Source: http://www.chambariere-notaires.fr/category/dip/
Timestamp: 2019-09-23 00:29:27
Document Index: 402664188

Matched Legal Cases: ['CJEU ', 'art 3', 'sui generis', 'art 1', 'sui generis', 'sui generis', 'sui generis', 'sui generis', 'sui generis', 'art 2', 'CJEU ', 'art 1', 'art 2']

DIP Archives - SCP Chambarière Grandin Figerou
The amendment repealing the flat-rate income tax on some non-residents
(Articles 164 C & 197 A of the French Tax Code)
The Amending Finance Law 2015 repeals provisions regarding the flat-rate taxation of some residents of third countries who own one or more residential properties.
This is to reflect decisions from both the Court of Justice of the European Union and the French Conseil d’Etat and shall take effect for the taxation of income of the year 2015.
Taxpayers domiciled outside France are, in principle, taxed solely on their French source income.
However Article 164 C of the French General Tax Code provided that people who did not have their tax domicile in France but who had in France one or more residential properties, in any capacity whatsoever, directly or under cover of third parties, were subject to income tax on a base equal to three times the actual rental value of this or these properties unless the French source income of the concerned parties was higher than said base, in which case the amount of such income would be the basis for taxation.
This measure included several exceptions that significantly reduced its scope.
In deed said provisions did not apply to:
French nationals who could prove they underwent in the country where they had their tax residency a personal tax on all of their income and if said tax was at least equal to two thirds of the one they would have had to undergone in France on the same tax base;
French nationals whose expatriation was justified by professional requirements and whose tax domicile was located in France continuously for four years prior to their transfer.
Taxpayers domiciled in countries or territories having concluded with France a tax convention to avoid double taxation with respect to taxes on income.
Drawing on the consequences of decisions from both the Court of Justice of the European Union (CJEU) and the French Conseil d’Etat, Article 21 of the Amending Finance Law 2015 repeals the provisions of articles 164 C and 197 A b of the French General Tax Code.
Preliminary ruling Welte of the CJEU dated October 17th, 2013 2013 (Case C-181/12 Welte of October 17, 2013)
It stems from said ruling that patrimonial property investments, made for private purposes i.e unrelated to economic activity, do not constitute direct investment within the meaning of Article 57 of the Treaty establishing the European Community (TEC).
The opinion of the Advocate General MENGOZZI delivered on June 12th, 2013 regarding said case shed light on the interpretation of Article 57(1) EC, and its applicability.
“41. As I have already pointed out, Article 57(1) EC enables Member States to maintain, vis-à-vis third countries, restrictions existing on 31 December 1993 on the movement of capital involving ‘direct investment – including in real estate’.”
The question whether the French rules above mentioned fell within the temporal and material scope of the standstill clause was less straightforward.
The ratione temporis condition laid down in Article 57(1) EC was met by Article 164 C of the French General Tax Code, and therefore we will not go into further detail in the present article.
However as regards the material scope of Article 57(1) EC, it should be noted that there were legitimate doubts as to whether capital movements in the form of investments in real estate unrelated to economic activity, regulated by the tax legislation of a Member State entailed ‘direct investment – including in real estate’ for the purposes of Article 57(1) EC.
“50. As I have mentioned, in the absence of a definition of ‘capital movement’, the Court has, so far, consistently relied on the definitions contained in the nomenclature in Annex I to Directive 88/361 and the associated explanatory notes in order to interpret both Article 56 EC and Article 57 EC. (30) …”
“54. According to the nomenclature, investments in real estate covered by category II, which are defined in the explanatory notes as ‘[p]urchases of buildings and land and the construction of buildings by private persons for gain or personal use’, are investments ‘not included in category I’, that is to say, not direct investments.”
“55. Thus, the reference in Article 57(1) EC to ‘direct investment – including in real estate’ (33) should be construed as covering investments in real estate which constitute direct investments, that is to say – to paraphrase the explanatory notes – investments in real estate of such a kind as to establish or to maintain direct links with an entrepreneur or an undertaking in order to engage in an economic activity.”
“56. By contrast, investments in real estate of a financial nature, which are unconnected with the pursuit of an economic activity, do not fall within the scope of Article 57(1) EC.”
Two judgments of the State Council of 26 December 2013 (No. 360488 and 332885)
Based on the conclusions of the ruling Welte, the French Conseil d’Etat in two successive decisions concluded that the flat-taxation of non-residents under article 164 C of the General Tax Code was contrary to the principle of free movement of capital in Article 56 TEC.
Article 164 C aimed to « submit detention in France of residential property to a tax payable by persons not having their tax domicile in France,». The court considered « that such a measure is likely to discourage non-residents to acquire or hold such property ».
The Amending Finance Law 2015
Article 21 of the Amending Finance Law 2015 (Law n°2015-1786 dated December 29th, 2015) abolishes the flat-rate taxation of certain non-residents owning one or more residential properties in France by repealing the provisions of Article 164 C of the French General Tax Code, a long side the provisions of Article 197 A b of said code.
Previously during the session en hémicycle on December 1st, 2015 Valerie Rabault, ‘rapporteure générale de la commission des finances, de l’économie générale et du contrôle budgétaire’ declared that: « Our Committee had already issued a favorable opinion on this amendment, but in addition, the services of the Ministry of Finance – whom I thank – indicate that this provision would concern 114 persons for a tax revenue of 86 000 euros. I think that the State can afford to do without said sum!
Said measure applies from the taxation of income of 2015.
Lucy OVERFIELD & Edouard FIGEROU
This entry was posted in DIP on 14 janvier 2016 by Edouard Figerou.
French legislation knows two different kinds of adoptions:
One where the blood parent is deprived of any right on his child, where all links between the child and his biological family end;
One where, in the contrary, the child meets two families: his biological one and his adoptive one.
Both have rights on the child, custody and authority to help him/her grow up and become adult.
The latter adoption is often used for step children, or where one child was raised in the absence of his biological parent (car or plane accident, disease…) by uncles and aunt for instance.
When stepparents are taking full day-to-day responsibility for stepchildren they may want to make their relationship with these children more formal and this is where the adoption comes.
English Law knows only one kind of adoption. We call it under French Law : ‘full adoption’ !
Several conditions must be fulfilled in the UK – Adoption and Children Act 2002:
The Child must :
Both birth parents normally have to consent to the adoption, unless:
they’re incapable of giving consent, eg due to a mental disability
the child would be put at risk if he/she wasn’t adopted
The adoption assessment in England is very similar to that in France:
An assessment is used to help a court decide if you can adopt the child (rather than being sent to an independent adoption panel).
The court will ask your local council to provide a report on your partner, the child and the other birth parent.
International conflict of law:
Pursuant to UK law, one must follow the adoption laws of the country of residency of the adopter.
You must follow UK adoption law if you’re normally resident in the UK.
You may have to give a sworn statement in front of a solicitor that you’re no longer habitually resident in the UK, the Isle of Man or the Channel Islands if the country asks for a ‘no objection’ letter from the UK government.
You must send this statement either to the Intercountry Adoption Team at the Department of Education or the nearest British embassy.
Also, the guidance for adoption provided by the British government is clearly recognized by the convention on adoption made under the Hague convention of 29 May 1993. The UK implemented that convention on 1 June 2003.
How can somebody adopt a stepchild? Is a British citizen entitled to adoption in France? What are the limits?
Article 370-3 of the French Civil code foresees whichever the law is applicable that adoption requires the consent of the legal representative of the child. Consent must be free, without consideration and with full understanding of its consequences.
This rule is inspired from the historic case of PISTRE in January 1990 and from article 4 of the International Hague Convention on adoption.
French Law also provides that the conditions of adoption are normally subject to the National Law of the adopter or, in case of adoption by spouses, with regard of the law governing the effects of their union.
The adoption cannot be pronounced if the national law of one of the spouses bans it.
Legally speaking the “adoption simple” is not forbidden in the UK but unknown! Does that mean a British resident in France can adopt “simply” his/ her stepchild? Would that be recognized and would that have any effect in France?
If the adopted child is under 18, the French jurisdiction would certainly accept to pronounce the adoption whereas if the child is over 18, the French jurisdiction would certainly refuse it because of the rules applicable in the UK.
When the adoption is ordered it will have full effect in France and of course and in the UK because of the implementation of the Hague convention in UK Law as evoked here above.
Be careful with Adult adoption which is permitted in France contrary to England. Although you have legally adopted a child abroad according to the rules of the state of your residency, England might not consider that adoption as valid.
What are the regular effects of an adoption order?
a) Legally speaking
The Court order of adoption takes away parental responsibility from:
b) From a tax point of view:
Transmissions that occur between adoptive parents and the adopted person are subject to normal taxation in the direct line for succession rules, (progressive rate after application of a personal allowance of € 100.000,00).
What are the effects of a ‘simple adoption’ order?
The Court order of adoption does not take away parental responsibility from the child’s other birth parent but can multiply the number of guardians in the best interest of the child.
Simple adoption creates a maintenance obligation between adopter and adoptee and vice versa.
The biological parents of the adopted child are not bound by this obligation unless the adoptee proves that he cannot obtain relief of his adoptive parents.
The obligation of the adopted child to his biological parents ceases if he was admitted as a ward of the state and supported by welfare.
Transfer of assets that occur between adoptive parents and adopted follow are levied at the prescribed tariff for the link natural kinship between them or, where applicable, the tariff for transmissions between non-relatives.
Article 786 of the French CGI provides for a number of exceptions to this principle, so that transmissions thus referred to are taxed according to the tax regime applicable to lineal transmissions.
It is especially the case when somebody adopt his/her stepchild where stamp duties are the same as the ones applicable in the direct line.
Mr Smith, British Citizen, is residing in Dordogne (France) where he married Hilary in 2007 who is the widow of a UK soldier. Hilary had one child from her previous marriage named Winston.
Mr. Smith is willing to adopt his stepchild who agrees with that. Is that adoption possible?
According with article 370-3 of the French civil code, the adoption is subject to the British rules (National law of the adopter).
We know that UK law prohibits adoption between adults and only knows ‘full adoption’.
That should imply whether Mr Smith is still willing to continue the adoption process that he will have to adopt his stepchild before he turns18 and in ‘full adoption’ (with the consequence of wiping out his stepchild natural/ biological kinship).
When a stepparent adopts their partner’s child it ends the legal relationship between that child and their other natural parent and that wider family network (grandparents and other relatives).
Sometimes that makes the child feel that they have to choose between different adults and later may blame you or your partner.
The child is losing all maintenance and inheritance rights too.
It is likely the French court would accept a ‘simple adoption’ (see case 1 infra) yet the British court does not know that type of adoption for the reason seen aboved.
This entry was posted in DIP on 1 décembre 2015 by Edouard Figerou.
Trust in France – Part 3
French Wealth Tax on Trusts
Our first article of this « Trust-Trilogy » started out by stating that in 2011, France defined trusts for taxation purposes only. The article also gave the main terminological basis of trust.
Our second article detailed this new taxation on estate planning (gifts and successions).
In this article we will look at the French wealth tax regime on the taxation of trusts.
Wealth tax (impôt de solidarité sur la fortune, ISF) provisions relating to property or rights held in trust, the sui generis levy due in the event said assets are failed to be declared and the reporting obligations are codified under articles 885 G ter, 990 J, AB 1649 CGI, 1736 and 1754 of the French General Tax code (Code Général des Impôts, CGI),
For more information on the concept of trust, settlor and beneficiary, see part 1 of our Trust Trilogy.
I. When are the assets held in trust subject to wealth tax?
A) Two types of trusts are excluded from wealth tax
Trusts whose beneficiaries are all qualified as charitable organizations
Said trusts must be irrevocable and the trustee must be subject to the law of a State having concluded with France a double tax treaty to combat tax fraud and tax evasion.
In such cases the assets placed in trust are not to be included in the taxable base for wealth tax.
Trusts settled by French residents specifically for retirement purposes are also excluded from this tax.
B) French territoriality rules
The principle of the current legislation is transparency.
Article 885 G ter of the CGI stipulates that property and rights placed in a trust, including their capitalized revenue, are taxable for wealth tax in the grantors name, as if they had never left his estate.
This rule makes the tax base irrelevant to the contents of the trust deed and thus the nature of the contract (whether it be revocable, irrevocable, discretionary or not).
Under France’s own rules (article 750 ter of the CGI), subject to international tax treaties (BOI-PAT-ISF-20-20), are subject to wealth tax:
The assets or rights placed in trust whose settlor or beneficiary that has become settlor are a tax residents of France, and thus regardless of where said assets or rights are situated, be it in France or abroad;
The assets or rights (excluding the financial investments referred to in Article 885 L of the CGI) situated in France having been placed in trust by a settlor or a beneficiary that has become settlor who are not tax residents in France.
When assets held in trust are subject to wealth tax they are taxed under the ordinary rules on wealth tax (scope, tax base, exemptions).
Thus, to give an example, taxpayers whose net fortune exceeds the threshold of ISF who have not been French tax residents during the five years preceding the year in which they become a French tax resident are only liable for wealth tax on the assets placed in trust that are situated in France; and this until December 31st of the fifth year following the year in which they have established their tax residence in France.
Reminder: the financial investments as defined under article 885 L of the CGI include all investments made in France by an individual and whose revenue of all kind, except capital gains, fall or will fall within the category of investment income (‘revenus de capitaux mobiliers’).
Are mainly concerned cash and term deposits in euros or currency; shareholder’s current accounts held in a company or a corporation that has in France its headquarters or place of effective management; bonds and bills of the same nature, bonds, shares and subscription rights issued by a company or corporation that has its headquarters in France or the centre of its effective management, life insurance policies or endowment contracts signed with insurance companies established in France.
However, are not considered financial investments:
shares representing sufficient influence in a company (in practice, are presumed equity securities, investments representing at least 10% of the capital of a company ; this threshold is judged globally at the level of the trust);
shares held by non-residents, in a French or foreign company/corporation, whose assets are primarily made up of real estate or rights in immovable property situated on French soil, in the proportion of the value of said property or rights in relation to the total assets of the company (second subparagraph of Article 885 L of the CGI);
shares owned more than 50% by non-residents (directly or indirectly owned) in corporations or organizations that own real estate or real estate rights in France (second subparagraph of Article 885 L of the CGI).
C) The impact of international tax treaties
The internal French rules seen above are subject to the provisions of international tax treaties, since Article 885 G ter of the CGI falls under the scope of double taxation avoidance where income and wealth tax are concerned.
Therefore in cases where double taxations are characterized, i.e. when a same person is subject to wealth tax in more than one State, double taxation avoidance rules are applied.
When the taxpayer is a French resident, the tax paid abroad is deducted from the French tax due. However the taxpayer must prove he/she actually paid foreign tax.
II. When the assets held in trust are subject to the sui generis levy
The main purpose of the new sui generis levy on trusts is to sanction the non-disclosure of assets placed in trust in respect to wealth tax.
This levy is not subject to the provisions of international conventions on double taxation avoidance with respect to income and wealth taxes.
A. Exclusion of two categories of trusts
By law two categories of trusts are excluded from the sui generis levy’s scope:
Irrevocable trusts whose sole beneficiaries are covered by Article 795 of the CGI and whose trustees are subject to the law of a State or territory who has concluded with France a double taw treaty on double tax avoidance.
Some trusts set up to manage pension rights.
B. Liable taxpayers
The taxpayers liable to the statutory levy owed on trusts are the settlors and the beneficiaries deemed to have become settlors.
The base of the levy is made up of:
All assets and rights placed in trust whether they are situated in or outside France, including their capitalized income for the people who reside in France for tax purposes;
The assets and rights placed in trust and situated in France, including their capitalized income (other than financial investments under Article 885 L of the CGI), for people who are not French tax residents.
In the case where several beneficiaries are also the settlors of the trust and in the absence of express distribution of assets in the trust deed or any additional annexes, the assets of the trust will be deemed equally distributed between each of them.
The base of the levy, as wealth tax, is set on the net market value of the assets, rights and capitalized income contained in the trust on January 1st of the tax year.
The sui generis levy rate corresponds to the highest rate of wealth tax.
D. Exemption of assets, rights or products properly declared to wealth tax or who fall under section 1649 AB of the CGI
The levy is not payable in respect to assets, rights and capitalized income:
Included in the scope of wealth tax of a settlor or beneficiary having become a settlor liable to wealth tax and having declared and paid his/her tax properly. In this regard the non-declaration of assets or rights due to their exemption does not make them subject to the levy; this also applies to assets non-declared in accordance with tax treaties.
that appear on the specific statement related to trusts under section 1649 AB of the CGI, when the assets of the settlor or the beneficiary having become settlor falls below the wealth tax threshold.
The net value of the estate taken into account includes the assets, rights and capitalized income placed in trust.
The exemptions applicable for wealth tax, including those relating to the nature of certain assets (business assets, shares subject to lock-up, art …), do not apply.
E. The recovery of the sui generis levy
The levy must be paid by the trustee.
The trustee, the settlor and the beneficiaries, other than those having satisfied their own reporting obligations, and their heirs, shall be jointly and severally liable for payment.
The levy follows the same rules and penalties of those applied in the matter of death duties.
III. Tax reporting obligations
Two tax reports must be filed.
Firstly, a « factual » statement following the creation, modification or extinction of a trust, said statement contents the content of the trust.
And on the second hand, an annual return containing the net market value of the assets and rights held in trust and their capitalized income on January 1st of that tax year.
Penalties for non-compliance of reporting requirements
Breaches of reporting obligations are exposed to a fine of 10.000 € or, if higher, an amount equal to 5% of the total value of the assets, rights and capitalized income situated in and outside France, that are placed in trust.
This entry was posted in DIP on 26 janvier 2015 by Edouard Figerou.
TRUST – Part 2
As you may recall our first article of this « Trust-Trilogy » started out by stating that in 2011 France defined trusts for tax purposes only. The article also gave the main terminological basis of trust.
Today let’s take a more detailed look at the new tax implications on your estate planning.
A./ Which transmissions are subject to tax?
All gratuitous transmissions, gifts/inheritances made via a trust are now subject to transfer duties. In France gift tax and inheritance tax both fall under the global denomination of ‘droits de mutation à titre gratuit’, also known as ‘DMTG’ for short.
The granted assets, including the income of capitalized assets placed in trust, are taxed at a net market value on the date of the transfer (i.e the date of the gift or upon death of the grantor).
B./ Which assets are subject to tax?
1. French territoriality rules
Article 750 ter of the French Tax Code (Code Général des Impôts or CGI for short) defines French territoriality rules in the event of a gratuitous transfer.
It is necessary to point out that French transfer duties apply, subject to double tax treaties.
In the event the settlor, or the beneficiary (who is also the settlor), are non-French tax residents transfer duties are due:
– On all the assets and rights held in trust, regardless of the country of their location, when the beneficiary is resident in France on the day of the transmission and has been for at least six years in the last decade;
– Or solely on the assets and rights held in trust that are located in France in all other cases.
2. The impact of international tax treaties
International tax treaties provide mechanisms to eliminate double taxation. Where inheritance and gift taxes are involved the right of taxation between the two States involved is based on two criteria: the location of the assets, or the State of domicile of the deceased, the donor or the heir.
Therefore when the assets held in trust are transferred in the cases foreseen by Section II, article 792-0 bis of the French Tax Code, the presence of the trust has no impact on the application of international double tax treaties where inheritances and donations are concerned.
When a juridical double taxation is revealed, that is to say when one person is taxable on the same property by more than one State the terms of elimination provided for by the conventions are applicable under the general conditions of common law.
In such a case, when France is the country of residence the tax paid abroad is due subject to the limit of the tax due in France. It is the responsibility of the taxpayer to prove payment of the foreign tax.
3. Presumption of ownership
The presumption of ownership foreseen by article 752 of the French Tax Code has been expressly extended to assets and rights held in trust.
Therefore the status applicable to securities has been extended to assets or rights held in trust to which the deceased had ownership, received income or performed any operation in relation to less than a year before his death.
Said assets or rights are presumed to be part of his estate, until proven otherwise.
C./ Obligations regarding tax returns
In the event of a gratuitous transfer of assets or rights held in trust, including the income of capitalized assets, they shall be reported on the general forms corresponding to their nature, i.e a « declaration de succession ou donation ».
These are the basic relevant forms filed upon death or after a gift.
D./ Terms of taxation
1. The transmissions qualified as gifts or as transmissions by death
The transferred assets, including their capitalized revenue will be taxed at their net market value at the date of the transfer under conditions of ordinary law. The tax rate will be that corresponding to the family tie between the grantor and the beneficiary.
If the grantor and the beneficiary were husband and wife or tied by a civil partnership the transmission upon the grantor’s death will be free of tax pursuant to article 796-0 of the French Tax Code.
2. The other types of transfers
The grantor’s death entails new taxation, whether the estate is transferred upon his death or whether it is foreseen for a later date.
a) The transmission of a determined share to an identified beneficiary
When the share is defined at the date of death transfer fees (death duties) are applied to said share and the tax rate is that corresponding to the family tie between the grantor and the beneficiary.
Thus for the liquidation of death duties the value of the assets, properties and rights held in trust and transferred upon death is added to the value of the rest of the estate.
Basically general taxation rules apply here. Equally the same rules of exemptions also apply. For example the exemptions foreseen by article 795 of the French Tax Code, that deals with transfers in favor of philanthropic organizations, apply.
b) The transmission of an overall share to one or several of the grantor’s descendants
Here we are faced with a situation where even though the share is defined at the time of death and globally is destined for all of the grantor’s descendants, it is not possible to share it individually between them.
In this case death duties are due on said share at the top marginal rate applicable in the direct line of lineal descent (said rate was increased to 45% for inheritances since July 31st 2011 by article 6 of the First Amending Finance Act of 2011, No.2011-900 of July 29th 2011) and no allowances are granted.
c) All other case transfers
This third case reflects in practice the following assumptions:
– Either the assets or rights remain held in trust after the grantor’s death without being attributed,
– Or the share, that is not individually defined, is attributed to several beneficiaries, some of which are not the grantor’s descendants.
In these situations taxation will occur at the highest rate of the installment table III of article 777 of the French General Tax Code.
The grantor of a trust who is a French non-tax resident dies on January 10th 2012. In 2010 he created three trusts whose characteristics are as follows:
– Trust A: a revocable trust whose beneficiaries are the grantor and one of his two sons. The son is a French tax resident;
– Trust B: a discretionary irrevocable trust whose beneficiaries are the two sons of the grantor, both of which are French tax residents;
– Trust C: a discretionary irrevocable trust whose beneficiaries are for half the two grandsons of the grantor « alive on the 1st of January 2015 ».
The trustee of the trust retains full discretion to dispose of the other half of said trust.
The grantor’s death entails the following tax liability:
– Death duties on the net value of his whole estate which comprises the net value of trusts A & B,
– Death duties on the net value of trust C: at a rate of 45% on one half due to the fact the number of the beneficiaries was not defined (« grandchildren alive on January 1st 2015 ») & at the rate of 60% on the balance.
E./ Summary of the different hypothesis’s of taxation
The nature of the transfer Taxation
Death or donation/gift Death duties are due at a rate dependent on the degree of relationship with the deceased
Neither death nor donation:
– The share and the beneficiary are determined
– The share is determined but it is destined globally to several descendants of the grantor
– other cases:
* the trustee of the trust falls under the law of a non co-operative State or Territory ; or the grantor was domiciled in France when he created the trust after May 11th 2011
*Assets remain placed in trust after the grantor’s death without having been attributed Death duties are due at a rate dependent on the degree of relationship with the deceased
In our third and final article we will take a look at the wealth tax issues related to trusts.
This entry was posted in DIP on 14 janvier 2015 by Edouard Figerou.
Be cautious, you may be subject to exit tax on your intangible personal property…
In 2011 an exit tax was put in place to curb tax relocations before the disposal of financial investments. Amended in 2014, the taxpayers concerned are those transferring their tax residence outside France as of 3 March 2011.
Exit tax system
When a taxpayer was a French tax resident for at least six of the ten preceding years, and transfers his/her tax domicile abroad this entails tax and social security contributions on:
unrealized gains arising on:
either direct or indirect investments, of at least 50% of the share capital of the company,
direct investments in one or more companies (including OPCVM’s/UCITS), whose total value exceeds € 800,000
deferred capital gains,
claims on an earn-out payment.
Are not subject to exit tax:
gains realized on real estate,
shares of open-ended investment companies (SICAV) ;
shares or securities of companies predominantly comprised of real estate (including SCI’s) ;
shares or securities referred to in article 244 bis A, I-3 of the French general tax code (CGI), particularly:
shares, securities or other rights of unquoted real estate companies, whether said companies are subject to corporation tax or not,
and shares, securities or other rights of real estate listed companies when the taxpayer owns directly or indirectly at least 10% of the company’s capital.
A tax-deferral is automatically granted when the move is made to a member state of the European Union or a State that has concluded a tax assistance agreement with France. And if the move is made to another country, the taxpayer may request a tax-deferral providing certain financial safeguards are ensured.
Said tax-deferral is then terminated upon sale, redemption, or repayment of the respective securities.
Capital gain tax is relieved or can be recovered if the taxpayer proves he/she still owns the investment(s) after a period of eight years after the move abroad. However social security contributions remain due.
For all moves abroad after December 31st, 2013, capital gains tax and social security contributions are exempt or refunded if the taxpayer can prove he/she still owns the investment(s) after a period of fifteen years after the move abroad.
Investment of shares subject to exit tax in a new company
Before doubts existed when it came to the tax neutrality of such a transfer.
New article 167 bis of the CGI provides us with clearer wording: the investment of securities, subject to exit tax after departing France, does not terminate tax-deferral when said deferral was granted under the conditions of article 150-0 B of the CGI (contribution of shares in a company subject to corporation tax, « offre publique », merger, division …) or postponed under article 150-0 B ter of the CGI (contribution to a company controlled by the contributor).
Gift of shares subject to exit tax
The law in place up until 2013 provided that a donation of shares subject to exit tax entailed the end of tax-deferral, unless the taxpayer could prove the gift was not solely granted for tax purposes only.
The law was therefore amended: a taxpayer leaving France to settle in a European Union member country (or a country in the European Economic Area which has entered into a tax agreement with France) has no longer to prove the non-tax purpose of the donation.
However, the probationary requirement is maintained for those who leave to settle in another state and said requirement has even been made heftier: the taxpayer must demonstrate that the gifts main motivation was not to evade exit tax.
Double-taxation avoidance
When a taxpayer sells investments subject to exit tax after leaving France, and pays relevant capital gains tax in his/her new state of residence, the foreign tax is deducted in France as follows:
First of all the foreign tax is deducted from the social charges resulting from the exit tax,
Secondly the remainder shall be credited against the income tax resulting from said exit tax.
Depreciation of the shares
In its initial version article 167bis of the CGI adapted exit tax to the effective gain made by the taxpayer transferring his/her tax resident outside France.
From now on, the text also allows to deduct the realized loss on a sale of securities subject to exit tax on the capital gain realized on the sale of other securities subject to exit tax. Said deduction is allowed on the sale of investments representing more than 25% in a French company or on future capital gains achieved after returning to France.
Equally, a capital loss realized before, or after leaving France on the sale of securities representing over 25% in French companies is deductible from any exit tax relating to investments sold within 10 years.
Tax reporting obligations in the event of exemption or refund
The taxpayer must now declare the nature and date of the event triggering an exemption or refund of exit tax and, on the same occasion, expressly request relief or restitution. This claim must be made within the year of said event and within the period stipulated in article 175 of the CGI (deadline for tax returns).
For more details on your tax reporting obligations upon departure, and then on a yearly basis; or if you have any question regarding penalties in case of non-compliance please do not hesitate to contact us.
This entry was posted in DIP on 12 janvier 2015 by Edouard Figerou.
New measures for non-French resident taxpayers on their French income
The French administration currently applies specific measures for non-French residing taxpayers on their income of a French source.
Currently said measures, that are thought to be unjust, are under the spotlight of the European Commission and the European Court of Justice.
2015 may bring advantages for non-residents, and claims for unrightfully paid tax may be filled for 2012 and 2013 – but you must act quickly!
Harmonization of capital gains tax rate for non-residents
Up until now taxpayers were treated differently dependent on their state of residence.
French residents, EU and EEA residents were taxed at a rate of 19%, whereas non EU/EEA residents were subject to a higher rate of 33,33%.
After the French Supreme Court (Conseil d’État) rendered a decision mid October 2014 highlighting this difference, judged as restrictive of the free movement of capital, the 2014 Amended Finance Bill changed article 244 bis A of the French General Tax Code.
Rates are now harmonized for residents and non-residents at the flat rate of 19%, however taxpayers of NCST’s (Non-Cooperative State or Territory) remain excluded.
Note: Even though it is not clearly expressed this situation is believed to cover not only individuals selling properties directly but also those selling properties via SCI’s.
Reclaim: For any overpaid tax in years 2012 and 2013 you may place a claim to the French tax authorities before the end of this year.
Reclaim on social contributions paid by non-residents
Since August 2012, non-French tax residents have been made liable for the social contributions on French income, i.e capital gain or rental income.
For example previously, such taxpayers were merely liable for capital gains tax, and since August 2012 the basic gross tax rate for EEA residents has been 34.5%.
However a case is currently pending before the European Court of Justice (Aff C-323/13 – Mr de Ruyter), whereby the application of French social contributions to non-residents may be put an end to.
They are considered contrary to the EU principle of free movement, and unjust due to the fact that non-residents do not benefit from French social protection.
France may be condemned to reimburse some 344 million euros for the year 2012.
Reclaim: Even though the CJEU has not rendered its decision yet, EU residents who paid social contributions in France on rental income or on the sale of their property should be able to claim back the amount paid from the French tax authorities.
For social contributions paid on capital gains taxpayers can make a claim up to the 31st of December of the year following the year in which the contributions were paid (Decision of the Administrative Court of Paris).
For tax paid in 2012 the deadline would have been the 31st of December 2013, and for tax paid in 2013 the deadline is the 31st of December 2014. However for 2012 and without any guidelines from the French administration it is believed claims could still be made before the end of 2014 to ensure any chance of recovery.
Announcement to suppress tax representatives
Non-French tax residents subject to French income must currently, under certain circumstances appoint a tax representative who will be jointly liable on said tax until its prescription date.
Some legal entities were granted licenses by the French administration as professional tax representatives. However their services came at a price, a price French tax-residents did not have to pay.
Portugal was condemned on this front by the European court in 2011.
In anticipation of a French condemnation and to comply with the law of the European Union, French amending Budget Act for 2014 proposes to remove the requirement for resident taxpayers in the European Union, and in some cases in the European Economic Area (EEA) to appoint a tax representative in France.
This follows a formal request sent to France from the European Commission to cancel this legislation.
From January 1st 2015 tax representatives for capital gains in France is likely to be canceled for taxpayers residing in the EU or in the EEA.
However we must await the final adoption of the law.
The same suppression is also implemented for income tax, wealth tax, corporate tax and the 3% tax.
A lot to take into consideration – if you need guidance please seek our advice.
This entry was posted in DIP on 23 décembre 2014 by Edouard Figerou.
Trust in France – Part 1
Trust is a widespread institution in foreign legal systems, especially in Anglo-Saxon law, but unknown in French civil law.
However in 2011, France defined trust for tax purposes only.
Trusts are characterised in so much as that property is divided between the legal ownership (‘propriété juridique’ given to the trustee of the trust who becomes the legal owner of the transferred assets) and the equitable interest (i.e virtual property residing in the right or title to assets, property or rights held for the beneficiary by the trustee in whom resides the legal title).
This property split is not to be confused with what we know in France as the ‘demembrement de propriété’ between usufruct and bare ownership.
Quick reminder: The right of ownership gives the owner three types of prerogatives. If we take the example of a property, these prerogatives consist of the right to use the property (i.e. to live in it), the right to receive income from said property (i.e to rent it out), and the right to dispose of the property (i.e. to sell it).
However an owner can divide these prerogatives into two sets: on the one hand what’s called « usufruct » which includes the right to use the property and receive its income, and on the other what’s called the « bare o­wnership » which includes the right to dispose of the property.
Therefore the right of ownership is the combination of the usufruct and the bare ownership.
In 2011, France defined trust for tax purposes only. Article 792-0 bis of the General Tax Code (Code Général des Impôts) defines trust as all legal relationships created under the law of a State other than France by a person called ‘grantor’ (settlor), inter vivos or mortis causa, in order to place assets or rights under the supervision of a ‘trustee’, in the interest of one or more ‘beneficiaries’ or to achieve a specific goal.
Are therefore considered to be trusts all legal relationships meeting this definition, regardless if they effectively go under the name of ‘trust’ and also regardless of their characteristics (whether revocable or not, discretionary or not, with or without legal personality, etc.).
On the other hand do not meet the definition of article 792-0 bis of the CGI:
Trusts established by a company or group of companies such as trusts established by companies and dedicated to the management of employee saving schemes or stock option plans.
Trusts called « unit trusts » that meet the definition of UCITS, Undertakings for Collective Investment in Transferable Securities.
The Grantor/Settlor
Article 792-0 bis of the CGI stipulates that the grantor of a trust is the individual that created it.
This definition allows us to discern the economic reality of a trust whatever its legal appearance or name. In practice, the aim is to determine the ‘real’ settlor of the trust in the event the settlor, sole entity named in the deed of trust, is an entity (….) or an individual acting professionally designated on behalf of the real owner of the assets placed directly or indirectly through one or more corporations, in the trust.
Furthermore the same article foresees taxation of accumulation trusts upon death of the settlor, and then in some cases upon death of the beneficiaries deemed settlors. Said taxation of the assets remaining in the trust takes place upon each change of beneficiary (for example, when the children of the initial beneficiary become replacement beneficiaries upon death of their parents).
The tax beneficiary of a trust means the person (one or more) designated to receive the income of the trust made by the administrator (trustee) and/or to receive the capital value of the property or rights of the trust during the life of the trust or at its end.
This definition does not exclude the grantor from also being a beneficiary of the trust, especially in the situation of an ‘inter vivos trust’.
In part 2 we will address trust and estate planning here in France.
This entry was posted in DIP on 10 décembre 2014 by Edouard Figerou.
French & UK Capital Gains Tax & Social charges
What to know about double taxation…
The French & UK Tax treatment of capital gains & social charges
On the sale of a French property:
Gains made from the sale of a property situated in France are liable for French Capital Gains Tax (CGT) + French ‘prélèvements sociaux’.
Therefore a UK resident selling a property situated in France will be subject to French CGT & social charges. But equally and due to the fact he/she is a UK resident, he/she will also be subject to UK Capital Gains Tax on the same sale.
On the sale of an English property:
Gains made from the sale of a property situated in the UK are liable for UK Capital Gains Tax. No English equivalent of ‘prélèvements sociaux’ are due.
Therefore a French resident selling a property situated in the UK will also in theory be subject to English CGT. But he/she will equally be subject to French Capital Gains Tax & ‘prélèvements sociaux’ because he/she is a French resident.
=> In effect we are potentially looking at taxation on both sides of the Channel, and that’s where the double tax treaty comes into play.
Double Tax Treaty (DTT) or Double Taxation Convention (DTC)
A double tax treaty was signed between France & the UK for corporation tax, income tax and capital gains on June 19th 2008.
The purpose of the Double Tax Treaty is not to allow the taxpayer to choose in which country he/she would rather pay tax, nor does it elect in which country (either the UK or France) tax should be paid – but it simply allows that:
– for a UK resident, any French tax paid will be credited against the UK tax arising from the same gain,
– & vice-versa, for a French resident, any UK tax paid will be credited against French tax arising from the same gain.
Let’s take a more detailed look at the possible situations:
I./ Residents
French taxpayers such as British nationals residing in France
On the sale of a French property by a French resident basic French rules of taxation, rates, main exemptions and taper relief apply.
On the sale of a UK situated property by a French resident we will need to make a distinction between two cases: whether tax was, or not effectively paid in the UK.
I./1 If no tax was effectively paid in the UK on the sale of a UK property
As a result of the new Franco-British DTT no tax credit can be granted in France and the gain is taxable under French law.
Therefore French Capital Gains Tax and social charges are due on an English gain.
How to declare & pay said gain?
In practice a certain amount of forms will need to be filed out:
– One specific form that must be filed at the local tax office within two months following the sale, accompanied by the corresponding payment of the tax.
You may ask your notaire or accountant to help you with this procedure.
– And two general tax returns to report the gain. The aim is to take said gain into account when determining the general tax rate of the household for that year.
I./2 If tax was effectively paid in the UK on the sale of a UK property
Principal of elimination of double taxation
In contrast to the situation we have just seen above, here the gain actually supported tax in the UK, therefore France (State of residence) will apply rules to eliminate the double taxation, with a system of tax credit.
The vendor will be entitled to a tax credit against French tax, equal to the amount of the foreign tax paid. However such credit shall not exceed the amount of French tax attributable to such income. Therefore if the foreign tax exceeds the French tax no deduction on the global tax due by the household will be granted and no refund will not be achieved.
II./ Non-Residents
British nationals residing in the UK selling a property in France
On the sale of a French property by a non-resident basic French rules of taxation and rates, main exemptions and taper relief apply.
However capital gains made on an occasional basis by taxpayers domiciled outside France are subject to some French specificities.
French tax is due & some specific measures will apply
– ‘Prélèvements sociaux’
Since August 2012, non-residents have been made liable for the social charges, where previously they were merely liable for the main capital gains tax.
Therefore the basic gross tax rate for residents of France and the European Economic Area (EEA) residents is 34.5%, whilst for those from outside the EEA it is 48.8%.
In the same manner as capital gains tax, tapered relief is granted on social charges but over a longer period of 30 years (against 22 years for CGT).
What are social charges?
‘Prélèvements sociaux’, also known as the ‘contributions sociales’, actually comprises 5 different taxes. They do not all generate an entitlement to social security benefits, therefore it is incorrect to say that said charges are social security contributions.
However several court cases are currently pending before the Court of Justice of the European Union because the application of said charges to non-residents is deemed unjust, and contrary to the EU principal of free movement.
France faces a bill of 344 million euros for 2012.
– Représentation accréditée
Non-resident individuals subject to French CGT must under certain circumstances appoint a tax representative who will be jointly liable on said tax until its prescription date.
If the tax representative is a legal entity they charge for their intervention.
This measure is also under the spotlight of Europe.
Portugal was condemned by the European court in 2011. In anticipation of a French condemnation the French amending Budget Act for 2014 proposes to remove the requirement for EU resident taxpayers.
UK CGT may also be due
So we have seen that if you are a non-resident selling a property in France you will be subject, for the moment to French CGT & social charges.
But that is not all you will be subject to: UK CGT may also be due.
I will not go into the basics of UK CGT here that is not the aim of this article. More importantly let’s look at what the double tax treaty states.
Following the sale of a French property the treaty’s provisions allow for the French tax already paid to be offset against the UK tax. If the French tax is greater no deduction against similar tax is granted in the UK. In such a case, there would simply would be no tax to pay in the UK.
Note: The amount of French tax paid can only be taking into for the CGT part and not the ‘prélèvements sociaux’ part. HMRC has a clear position when it comes to French ‘prélèvements sociaux’: they are not considered as ‘tax’, therefore they are excluded from the charges for which credit is allowed against UK capital gains tax.
If you are affected by any of the situations mentioned above – be it a French resident selling a property in the UK, or a UK resident selling a property in France – you may need to be more vigilant when it comes to your tax obligations.
Inheritance planning New inheritance rules under EU Regulation of July 4th 2012
… or potentially, the key to put your mind at rest
For those of you with international profiles – living abroad, or who own assets abroad – new EU measures represent a major step forward for your estate planning.
And this will apply from August 17th, 2015.
Under current French inheritance law
French inheritance laws are very different from those of the United Kingdom.
In France you are not free to dispose of your whole estate as you may wish.
Upon death the deceased’s estate is divided into two sections, called:
« la réserve héréditaire », or what’s known as « forced heirship »– which must be left to any protected heirs, i.e your children
and « la quotité disponible », which represents the free part of your estate, which can be left to whoever you wish.
If you have children, and whether you draft a will or not, you cannot disinherit your children. They are legally entitled to a share in your estate:
If you leave 1 child, he/she is entitled to 1/2 of the estate,
If you leave 2 children, they are entitled to 1/3 of the estate each,
If you leave 3 or more children they are entitled to 3/4 of the estate in equal shares.
You may have already taken measures to mitigate French inheritance rules, you may have:
changed your marital regime,
created an SCI,
bought in tontine,
put in place a gift between spouses, etc.
Whether you have taken measures or not, your situation will need to be reviewed in light of the new EU regulation.
« Forced heirship » rules will not disappear, but from August 2015 it will be possible for some of you to dispose freely of your whole estate.
New inheritance rules under EU regulation n°650/2012
From August 17th 2015:
If the deceased says nothing in his/her will, or in the absence of a Will, his/her last habitual residence at the time of death will determine the laws of his/her succession.
However, the testator is allowed to designate his/her national law (at the time of the choice or the time of death) as the law governing his/her succession as a whole, by stating his/her choice expressly and in testamentary form.
For example an English citizen can choose English law to govern his/her succession as a whole, by stating so in a will.
The context of these rules
The purpose of Brussels IV is to facilitate free movement, within the EU, by removing the obstacles faced by EU citizens in asserting their rights in the context where the deceased’s assets are situated in different countries.
In particular it provides certainty as to which law will apply in governing your succession.
The regulation is of universal application
Whether it be the law of the country of habitual residence or the law of the testator’s nationality, said law will govern the succession as a whole, including all worldwide assets, regardless of their nature (movable or immovable assets), and their location (whether they are located in another EU State or a state outside the EU).
came into effect on August 16th 2012,
but will only apply from August 17th 2015.
In practice this means that you can already prepare your inheritance in accordance to said regulation, by writing your will now, however it will only apply if you live until August 17th 2015.
It will facilitate your estate planning
Because not only will you be able to choose the law applicable to your inheritance; but said law will govern the whole of your worldwide assets.
It will enable you to mitigate side effects of the law of habitual residence
If the law of your habitual residence doesn’t permit you to dispose of your estate how you wish, you may choose your national law to achieve your aim.
For example if you are an English national living in France, you can choose English law and therefore avoid the French « forced heirship » rules, enabling you to dispose freely of your entire estate.
Exit some old strategies, like creating an SCI to avoid French inheritance rules. A simple Will may suffice.
A sole and unique law governing the whole of your succession will simplify international inheritances considerably.
However every clients situation is different and needs careful analysis and even though these new rules will open up great new perspectives, their application will not be plain sailing – seek the best advice to protect the ones you love, and put your mind at rest.
Some foreseeable difficulties
The UK, Ireland and Denmark have opted-out of EU Regulation n°650/2012
In practice this will have a strange effect:
UK citizens living abroad will be able to benefit from these rules,
Whereas other EU citizens (French nationals, for example) living in the UK will not, because the UK does not abide by the regulation.
So if said French national, living in the UK has property in the UK, he cannot chose for said property to be dealt with under French law.
The concept of Habitual residence adopted by the EU has not been defined
It may reveal difficult to prove; and the lack of definition leaves room for manipulation.
If we take the example of the UK, UK’s internal private law is coordinated around the concept of « domicile ».
Said notion is complex and involves numerous aspects, encompassing habitual residence, place of birth and centre of economic interests, etc…
In English law an English national may have lived a large part of his life outside of the United Kingdom and still be regarded as « domiciled’ in his country of origin if he/she intends to return.
In practice, we may be confronted with situations whereas:
An English lawyer will consider the deceased domiciled in England and apply English law, and a French notary who will consider the deceased to have his habitual residence in France, and apply French law to the whole of the deceased’s estate.
Therefore it is essential to explicitly choose the law that will govern your future inheritance in a will.
Acceptance and application of EU Regulation in a third member State
Other issues concern the domains excluded by the Regulation, such as:
Matrimonial regimes…
These will remain governed by the state in which the assets are held and double tax treaties between the states is they exist.
Because of the disparities in « tax rules » across Europe, often fiscal aspects determine the « civilian strategy » to adopt.
It is likely that, for people who may have a choice of law, said choice will be dictated by the desire to obtain the most favorable tax regime, in order to protect their Loved Ones.
This particular issue will be addressed in detail, in a future article.
In the meantime seek the best advice to protect the ones you love, and put your mind at rest.
This entry was posted in DIP on 7 décembre 2014 by Edouard Figerou.