria, Associate

The Competition, Merger Control Department of Alerion regularly works with the Corporate law, Mergers & Acquisitions and Private equity practice teams for merger control operations. In order to identify the most essential aspects of the merger control procedure in France, our team summarizes the first information needed in such transactions.

Type of mergers reviewed by the French Competition Authority: “Autorité de la concurrence” Art. L. 430-1 and sq. of the French commercial code :

A merger shall be deemed to have occurred where:

• Two or more previously independent undertakings merge;
• One or more persons already having control of at least one undertaking or when one or more undertakings acquire control of all or part of one or more other undertakings, directly or indirectly, whether by the acquisition of a holding in the capital or by purchasing assets, a contract or any other means.

The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity shall constitute a merger.

The control results from rights, agreements or any other means which, either separately or jointly and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on the activity of an undertaking, in particular by:

• rights of ownership or enjoyment of all or parts of the assets of an undertaking;
• rights or agreements which confer decisive influence on the composition, voting or decisions of the organs of an undertaking.

Thresholds applicable to all transactions Art. L. 430-2, I. of the French commercial code :

Mandatory notification if the three following cumulative conditions are met:

• The combined worldwide turnover exclusive of tax of all of the undertakings or of all of the individuals or legal entities involved in the merger is greater than €150 million, and
• The combined aggregate turnover exclusive of tax earned in France by at least two of the undertakings or groups of individuals or legal entities concerned is greater than €50 million; and;
• The transaction does not fall within the jurisdiction of the European Commission.

Specific thresholds applicable in retail trade Art. L. 430-2, II. of the French commercial code :

When at least two of the parties to the concentration operate one or more retail outlets notification is mandatory if the three following cumulative conditions are met:

• Aggregate turnover exclusive of tax earned worldwide by all of the undertakings or of all of the individuals or legal entities involved in the merger is greater than €75 million;
• The total turnover exclusive of tax generated in France, in the retail business sector, by at least two of the undertakings or groups of individuals or legal entities concerned is greater than €15 million;
• The transaction does not fall within the jurisdiction of the European Commission.

Mergers concerning certain French overseas territories Art. L. 430-2, II. of the French commercial code :

When at least one of the parties to the concentration exercises all or part of its business in one or more French overseas departments, in the department of Mayotte, the Wallis and Futuna Islands or the overseas territories of Saint-Pierre-et-Miquelon, Saint-Martin and Saint-Barthélemy, notification is mandatory if the three following cumulative conditions are met:

• The combined aggregate turnover exclusive of tax earned worldwide by all of the undertakings or of all the individuals or legal entities involved in the merger is greater than €75 million;
• The total worldwide turnover exclusive of tax generated separately in at least one of the French overseas territories concerned by at least two of the undertakings or groups of individuals or legal entities concerned is greater than €15 million, or €5 million in the retail sector without this threshold having to be reached by all the undertakings concerned in the same French overseas territory;
• The transaction does not fall within the jurisdiction of the European Commission.

Date by which the transaction must be notified to the Competition Authority Art. L. 430-3 and Art. L430-4 of the French commercial code :

The transaction must be notified prior to its completion, when the project is sufficiently advanced to enable the processing of the file.

The transaction can be effectively completed only after the Autorité de la concurrence has given its consent.

The notification procedure has a suspensive effect (except in the exceptional cases provided for by law).

Pre-notification :

The parties to the operation may initiate a contact with the French Competition Authority before the formal notification, in order to have a first formal evaluation of the questions raised by such operation.

At this stage, the procedure remains confidential, and the French Competition Authority cannot disclose it to third parties.

The confidential pre-notification is strongly recommended.

Fines Failure to notify Art. L. 430-8, I of the French Commercial Code :

Persons responsible for the notification, legal entity: Financial penalty of 5% of their pre-tax turnover made in France during the last closed fiscal year, plus, if applicable, the turnover that the acquired party made in France during the same period.

Persons responsible for the notification, individuals, €1.5 million.

Fines Early implementation of a merger, or gun jumping Art. L. 430-8, II of the French Commercial Code :

Notifying person, legal entity: financial penalty of 5% of the turnover excluding taxes made in France during the last financial year ended, increased, where applicable, by the turnover made in France during the same period by the acquired party.

Notifying person, individuals: financial penalty of €1.5 million.

Fines Omission or inaccurate statement Art. L. 430-8, III of the French Commercial Code :

Financial penalty of 5% of turnover for legal entity withdrawal of the decision of the Competition Authority.

Catherine Robin, Partner

After the COVID crisis, the invasion of Ukraine and the economic sanctions imposed on Russia, economic actors are faced with a shortage of raw materials and energy.

Thus, the question arises as to how existing contracts can be adapted under  French law and what strategies can be put in place when concluding new contracts.

1. Legal basis for adopting existing commercial contracts

The first idea is often to rely on a “force majeure” clause, but the application of Article 1218 of the French Civil Code presupposes that the contractual parties are faced with an event beyond the debtor’s control which could not reasonably be foreseen at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures and which prevents the performance of the contractual obligation.

However, if it is only a temporary disruption, French law only provides for suspension of the contract during this period and termination in case of permanence.

The reference to force majeure, if however the debtor of the obligation can prove that the event was unforeseeable at the time of the conclusion of the contract, does not allow the modification of the contract, but only its suspension or termination.

The second possibility could be to rely on the theory of unforeseeability with reference to Article 1195 of the French Civil Code.

Indeed, this provision confers a right to renegotiate the contract in the event of a change in circumstances unforeseeable at the time of the conclusion of the contract which makes the performance of the contract excessively onerous for one of the parties who would not have agreed to conclude the contract if it had known the new circumstances.

Here again, the party wishing to renegotiate must not only prove the unforeseeability of the event giving rise to the request, but also that the new situation creates an imbalance in the contractual relationship.

Moreover, French law does not provide for a limitation in the duration of the negotiation and during this time the contract must be performed according to the original terms.

Only after the failure of the negotiations, one of the parties can, after a reasonable period of time, ask the judge for revision or termination, without knowing what the result will be.

2. Contractual arrangements to give more flexibility to the execution of commercial contracts

One solution is to define the concept of “force majeure” more broadly.

In addition, it is possible to include price revision clauses automatically or under certain circumstances.

Furthermore, it is strongly recommended that the conditions for renegotiating the contract are strictly regulated, as well as in the in the event of failed renegotiations.

However, care must be taken to ensure that contractual clauses are balanced to avoid infringing the provisions of Article L.442-1.I.2° of the French Commercial Code, providing for damages if one party subjects the other to contractual obligations that create a significant imbalance.

In a nutshell, the provisions of French law alone do not allow contractual parties to adapt easily their contracts, but French law is quite flexible, allowing for contractual clauses at the time of conclusion of the contract which give the necessary flexibility during the performance of the contract.

Nicola Kömpf, Partner

Cass. 1^st Civil Chamber, 7 September 2022, No. 20-22.118, Libya v. SORELEC

Earlier this year in the case Belokon, the Cour de cassation (French Supreme Civil Court) considered that the conformity of arbitral awards with French international public policy could be subject to a “maximalist review” by the annulment judge.

As pointed out previously in Alerion’s newsletter, it remained uncertain whether such review applied to all cases of international public policy or whether it was limited to cases of money laundering, corruption and similar internationally recognized offences.

In a recent decision dated 7 September 2022 rendered in the SORELEC case, the Cour de cassation seemed to confirm the expansion of the judicial review to all cases of alleged violations of French international public policy.

However, this decision raises new questions as to whether the maximalist review would apply to all potential grounds of annulment which may be raised against an arbitral award under French law.

A highly political background

In 1979, the Education Ministry of Libya granted SORELEC, a French company, a contract for the construction of schools in Libya. A dispute arose between the parties in 1985 and the project was interrupted. In 2003, after several years of negotiations, a settlement agreement was reached.

In 2013, SORELEC filed an investment treaty claim against Libya to obtain the payment of the settlement, based on the France-Libya bilateral investment treaty of 2004. The proceedings took place in the context of the Libyan civil war where two rival governments were formed, in Tobruk and Tripoli.

In 2016, SORELEC reached a new settlement agreement with the Justice Minister of the Tobruk government. Libya was to pay SORELEC Euro 230 million before a certain date. In case of failure, Libya would have to pay Euro 452 million.

SORELEC requested the arbitral tribunal to homologate the settlement agreement, while Libya objected that the agreement was invalid since it was not signed by the Tripoli government. The arbitral tribunal homologated the agreement.

In 2017, the arbitral tribunal rendered a partial award ordering Libya to pay SORELEC Euro 230 million within 45 days. Libya did not pay. In 2018, the arbitral tribunal rendered a final award condemning Libya to pay SORELEC Euro 452 million.

Setting aside proceedings before French courts

Libya filed requests before the Paris Court of Appeal to set aside both awards. It alleged, for the first time, that the 2016 settlement agreement had been obtained through corruption and, therefore, that the awards would be in breach of French international public policy.

By separate decisions dated 17 November 2020, the Paris Court of Appeal set aside both awards. Regarding the partial award, the Court considered that there were “serious, precise and concurring” indicators that SORELEC had colluded with Libya’s Justice Minister for the signing of the 2016 settlement agreement. This decision entailed the setting aside of the final award, since its sole purpose was to sanction the non-performance of the partial award.

On 7 September 2022, the Cour de cassation upheld the ruling of the Paris Court of Appeal setting aside the partial award for violation of international public policy. Consequently, on 14 September 2022, the Court dismissed SORELEC’s appeal regarding the final award.

The first argument raised by SORELEC was that the Court of Appeal had not correctly applied the applicable standard of proof (generally presented as a “red flags” approach) and reversed the burden of proof.

The Cour de cassation rejected this ground summarily without setting forth its reasoning, which some may regret since the arbitration community would welcome a clear roadmap on this issue.

Secondly, SORELEC alleged that the principle of procedural fairness should have precluded Libya from bringing for the first time before the annulment judge its corruption allegations which it intentionally refrained to submit before the arbitral tribunal.

The Cour de cassation also rejected this argument, considering that parties have the right to invoke potential violations of French international public policy for the first time before the annulment judge.

Thirdly, SORELEC submitted that the Court of Appeal made a number of determinations which amounted to a prohibited de novo review of the award on the merits.

In response to this ground, the Cour de Cassation first quoted entirely Article 1520 of the French Code of civil procedure, which lists the five grounds on which an international award may be set aside under French law.

Then, the Court stated that although the annulment judge must limit its review to the grounds listed in this provision, there is no limit to its power to consider all elements – in fact or law – relevant to these grounds.

Finally, the Court concluded that the Court of Appeal was allowed to verify the veracity of the allegation that the settlement had been obtained through bribery by examining all the evidence produced in its support, even if they had not been submitted to the arbitrators.

The “maximalist” review of awards

The Cour de cassation confirmed the position taken in the Belokon case that, when an international award is challenged based on potential violations of French international public policy, French courts will thoroughly examine such allegations, including by reviewing new evidence.  

In addition, the Court disregarded the fact that the applicant chose not to bring these allegations before the arbitral tribunal, waiting for the issuance of the award. Hence, compliance with French international public policy on the merits took precedence over procedural fairness.

The SORELEC ruling calls for at least two comments.

First, the maximalist review of grounds for setting aside an award becomes closer to a de novo review of the merits of the case. The Court of Appeal reviewed in detail several aspects of the case including the respective concessions of both parties in the settlement agreement, in considering whether it could be an indicator of corruption.

Second, the wording of the decision leads some authors to question the – until then – common understanding that the maximalist review applied to challenges pertaining to the arbitrator’s jurisdiction and alleged violations of French international public policy. The Cour de cassation’s quotation of the entirety of Article 1520 of the French Code of civil procedure before reaffirming the maximalist review of the grounds raised against the award, could indicate that such review would apply to all five of them.

Practitioners would welcome clarification on these issues.

Conclusion

As the developments above suggest, this decision confirms the French Highest Court’s willingness to track down any corruption traces in matters submitted to arbitration. Practitioners should take this into consideration when determining arbitration or enforcement strategies.

Jacques Bouyssou, Partner, Marie-Hélène Bartoli-Vallet, Counsel, and Juan Diego Niño-Vargas, Associate.

By a decision of July 5, 2022 (SA AXA, no. 463021), the Conseil d’Etat (French highest administrative court), seized within the framework of an appeal on the ground of abuse of authority (ultra vires), invalidates the French tax authorities’ commentaries (referenced in France under BOI-IS-BASE-10-20 n°100). It acknowledges that the 5% share of costs and expenses that French parent companies receiving dividends within the framework of the parent company-subsidiary regime have to add-back into their taxable income, has  the nature of a taxation.

Under the parent-subsidiary regime, dividends received by a parent company are exempt from corporate income tax (CIT), except for a share of costs and expenses set at 5% of their gross amount (or 1% in certain situations) which must be added back to the taxable income of the parent company (Article 216 of the French Tax Code).

If a parent company receives dividends from a foreign subsidiary, which have been subject to withholding tax in the subsidiary’s country, this withholding tax gives rise to a tax credit in France, which is however limited to the amount of French tax due on these dividends. According to the French tax authorities, investment income is deemed to be tax-exempt, implying that the CIT paid on the share of costs and expenses cannot be considered as a taxation of the dividends as it is intended to cover the costs and expenses incurred by the parent company. In practical terms, it means that the foreign tax cannot be set off against the CIT paid in respect of the share of costs and expenses.

According to the Conseil d’Etat, the provisions of article 216 of the French Tax Code are not solely intended to neutralize the deduction of expenses relating to equity investments whose income is tax-exempt. Their purpose is to tax a fraction of the investment income benefiting from the parent-subsidiary regime. The Conseil d’Etat draws this conclusion from the flat-rate nature of the share of costs and expenses, which does not authorize the parent company to limit the amount to be added back to the actual amount of the costs and expenses incurred in order to acquire or retain the income.

This position was expected since the Conseil d’Etat applied to dividends the solution it had already adopted with respect to capital gains on the sale of equity securities (November 15, 2021, Air Liquide, no. 454105). Indeed, in opposition to the French tax authorities’ commentaries, the Conseil d’Etat stated that the 12% share of costs and expenses on the sale of foreign equity securities had the nature of a taxation against which a foreign tax credit could be set off.

While this ruling lays the groundwork for the offset of foreign tax credits against CIT paid in respect of the 5% share of costs and expenses, clarification would be welcome as to the terms and conditions of such offset, and in particular as to the amount of the foreign tax credit that can be offset against the French corporate income tax. In particular, guidance is required as to whether the full amount or only a portion of the CIT incurred should be considered as a taxation. Despite these uncertainties, it is nevertheless important to anticipate the situation by filing claims. Our teams remain at your disposal to discuss these issues and assist you in this process.

Philippe Pescayre, Partner, Julien Lebel, Counsel et Juliette Allot, Associate.

The Paris Court of appeal granted the Malaysian government’s application to stay the enforcement of the USD 14.92 billion award granted earlier this year in favor of the heirs of the Sultan of Sulu and North Borneo, while the heirs attached assets of the Malaysia’s state energy company in Luxembourg.

In a recent newsletter, Alerion partner Jacques Bouyssou, counsel Marie-Hélène Bartoli Vallet and associate Juan Diego Niño-Vargas commented this multi-billion award.

Now, in addition to its unique historical background and the considerable amounts at stake, this matter evolves interestingly at the stage of the recognition and enforcement of the sole arbitrator’s decisions before the Paris Court of Appeal.

Brief background of the case

In 1878, Muhammad Jamalul Alam, Sultan of Sulu and North Borneo, entered into an agreement with German and British merchants, by which the Sultan received annual rental payments in exchange for the exploitation of natural resources of the north coast of the island of Borneo, at the time a Spanish territory under his control, today in the Malaysian State of Sabah.

The merchants’ rights were transferred in 1963 to the Malaysian State, which became responsible for the payments, but stopped paying the annual rental in 2013.

In 2017, the Sultan’s heirs launched an ad-hoc arbitration and obtained from Spanish Courts the appointment of Dr. Gonzalo Stampa as sole arbitrator. Dr. Stampa issued a Preliminary Award confirming its jurisdiction, determining Madrid as the seat of arbitration and the international principles as lex causae.

Malaysia challenged the appointment of Dr. Stampa before the Superior Court of Justice of Madrid which, on 29 June 2021, annulled Dr. Stampa’s appointment.

However, the Sultan’s heirs obtained from the Judiciary Tribunal of Paris an Enforcement Order of the Preliminary Award and Dr. Stampa then relocated the seat of arbitration from Madrid to Paris on 29 October 2021.

In parallel, Malaysia lodged an appeal against the Enforcement Order before the Paris Court of Appeal and obtained an order suspending its effects on 16 December 2021.

On 28 February 2022, after four years of proceedings, the sole arbitrator delivered a Final Award in favor of the heirs of the Sultan, allocating them USD 14.92 billion in damages for Malaysia’s breach of the agreement.

Request to set aside the Final Award and stay its enforcement

Malaysia applied before the Paris Court of Appeal to set aside the Final Award and to stay its enforcement. A judge was assigned to the case to issue a preliminary ruling on the request to stay enforcement.

Under French law, international arbitration awards are enforceable even when a request to set aside the  award is pending. Under Article 1526 of the French Code of civil proceedings, a party may however obtain a stay of the enforcement if it proves that the “enforcement could severely prejudice/damage [its] rights”.

Malaysia alleged that the enforcement of the Final Award could severely prejudice its rights on two grounds.

Firstly, Malaysia alleged that the Final Award could infringe its sovereignty since it provides that Malaysia is not the owner of the territories subject to the 1878 Agreement, but merely the tenant. Malaysia argued that its sovereignty over these territories was recognized by the international community and that the permanent sovereignty of a State over its natural resources is a component of its territorial sovereignty.

Secondly, Malaysia alleged that the procedural context under which the Final Award was rendered would be prejudicial, referring to Dr. Stampa’s decision to relocate the seat from Madrid to Paris after the annulment of his appointment by Spanish Courts and to the fact that he rendered the Final Award after the Paris Court of Appeal decided to suspend the Enforcement Order of the Preliminary Award.

The Paris judge first dismissed these allegations regarding the procedural background, considering that they would be assessed by the Court when ruling on the merits of the application to set aside the Final Award, but that they did not characterize any prejudice to Malaysia’s rights resulting from the enforcement of the Final Award.

Then, however, the Paris judge accepted Malaysia’s main argument based on the potential infringement of its sovereignty. He pointed out that even if Dr. Stampa held that the award did not affect Malaysia’s sovereignty, the Paris judge was not precluded from considering the merits of Malaysia’s allegations regarding the potential consequences of an immediate enforcement of the Final Award on its sovereignty.

The judge noted that the Final Award allocated damages to the Sultan’s heirs that were equivalent to the value of the exploitation of natural resources of the disputed territories which were under Malaysia sovereignty. On this basis, he decided that such indemnity was a financial equivalent to a restitution of the territories, and that the enforcement of such indemnity cannot not be considered as the mere enforcement of a commercial contract.

Additionally, the judge highlighted the geopolitical context of the matter. He noted that Malaysia had stopped paying the annual rental after a Filipino armed rebel group launched an attack against the Malaysian State of Sabah. He also pointed out that the Sultan’s heirs had themselves submitted to the sole arbitrator that a restitution of the territories could provoke uprisings, civil war, unrest, or other disturbances in the region.

The judge concluded that the enforcement of the award could seriously prejudice Malaysia’s rights.

In its decision dated 12 July 2022, the judge of the Paris Court of appeal stayed the enforcement of the Final Award.

Attachment of Petronas assets in Luxembourg

In parallel, the Sultan’s heirs started the enforcement of the Final Award in Luxembourg. Both the Preliminary Award and the Final Award were recognized by local courts.

On 11 July 2022, a day before the Paris Court of Appeal ordered the stay of the enforcement of the Final Award in France, assets of Malysia’s state energy company, Petronas, were attached in Luxembourg.

The Sultan’s heirs had bailiffs in Luxembourg serve two seizure notices (saisies-arrêts) by local courts to two subsidiaries of Petronas, Petronas Azerbaijan (Shah Deniz) and Petronas South Caucasus.

The attached subsidiaries formerly managed the State entity’s operations in Azerbaijan. The specialized press reports that the relevant assets amount to over USD 2 billion.

However, Petronas published a statement indicating it had “previously divested its entire assets in the Republic of Azerbaijan and the proceeds from the exercise have been duly repatriated” and is, in any case, preparing its legal position to challenge the attachments.

Conclusion

This historic case will continue evolving and will be subject of study due to its geopolitical implications and to the unprecedented decisions of the sole arbitrator and State courts.

There are high expectations for the decision of the Paris Court of Appeal on the request to set aside the award and for the outcome of the enforcement proceedings that the Sultan’s heirs could launch around the world.

Jacques Bouyssou, Partner, Marie-Hélène Bartoli Vallet, Counsel and Juan Diego Niño-Vargas, Associate

Whereas the tax regime of “inpatriates” is known and implemented in multiple companies, it is less so in sport clubs, which does not mean that it is ignored, far from it.

A tax exemption that everyone can benefit from…

The “inpatriates” tax regime is a mechanism providing for a tax exemption of additional remuneration paid to employees / players recruited abroad. In certain cases, this additional remuneration may be fixed at 30% of the remuneration before taxes.

Thus, everyone can benefit from such a mechanism insofar as it allows French companies and sports clubs to reduce their payroll costs. This is implemented during the negotiation of the employee or player’s remuneration (on a net basis after taxes) while maintaining said employee or player’s salary level.

This mechanism also allows the beneficiary to exceed the 30% tax exemption, particularly when working abroad (for example when the club qualifies for European competitions) up to a 50% exemption of the total net remuneration.

In addition, it is combined with a partial exemption of certain foreign patrimonial income, such as dividends or capital gains on the sale of company rights.

Lastly, a real estate wealth tax (“impôt sur la fortune immobilière” – IFI) exemption is also applicable for 5 years on real estate assets held outside France.

… Provided that the conditions are met

In order for the conditions to be met and the exemption to apply, the employee/player must have spent more than 5 full calendar years (and not 5 seasons) abroad before moving or returning to France.

It is recommended to include the “inpatriates” bonus in the employment contract prior to the move to France, and to ensure that it corresponds to an additional remuneration compared to the one received by players recruited in France with the same profile.

The exemption can be applied until the end of the 8^th year following the move to France, which however supposes that the player does not change club.

A mechanism designed to attract foreign talent to France

What is understandable for employees of French companies is also understandable for sportsmen and women; the international competition in which clubs from all over the world take part has prompted the legislator to create incentive mechanisms aimed at competing and attracting the best talent.

This is the very essence of the legal text, which gives French clubs some weapons to try and make themselves heard on the transfer market, even if equivalent mechanisms exist in other European countries; Paul Pogba will thus be a potential beneficiary of the Italian “inpatriate” tax regime when he signs his contract with Juventus after six seasons spent at Manchester United.

An attractive tax mechanism to compensate for the high level of French social security contributions

The level of social security contributions in France being known as one of the highest in the world, this small advantage can sometimes make the difference in arduous discussions between clubs and agents during the Mercato (transfer period), by acting as a counterbalance to these high social contributions with a tax system more in line with the standards of neighbouring countries.

Thus, while the marginal tax rate in France can be as high as 49% (adding to the tax itself the exceptional contribution on high incomes, which can reach 4%), this rate can drop to around 35% when the “inpatriate” exemption is applied.

Thus, everyone can benefit from such a mechanism insofar as it allows French companies and sports clubs to reduce their payroll costs. This is implemented during the negotiation of the employee or player’s remuneration (on a net basis after taxes) while maintaining said employee or player’s salary level.

Jacques Perotto, Partner, and Julien Lebel, Counsel.

Keep it in mind #1: Working time in days: don’t forget the annual interview!

Each year, employees who are subject to a working time scheme set up in days (“forfait jours”) must benefit from an interview aimed at discussing their workload, the balance between their personal and professional life, their remuneration and the organization of working time within the company.

This interview must be separate from the performance review and must be documented.

In the absence of such an interview, the “forfait jours” may be deemed void, allowing the employee to request the payment of overtime and/or damages.

Case law: Validity of the “Macron” damages scale

In 2017, the French government set up a scale of indemnification for dismissals deemed without cause, with ceilings for damages. 

Some Labor and Appeal Courts dismissed the application of this scale, based on the interpretation of European and international rules.

The French Supreme Court ruled on this matter in two recent decisions: the scale is validated and may not be quashed by judges.

French Supreme Court – 11^th May 2022, n°21-14.490 and 21-15.247

Social database: environment indicators

Companies with more than 50 employees shall implement a social database with various indicators regarding finance and HR topics. Such database shall now be completed by indicators related to the environmental impact of the company’s activity. These indicators may be agreed through a company-wide collective bargaining agreement. If not, a recent decree sets the items to be integrated, which includes: waste management in the company, assessment of the environmental impact of the company, energy and water consummation and emission of greenhouse gas.

Decree 2022-678 of April 26^th 2022

Article: Deliveroo France found guilty of undeclared work

The Paris Criminal Court convicted the platform Deliveroo and three of its former managers of “undeclared work”.

Jacques Perotto and Quentin Kéraval present their analysis of the decision.

Case law focus: working time

(i) The French Supreme Court is aligned on EU case law, and ruled that an employee who exceeded the maximum working time is automatically eligible to damages without having to prove the existence of a prejudice.

The French Supreme court thus created a new exception to the principle established in 2016, according to which the existence and extend of prejudice must be demonstrated by the plaintiff.

French Supreme Court – 26^th January 2022, n°20-21.636

(ii) A Company which does not justify having taken the necessary measures to ensure that the workload of an employee subject to working time scheme set up in days (“forfait jours”) remains reasonable fails in its obligation of safety. The plaintiff employee is thus entitled to damages for the resulting prejudice.

French Supreme Court – 2^nd March 2022, n°20-16.683

Case law: intentionality of moral harassment

Moral harassment is both a civil and criminal offense. However, there is a major difference between both qualifications:

• According to employment law, moral harassment is qualified independently of the author’s intention as long as the behavior meets the legal definition.

• On the contrary, for moral harassment to be qualified as a criminal offence, it is mandatory to prove the author’s intention to harass the employee.

The French supreme court recently confirmed this principle and ruled that to be criminally liable, the employer must be “aware of the degradation of working conditions“.

French Supreme Court – 22^nd February 2022, n°21-82.266

Jacques Perotto, Partner, Maxime Hermes, Anne-Sophie Houbart, Eloïse Ramos, Associates.