Vivendi Spin-off of Universal Music Group Will Attract French Withholding Tax

By Stuart E. Leblang, Michael J. Kliegman, and  Amy S. Elliott  with assistance from Sebastian Boyxen and Lionel Lenczner

On February 13, French media conglomerate Vivendi SE announced that, in response to pressure from institutional investors, its Management Board had decided to pursue a distribution of 60 percent of the outstanding shares in its Universal Music Group (UMG) subsidiary. ¹  The distribution will be a special dividend of shares in UMG, a newly formed Netherlands company, in conjunction with a listing of the shares on the Euronext exchange.  This announcement followed a January 29 announcement of Vivendi’s sale of 10 percent of UMG to a consortium led by Tencent Holdings Limited (HKEX:  700) with the participation of Tencent Music Entertainment (NYSE:  TME), increasing the Tencent group’s ownership to 20 percent of UMG. ²  The UMG spin-off was approved by an overwhelming majority of shareholders at a March 29 extraordinary general shareholders’ meeting. ³ 

The spin-off will be a taxable dividend for French tax purposes, generally taxable to French shareholders and subject to withholding tax for non-French shareholders.  With certain exceptions, the withholding tax is 26.5 percent (the same as the French standard corporate tax rate) of the gross amount of the distribution.  A reduced rate may be available for residents in tax treaty countries (e.g., 15 percent under the France-U.S. treaty), but when qualification requires fund disclosures regarding investors, ⁴ this is unlikely to be useful.  A much higher withholding rate of 75 percent is presumptively imposed on distributions to a company resident in a “non-cooperative state or territory” (NCST), including, for example, the British Virgin Islands. ⁵  The Cayman Islands is not an NCST, so a Cayman entity would generally be subject to the regular 26.5 percent rate.  Under certain conditions, no withholding tax is imposed on dividends to collective investment funds that comply with the European Undertakings for the Collective Investment in Transferable Securities (UCITS) fund regulation and are based in the European Union or a state outside the European Union that effectively exchanges information with France under a tax treaty or a Tax Information Exchange Agreement.

It might be possible to participate in the financial benefits from the proposed UMG spin-off through a swap contract.  While France has anti-abuse rules to prevent certain dividend arbitrage trading schemes, the rules do not appear to go as far as Section 871(m) of the Internal Revenue Code, which can subject a non-U.S. investor to U.S. withholding tax as a result of payments under notional principal contracts that refer to the payment of a U.S.-source dividend.  On the other hand, it may be challenging for banks to participate as counterparties to such a swap with respect to Vivendi, given the necessity of ultimately having to hedge the risk with an entity that can absorb the UMG dividend without significant income tax cost.

^{[1] Press Release, Vivendi, Vivendi will examine the distribution of 60% of UMG’s share capital and its listing by the end of the year (Feb. 13, 2021) (https://www.vivendi.com/wp-content/uploads/2021/02/20200213_VIV_PR_Vivendi-will-examine-the- distribution-of-60-of-UMG-and-its-listing.pdf).}

^{[2] Press Release, Vivendi, Vivendi:  the Tencent-led consortium has completed the exercise of its call option and now owns 20% of UMG’s share capital (Jan. 29, 2021) (https://www.vivendi.com/wp- content/uploads/2021/01/PR210129_Tencent_20_in_UMG.pdf).}

^{[3] Press Release, Vivendi, 99.98% positive votes at the Vivendi’s Extraordinary General Shareholders’ Meeting (March 29, 2021) (https://www.vivendi.com/wp-content/uploads/2021/03/20210329_VIV_PR_following-EGM.pdf).}

^{[4] For example, disclosure is required when a partnership is involved that is not considered as a tax resident.  In principle, no investor disclosure would be required for U.S. pension funds and charities, which are expressly considered tax residents of the United States under the France-U.S. tax treaty.}

^{[5] Non-cooperative state or territory (NCST) jurisdictions are American Samoa, American Virgin Islands, Anguilla, British Virgin Islands, Dominica, Fiji, Guam, Panama, Samoa, Seychelles, Trinidad, Tobago and Vanuatu.}