France

Country Name France
Country Region Western Europe

Economic and Political Environment

The Banking Environment

The central bank is Banque de France (BDF).

The French banking sector can be broken down into three categories:

• mutuals
• commercial banks
• specialist companies
  

There are over 300 registered commercial banks in France, with a total of over 10 000 branches between them. The post office also plays an important role in the banking market with almost 17 000 branches.

The leading banks are:

• BNP Paribas
• Société Générale
• CCF Group
• Crédit Agricole Indosuez/Crédit Lyonnais
•  Caisse des depots
• Natexis Banques Populaires
• Crédit Mutuel
• Crédit Industriel

Cash Management Features

The main features of Cash Management in France are the restrictions on payment of interest on current account balances owned by residents, the quite large array of payment methods, widespread use of cheques and increasing automation.

The high-value payment systems are open to all and are fully compatible with SWIFT. For low-value and domestic activity, the SIT system is all-important and so it becomes important for corporates to maintain a relationship with a bank that is a full member of this system, which few foreign banks are.

It is forbidden by law for banks to pay interest on current account balances owned by residents. To work round this, residents do one of the following:

1. run a net short position using overdraft and loans, although overdraft charging can be opaque with charges such as a quarterly utilisation fee on the maximum drawn balance
2. sweep funds into unit trusts (SICAV)
3. combine resident funds with non-resident funds in a cash pooling structure

There are many payment instruments, but the paper-based versions of some have been phased out such that the related process is now electronic.

The importance of cheques is not just due to convenience. There is a level of assurance for the beneficiary because the penalties for the issuer of a bad cheque are severe. Both the banks and the courts are allowed to ban companies and individuals from writing further cheques when they issued bad cheques in the past.

There are national registers which receivers of cheques are by law permitted to consult:

• “Fichier central des cheques” (Central Cheque Register) where the occurrence of any cheque “incidents” against a cheque issuer is recorded as well as all instances of bank-imposed or court-imposed bans on cheque writing
• the more detailed “Fichier national des cheques irreguliers” (National Register of Cheque Irregularities) where all cheque “incidents” are recorded in detail, such as a returned unpaid cheque, a cheque drawn on a closed account and so on

These registers operate as a Black Book and so no company would be pay by cheque if it risked appearing in the Black Book.

Likewise there is a national register of card confiscations.

The procedure and infrastructure for clearing cheques has been overhauled such that all cheques clear in truncated form. Only cheques over EUR5,000 have to be physically returned to the drawer’s branch.

Previously cheques could be presented in any of 100+ local Banque de France branches and be cleared either locally in one day or nationally in three. Then 7 regional processing centres for cheque truncation were introduced, running in parallel to the local clearings, and large volumes were transferred to this method, but still with a difference in clearing cycle dependent upon whether the cheque was drawn in-region or in a different region.
Now the banks’ data centres are responsible for truncation and the images of cheques are exchanged in the SIT clearing system, in common with all other retail payment types.

The only centre for physical cheque presentment called the CEPC (“Centre d’echanges physiques des cheques”) in Paris and this is mechanism for presentment of cheques over EUR5,000.

The SIT system is highly important because so many payment types are cleared through it.

They include two types of Bill of Exchange which are commonly used for business-to-business payments. The Bills confer on the users legal rights that are advantageous and not replicated when they use credit transfers. These rights allow a creditor to short-cut the commercial law remedies to obtain payment and make a “protest” under the Bill Law: if the Bill is proven to be valid, the debtor must pay at once or be put into administration. Bills are a payment type which used to be in paper form, but now only exist in electronic form.

The Bill types are:

1. BOR (Billet a Order Releve), which is created by the buyer and sent to the seller through their bank. It is thus a Promissory Note and is recognised as payable as soon as it is sent
2. LCR (Lettre de Credit Releve), which is created by the buyer and sent to the seller through their bank. The seller has to accept the LCR as being payable and has a set period in which to do this

In terms of high-value payments, account holders need to beware of the practice of backvaluation i.e. where a payment order made today is debited today but with value yesterday. This is problematical when the account has been swept as part of a cash pooling structure.

The supply of electronic banking services is noteworthy in that clients that require systems in their office with advanced functionality usually acquire these from independent vendors, not from banks.

Banks make available numerous channels for customers to give instructions and retrieve information, such as internet, phone, kiosk, ATM, but the corporate user will often acquire extra software – but not from banks.

As such, electronic banking systems are multibank, not least because they operate in line with the ETEBAC security and technical standards, allowing exchange of data in several formats – formats that correlate to payment methods.

The embedding of ETEBAC enables high levels of end-to-end automation for the payment methods that fall within scope.

Accounts and funding

Foreign currency as well as EUR accounts are offered, both to residents and non-residents.

Residents can hold EUR and foreign currency accounts outside France.

Paying interest on demand deposit in French Francs held by residents is forbidden. Paying interest on foreign currency accounts of residents as well as accounts held by non-residents is authorised.

Overdraft are allowed but must be first negotiated with the bank.

Residents / non residents issues

There is no specific financial difference between a resident and a non resident company.

Same prices are offered. The only difference is that non resident companies can have their current account balances remunerated whereas it is strictly forbidden for resident companies.

There is no withholding tax on interest paid to the bank.

Both resident and non resident companies can participate in the same cash pool system. So, it is possible to have standing instructions which sweep from a resident to a non resident account (or vice versa).

Note that cross-border payments can attract lifting fees, unless they are below EUR12,5000, have both ends within the EU and the remitter supplies the beneficiary’s IBAN and BIC.

Where both accounts are in France but the payment still qualifies as “cross-border”, the lifting fee should be around 0.025%.

Where one account is outside France, the lifting fee should be around 0.1%.

All fiscally resident companies are subject to a 33.3% corporation tax on their profits. Local business taxes come on top of this, as well as payroll-related taxes (which can amount to as much as 45% of employee gross pay).

If corporation tax exceeds EUR763,000 there is a surcharge and the corporation tax rate rises by of 3% with a further social contribution of 3.3% on top of that.

The general rate of VAT is 20.6%. Bank services are subject to this rate. A reduced rate of 5.5% applies on essential goods and certain publications, and a reduced rate of 2.1% applies on certain medicines, newspaper and theatrical events.

Withholding tax applies to payments to non-resident companies as follows:

dividends 25%
royalties 33.3%
interest 15%

These rates can be reduced, in some case to zero, if an appropriate double tax treaty is in place between France and the receiver’s country.

There are further dispensations for various situations where the receiver of monies is related to the payer and the receiver is in the EU.

French tax law dictates that inter-company transactions must be carried out using arm’s-lngth pricing in accordance with OECD guidelines.

There are thin capitalisation rules: interest paid to a foreign majority owner is disallowed where debt of the French company is more than five times equity. Interest is disallowed where it is based on an interest rate higher than a specified level and is paid to any shareholder (in 2002 the specified rate was 5.66%).

Central bank reporting applies to the following payments:

Residents to / from non residents
Resident making / receiving payments on their accounts held outside France.
For each type of these payments, every transaction over EURO 12,500 has to be reported on a monthly basis.

Banks are responsible for reporting transactions processed by them, but companies whose total amount of international payment exceeds EUR 150 million / year have to report directly.

In either case it is the French resident who bears the ultimate liability that the reporting is correct.

None

The most common payment method is cheques. 

Credit transfer is the main way in which wages, pensions and social benefits are paid.

Lockboxes services are used but they are not brought up by banks since they are not a packaged but a tailor-made offer.

Implications of Payment Volumes statistics:

• The figures for Credit Transfers include the High-Value payments in both RTGS and Net Settlement systems
• Of the low-value payment methods, cheques is dominant in terms of value, because it is used in commercial business
• Direct Debit figures include the BOR and LCR, where the value per item is quite high
• Card transactions are used for relatively small amounts, reflecting the predominance of debit cards/electronic money cards over credit/charge cards, and their use as a cash substitute not least because shops happily accept them for small purchases
• This in turn reflects their low processing cost due to automation

Cheques are the dominant non-cash payment instrument (excluding large value payments). There is no specific use and user of cheques. France is trying to make their use decrease but businesses are quite attached to this mean of payment. Value dating is done on a commercial negotiation basis.

France took the opportunity of the introduction of the EUR to overhaul the cheque clearing procedure and retire all regional and local clearing houses. Previously the Banque de France administered nine regional truncated cheque clearing centres (called CREIC or Centre regional d’échanges d’images-chèques) and 103 provincial cheque clearing houses (called Chambres de compensation be province).

The rules regarding availability of funds to banks were that a cheque deposited within the same clearing house region where the cheque is drawn, the clearing cycle was D+1. If deposited outside of the clearing house region where the cheque is drawn, the cycle was D+2.

The availability of cheque proceeds onto customer accounts was based off these timings, and agreed by negotiation. This is still the case but the framework around which the negotiation is based is that the banks receive availability as follows:

TBF (“Transfers Banque de France” or Banque de France Transfers) is the high-value RTGS system linked to TARGET and runs to TARGET operating hours, i.e. 07:00-17:00 CET for customer payments and until 18:00 CET for interbank.

TBF allows large value euro transfers to be sent to any bank within the EU that participates in a domestic RTGS system under exactly the same conditions as a « domestic » transfer between two TBF participants.

Only orders denominated in Euro are accepted by TBF

TBF has 176 direct participants including many foreign banks through their French branches and subsidiaries.

Payments through the TBF would be termed “Virements” (Credit Transfers), or “Virements de Grand Montant” (Large Value Credit Transfers), hence their inclusion under Credit Transfers in the statistics above.

PNS (“Paris Net Settlement”) is a high-value net settlement system and payments through it would also be termed “Virements de Grand Montant”.

PNS is for EUR-denominated interbank payments. It has 21 direct participants.

Participants have to pay a minimum of EUR15 million onto their PNS accounts at the start of the day, in order to have the liquidity in place to settle payments during the day. Pay-ins are made on the TBF system.

Payments are cleared to the participants’ PNS accounts, and at the end of the day the outstanding balance (always positive) on the PNS account is zero-balanced to the participant’s account held for paying/receiving in TBF.

PNS participants must therefore also be TBF participants.

The SIT system (Systeme interbancaire de Telecompensation) is France’s ACH system. The SIT processes all dematerialised retail payment instructions such as credit transfers, truncated cheques, bills, automated withdrawals, standing orders, credit card transactions.

SIT provides direct bilateral links between a maximum of 25 direct participants, under the control of common centres. A direct participant must send and receive on its own account a minimum of 0,2% of the annual SIT volumes.

Opening hours: 00:00 to 21:00, Monday to Saturday, with a cut-off time for same day settlement at 14h30.

The use of credit transfers (“Virements”) is growing. High value payment are done by transfers.
Wages are commonly paid by credit transfers. Businesses also pay suppliers and taxes via this instrument rather than bills of exchange and cheques.

There are some specific types of credit transfer:

• Virement d’origine exterieure – a credit transfer emanating from outside France, for which a French institution can create a SIT payment layout that shows original currency and amount, FX rate used, and charges
• Virement echange des donnees informatiques – credit transfer with Electronic Data Exchange, which is then in Edifact format
• Virement reference – credit transfer with extra reference information that supports the beneficiary’s reconciliation
• Virement specifique oriente tesorerie – interbank transfer for cash management purposes
• Virement commercial financable – a commercial credit transfer where the creditor receives an advice and can have funds available straight away, less interest charges which are calculated on a discount method
• Virement commercial non-financable – as above, but the creditor just gets the advice and cannot discount the future receipt

The processing of all these credit transfer types is supported in electronic banking systems and accounting systems, and facilitated by ETEBAC5.

Three kinds of Direct Debit exist.

• Prelevement - the common one for retail use: the debtor signs to the creditor an authorisation to have his account debited for a giving amount for a fixed period. Then the creditor passes on this authorisation  to his bank.
• TIP (Titre Interbancaire de  Paiement) - TIPs work in the same way as the common direct debit except that each individual payment must be signed off by the payer. TIPs are used widely for paying regular bills such as subscriptions.
• LCR or Lettre de credit releve nd BOR or Billet ordre releve – these are the Bill payment types. Once they are lodged in the banks’ systems as due and payable on a particular date – and either accepted or not rejected by the payer – they debit automatically to the payer’s account on due date (if funds are available) and credit the beneficiary

Bank cards are the second most commonly used non-cash payment instrument in France. Cards issued by retailers and those used for accessing transport systems and local amenities such as leisure centres are also widely used.

Procurement Card

The Procurement Card is aimed at simplifying the order and payment process for those non-strategic purchases that bring excess administrative burden on the corporate.

It is a new payment tool dedicated to the small amount inter-enterprise buying.

Its principle lies on the delegation of the supply function to specified collaborators. The purchasing function (selection of suppliers, negotiation) remains under the responsibility of the Purchase Department.

Business Card

The Business Card is a credit card issued from a company in the name of certain of its employees to allow them to pay their professional expenses in France and abroad.

VCOM (Mobilisable Commercial Bank-Transfer) 

Certain banks, including HSBC France, have created this new type of supplier bank-transfer to mitigate two major drawbacks of the traditional bank transfer: its inability of conveying trade information and its incapacity to be mobilized by the supplier.
 
 In addition to being a transfer order, the VCOM enables the Instructing Party’s bank:

• to inform the supplier ahead of time of the forthcoming arrival of this transfer through means of a notification called a “pre-announce”;
• to provide the supplier with the possibility of ”discounting” this bank-transfer.

The durability of this new means of payment is ensured by the use of EDI international standards (EDIFACT), now used by all banks which can propose the VCOM.

Electronic Banking

Electronic Banking systems are commonly used in France. The single standard used is called ETEBAC5. ETEBAC is a multi-bank standard for file exchange between banks and customers. ETEBAC 5 is the improved version of ETEBAC 3. It offers increased security and the possibility to exchange files in a variety of formats independent of their contents.

With ETEBAC 5, security is based on:

• the authentication of the two parties to an exchange (Prior to a transaction, the authentication is achieved by RSA whereby the two parties identify themselves to permit recognition by means of a code contained in a microchip card)
• the integrity and the confidentiality of the data (The file is sealed by the first signatory seal is calculated on the basis of the entire contents of the file by the sender. The seal sent to the bank is matched to the one calculated by them. The integrity is achieved by the DES principle which prevents illicit decoding of the contents of the file)
• the non-repudiation of the file exchange (A record of the exchange, type of file, name of file, date / hour of creation, client ID, bank ID is registered on each party’s computer. This principle is assured by RSA)

Every kind of company uses EB-Systems and almost every bank has developed or plans to develop an internet offer.

As stated earlier, bank eb offerings tend to be operated by the client using bank-supported devices outside client premises (kiosk, ATM) or by the client remotely accessing a bank server (internet, mobile phone, PDA) or by host-to-host connection for large volumes.

Given the existence of national standards and ETEBAC5, none of the above requires the client to install bank-supplied software.

Where clients require the functionality of such software, it is usually supplied by independent vendors such as Cerg Finance.

Liquidity Management

Legal aspects

In setting up a cash management system, it is necessary that a capital link exists between companies which gives one of them effective control  over the others (French Banking Act, 1984).

French authorities consider that this effective capital link automatically exists if a minimum of 50% control exists between companies. This control can come from either the mother or the subsidiary . It can also be direct or indirect, which means that the pooling company can be a sister company of the other companies participating in the cash pooling arrangement.
If the 50% control is not reached, the effective capital link can also be met if a company has a significant impact on the management of another company. This occurs when a company:

Holds directly or indirectly, a percentage of the capital giving it a majority of the voting rights at shareholders’ meetings;
Holds a majority of the voting rights in said company pursuant to a shareholder agreement which is not detrimental to the controlled company’s interest;
Determines, in fact, through the voting rights it holds the decisions adopted during the shareholders’ meetings
Holds directly or indirectly more than 40% percent of the voting rights of a subsidiary whereas no other shareholder, directly or indirectly, holds a more important number of voting rights.
In order to comply with the rules covering relationships between companies of the same group, it is essential to set up a cash agreement between the pooling company and the related companies. This agreement must lay down in particular:

The roles  and obligations of each of the participants
The interest payment and borrowing conditions between the companies of the group
The length of agreement
For each of the companies, a board must authorise each of the Chairmen to sign this agreement.

Both residents and non-residents can participate in a same pooling system.

Tax aspects

Participants to the cash management system must involve remuneration on money lent to the group. It means that a company which lends money to another company of the group must receive interest. This remuneration must be equal to the interest rate that the lender would obtain from a bank in remuneration of the same sum deposited in an account bearing interest.

Subject to the capital of the subsidiary being fully paid-up, interest paid by one subsidiary to its parent company is deductible against the subsidiary’s corporation tax under certain limits:

A maximum interest rate applying to the loan (EONIA) that corresponds to the average effective rate applied by credit institutions for variable-rate loans to companies, for an initial period of more than two years;
A maximum principal amount for the loan that must be equal to 150% of the capital of the subsidiary (interest on any amount above that is reclassified as a dividend).
Interest paid by a mother company to its subsidiary (or between two sisters)  is deductible, subject to the rate applied being considered “reasonable”.
Withholding tax applies as stated above.

Both resident and non resident companies can participate in the same cash pool system.

ZBA

ZBA is allowed but under these previous conditions. It can be direct or indirect:

The direct method:

Each transaction affecting a secondary account is transferred daily to the pooling account. The accounting and value balance of the secondary account is always nil.

The indirect method:

The feedback takes place through a “shadow” account. The current account (“operating” account) is merged in terms of statements with its shadow account. The accounting and value consolidated balance of the operating account and of its shadow account is nil.

The advantage of this method is to enable companies to keep track daily of the loans/borrowing positions of the subsidiaries vis-à-vis their parent company.

Notional Cash Pooling is not authorised

With regard to the French law, setting up a notional cash pooling is forbidden for two major reasons:

Accounting prohibition to set off accounts against each other when said accounts are owned by different and separate legal entities. Thus only Notional Cash Pooling between sub accounts of a same legal entity is authorised
Banking prohibition to remunerate sight deposits. Setting up a notional pooling can be seen as a mean of getting round the forbidding of remunerating sight deposit accounts.
NB: Notional Cash Pooling between different legal entities in the same group has been tolerated in the 1995s for very large corporate groups such as Air France or France Telecom under certain circumstances, often that the companies have signed an agreement amongst themselves to become a Groupe d’interet economique (“Economic Interest Group”).