The french online gambling market: analysis of the draft french gaming law

The French online gaming market is opening up to competition: the French Government is in the process of enacting a legislation liberalising the online gaming market under the pressure of both the European Commission (hereinafter referred to as the “Commission”) and the fast-moving environment on the Internet where online gambling operators are already present and offer games of chance to french consumers.

The present memorandum will briefly summarize the main features of the Draft French Gaming Law (currently under discussion at the French Parliament) and will put a particular emphasis on the following issues:

1. Is the future licensing and tax regime viable?
2. Is France a real opportunity for new entrants?
3. Is the new regime compatible with EU law?

Main features of the Draft French Gaming Law

In order to safeguard social order and to prevent addiction, wagers, winnings and the average rate of return to the players will be limited. In a preventive way, operators will have to insert apparent objective messages on their websites about the prohibition to play for minors and the risks related to gambling activities.

– The opening will be limited to online horse race betting, sports betting and games consisting of shared games which depend on skill, whereby the player, after the intervention of chance, demonstrates his/her will and decides, in relation to the strategy adopted by the other players, to use a strategy which is likely to increase his / her chance of winning (for example online poker);

Thus, lotteries, virtual slot machines, “spread betting”, “betting exchange”, betting on virtual competition and casino games in which consumers play against the bank (roulette, blackjack, etc…) are excluded from the opening since they are considered to be too dangerous in light of maintaining public and social order, i.e. said to be too addictive;

– The online Games Regulations Authority, ARJEL, independent public authority, will be specially created to regulate the remote gambling market. This Authority will be in charge of:

1. Monitoring compliance with the objectives of the policy of games accessible via the internet;
2. Proposing a cahier des charges (list of requirements established by the ARJEL)to the government for each type of license (see below);
3. Preparing the licence request files for online gaming operators and attributing the licenses;
4. Auditing for compliance by operators with legislative and regulatory measures and clauses of the reference terms that they are subjected to;
5. Carrying out surveillance of online operations and participating in the fight against illegal game sites and against fraud; To that end, the ARJEL shall be entitled to block access to illegal websites by a direct injunction addressed to Internet Service Providers as well as to block financial transactions of illegal online gambling operators;
6. Enacting rules regarding the audit of technical and financial data for each online game or bet;
7. Determining, where appropriate, the technical parameters of online games within the framework of rules set by the decrees;
8. Proposing legislative and regulatory modifications to the Government;
9. The license will only be granted to online operators complying with the regulations contained in the cahier des charges setting general requirements for all operators and specific clauses according to each type of licenses, namely sports betting, horse race betting or circle games (such as poker or baccarat);

For instance, all operators will be required to provide information and guarantees concerning their identification, their experience in the gambling industry, the transparency of their shareholding, the measures they will implement to fight against fraud and money laundering, to authenticate online payment, and to protect children or process personal data, etc;

– Licenses will only be granted to operators established in a Member State of the European Union or the European Economic Community. Operators whose headquarters are based in one of the states featuring on the list of non co-operative tax havens made by the Organisation for Co-operation and Economic Development or whose main shareholders are based in one of the States featuring on this, cannot be granted a license to provide their services in France;

– Operators will have to operate from an internet website accessible through a first level domain name with a “.fr” ending;

– All data related to gambling activities, all data exchanged between players and operators and data linked to the identification of gaming or betting events, should be available on a mirror server based in France and eventually provided through an operator representative in France;

– The license will be granted for a period of five years. It is renewable. It is not transferable. A specific agreement will be requested for each type of games operated by the licensee;

– The tax rate will be calculated on the amount of the wagers: the total sums outlaid by players and punters. The winnings, invested by the latter in the form of new bets, will be equally taxed. The taxation is set according to the following scheme:

* 8,5% for sports betting;
* 15,5% for horse racing betting;
* 2% for online poker.

Once the Draft French Gaming Law is enacted, the ARJEL will need another few months to be efficient and begin to grant licenses. According to Eric Woerth, France will not start granting online betting licenses in the beginning of 2010 as initially contemplated. Due to a delay in the legislative process caused, among other things, by the Commission’s detailed opinion, rendered on June 8th, 2009, the Draft French Gaming Law is unlikely to enter into force as from January 1st, 2010. In any event, it should enter into force by the beginning of the World Football Cup in South Africa at the latest.

Is the future licensing and tax regime viable?

The Draft French Gaming Law provides that taxation shall be based on wagers rather than on gaming gross revenue; the latter being much more adapted especially for poker operators. In application of the above, imposing a 2% tax on global wagers would amount to tax around 60% of their gross revenue.

It is likely that this will be considered as very little incentive for most operators to offer their services on the French online gaming market. In addition, this system could be considered as a barrier to the freedom to provide services within the EU.

Is France a real opportunity for new entrants?

Following completion of the contemplated reform, France should remain an attractive market for new entrants.

However, several issues will have to be addressed in order to improve the attractiveness of the French online gaming market.

First, as noted above, the proposed tax regime is likely to constitute a deterrent for foreign online gaming operators willing to penetrate the French online gaming market.

Second, the requirement to designate a fiscal representative in France seems to be disproportionate in the light of the aim pursued: in this regard, an appropriate system of ex post surveillance/notification requirements would be more suitable to attain the legitimate aim pursued, namely an efficient tax collection.

Third, operators established in “proper jurisdictions” outside the EU, such as Alderney or the Isle of Man, should be allowed to apply for a license since their home jurisdictions offer an equivalent level of protection for players.

Is the new regime compatible with EU law?

Following the notification (in accordance with Directive 98/34/CE) of the Draft French Gaming Law, the Commission rendered its detailed opinion on June 8th, 2009.

The French authorities are urged to clarify and amend some of the provisions of the Draft French Gaming Law in order to ensure its compatibility with EU law.

* The first objection relates to Article 16 of the Draft French Gaming Law and the system put in place for granting licenses. According to the Commission, this rule restricts the freedom to provide services (Article 49 of the EC Treaty). To be compatible with European law the French authorities are requested to clarify to which extend they will take into account the requirements of the legal system under which the operator is already licensed (home country).

* The second objection pertains to Article 52 of the Draft French Gaming Law which provides for an obligation for all licensed operators to obtain consent from the operating right owner of the sport event. According to the Commission, such a requirement could constitute a restriction to the freedom to provide services, as the betting offer would become less attractive.

* The third remark questions the justification of Article 8 of the Draft French Gaming Law: French Government has to prove the necessity of this restriction. According to this provision, a maximum payback ratio is foreseen, whereby the Commission considers this might constitute an infringement to the freedom to provide services. In this respect, the French authorities are urged to adduce evidence concerning the link between the rate of return and fight against addiction.

* The last objection is related to Article 39 of the Draft French Gaming Law which provides for an obligation to have a fiscal representative established in France. Such a requirement might constitute a restriction to the freedom to provide services, notwithstanding the contention of the French Government that this provision is aimed at ensuring an effective fiscal supervision. Such a contention is not acceptable (see Commission v. France judgement C-334/02) considering that such an obligation is disproportionate and can be replaced by less restrictive measures.