LEGRAND / 2018 Registration document

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INTERNAL CONTROL AND RISK MANAGEMENT RISK FACTORS AND CONTROL MECHANISMS IN PLACE

R 3.6.4.5 TAX RISK Because of the complexity of the various tax systems around the world, the Group is exposed to: W the risk of changes in tax regulations or their interpretation. The increase in existing taxes, the introduction of new taxes or the double taxation, particularly regarding corporate income tax, along with dividend repatriation costs, could adversely affect the Group’s results; W the risk that the Group’s positions could be challenged during tax inspections, which may take place anywhere the Group operates. Such challenges may give rise to financial costs that are potentially significant and, in some countries, criminal penalties that would damage the Group’s image and reputation. The Group Tax Department reports to the Group Finance Department and has experienced financial officers in the various countries. Those officers are in charge of their subsidiaries’ tax policy and work under the Group Compliance program. The Group Tax Department also relies, for the countries most exposed to tax risks, on highly qualified tax experts, particularly in the United States, Brazil and India. The Group Tax Department carries out permanent monitoring of the most significant regulatory developments. It ensures that the Group complies with the applicable rules and laws in the main countries, particularly regarding transfer pricing, and checks overall compliance with the Group policy defined in accordance with OECD rules. The Tax Department has also set up country-by-country reporting in accordance with international recommendations. This enables it to detect any discrepancies in tax expense or in the distribution of earnings. The Group Tax Department and local professionals are committed to refraining from using aggressive tax strategies disconnected from operational reality or artificial tax arrangements. If necessary, operational teams use the services of tax firms that are internationally renowned or have a very strong local reputation. Each month, the Group tax department checks the overall tax expense borne by Legrand and all Group subsidiaries. Quarterly discussions take place between the Group Tax Department and finance officers in the Group’s main countries to review the main tax subjects. Material tax items and any disputes and regulatory developments relating to tax are examined every quarter with the Finance Department and every year with General Management. The main matters are also shared with the Audit Committee at each quarterly publication.

R 3.6.4.6 CUSTOMER CREDIT RISKS Credit risk is the risk linked to Legrand’s outstanding trade receivables. As stated in notes 2.1 and 5.1.2.4 of Chapter 8, a significant portion of Legrand’s income is from sales to its two electrical equipment distributors, which represent almost 18% of consolidated net sales. The Group estimates that no other distributor accounts for more than 5% of consolidated net sales. Therefore, Legrand may have significant amounts receivable from its distributor clients, exposing it to the risk of customer insolvency or bankruptcy. Trade receivables stood at €666.4 million at end- December 2018. Note 3.5 to the consolidated financial statements gives detailed information about this. Furthermore, Legrand’s global presence means that the Group operates in regions where credit risk is higher than in the Group’s historical markets. Consequently, Legrand imposes strict monitoring of its trade accounts receivable. Credit limits are set for each customer, debt collection is closely monitored, with systematic reminders when payment deadlines are missed, and the balance of outstanding trade receivables is monitored carefully at each of Legrand’s product distribution subsidiaries. The Group’s Finance Department reviews specific indicators monthly using reporting and analysis tools. These indicators are part of the elements considered to be key in assessing the commercial performance of Legrand’s subsidiaries and the individual performance of their respective management teams. When the situation warrants, the Group makes use of credit risk insurance (provided by a global insurance company) or factoring. R 3.6.4.7 FINANCING AND LIQUIDITY RISK The banking and financial indebtedness of the Group is described in section 5.5.2 of the management report, as well as in note 4.6 to the consolidated financial statements in chapter 8 of this registration document. The Group considers that managing liquidity risk depends primarily on having access to sources of financing that are diversified in terms of their origins and maturities. This approach represents the basis of the Group’s financing policy. Although the Group has, in the past, demonstrated its capacity to generate significant levels of free cash flow enabling it to finance its growth, its ability to comply with the covenants contained in some loan agreements, and to refinance or repay its borrowings in the manner provided for therein, will depend on its future operating performance and could be affected by other factors (economic environment, conditions in the debt market, compliance with legislation, regulatory changes, etc.).

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LEGRAND

REGISTRATION DOCUMENT 2018