jonathan crowther provides advice on how to negotiate the french tax labyrinth
The matrix in diagram below is a bird's eye summary of the easy guide... articles so far. An individual connected to Country A acquiring an asset connected to Country B should analyse the tax and estate implications for him and his family within the framework of the matrix. This article looks at tax and estate planning impacts of an indiv- idual acquiring a residential property in France.
The first impact is the potential for the individual and his family to become connected themselves with France by virtue of occupying the property. The connecting factors for individuals with France are:
• The family home (foyer) or principal place of residence (sejour principal). The foyer is the place where the individual's spouse and children live together and normally reside, irrespective of the period of effective residence of the taxpayer during the year. The sejour principal is that of effective presence i.e. more than 183 days a year.
• Carrying on a professional activity, whether salaried or not, unless it can be shown this activity is exercised in France only on an ancillary basis.
• The centre of economic interests i.e. the place of the individual's principal investments, the place where they administer their assets or from where they draw a larger part of their income.
The definition is therefore wide and does not necessarily require any period of partial or full time physical presence to render an individual liable to French tax. The ownership of a second home in France where family visits are less than 6 months a year should not result in becoming resident in France. For an individual who is resident in a country with a treaty with France, the treaty should avoid him becoming resident even if he triggers one of the connecting factors subject to the tie-breaker tests found in most treaties.
Although the individual can avoid becoming connected with France, the property's situs is in France. Any rentals arising from the property would therefore be subject to French income tax under the source doctrine. However, even if it is not rented out, Article 164c of the French tax code provides that owners of French residential property who are not resident for French income tax purposes are subject to French income tax on deemed income from the property, calculated as three times the estimated annual rental value. To avoid this tax charge recourse must be had once again to a double tax treaty, either in respect of his residence or failing that his nationality.
An individual resident in a country with a double tax treaty with France can escape this tax if the treaty has the appropriate article. For instance, Article 24c of the UK-French treaty provides:
"A resident of a contracting state who maintains one or more places of abode in the other contracting state shall not be subject in that other state to an income tax according to an imputed income based on the rental value of the place or places of abode."
If the individual's country of residence does not have either a treaty with France or an Article 24c equivalent then they must fall back on their nationality. Article 25(1) of the UK-French treaty provides:
"The nationals of a contracting state shall not be subjected in the other contracting state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other state in the same circumstances are or may be connected."
It is therefore necessary to look at the treatment of non-resident French nationals under Article 164c. Under the article there is an exception to the charge for French nationals who can prove they are subject, in the country in which they are resident for tax purposes, to income tax equal to two-thirds of the amount they would have had to pay in France on the same basis. A British national would therefore avoid the charge only if he is subject to a deemed income assessment equal to two-thirds of the amount they would have had to pay in France on the same basis. Residents of countries such as Dubai who owned French residential property for their own occupation would therefore have difficulty in avoiding the charge.
In addition to the deemed income charge, the property can also be subject to capital gains tax and wealth, succession and gift duty and French forced heirship rules since it is sited in France. The property's connection with France can be broken by interposing a company and so potentially avoid these taxes. However, using a non-French resident company would trigger another deemed income charge equal to 3% of the value of the property. Normal practice therefore has been to use a French property company, a Societe Civile Immobilere (SCI). Since SCIs are treated as transparent for French tax purposes they would not avoid the Article 164c charge. However, as discussed above, individuals resident in the UK would avoid the charge.
If the individual were resident in the UK there are no deemed income provisions if property is held in the individual's own name or through a nominee.
However, if the property is owned through a company then the property could be within the charge to income tax under ICTA 1988 section 145 and 146, on the grounds the individual is a shadow director of the company and therefore subject to the benefits charge, since the property is made available for the individual's occupation by the company. The individual is treated as an employee and the use of the property regarded as a benefit-in-kind calculated at 5% of the cost of the property over £75,000. The Inland Revenue confirmed in their December 2000 Tax Bulletin they consider an SCI to be opaque for UK tax purposes and so potentially within this charge. However, there are some compelling arguments against the Revenue's view and it has recently agreed to review the position, and in the meantime are not pursuing any cases.
A means of avoiding this charge, if the Revenue eventually concludes an SCI is opaque, would be to draw up an agreement whereby the French company holds the property as a nominee for the individual. In this way it is believed the individual would be the beneficial owner for UK tax purposes and the company the owner for French inheritance purposes.
There is a detailed discussion of these matters at www.depinna.com/documents/FrenchInheritanceAndTaxPlanning2003.pdf which covers inheritance and wills in depth and at www.stephensmithfranceltd.com/ArticleAvoidingSuccessionWar.html which looks at tax and inheritance problems that can occur if proper planning steps are not taken.
Whilst acquisition of a French property should not trigger residence, in all likelihood over the years the individual and his family will strengthen their ties with France. At some point his family may move to France and he may commute to the UK, and eventually he may retire to France and become domiciled there. Tax and inheritance planning must therefore be undertaken from the outset.
An individual who becomes or will become resident in France can use a French approved insurance linked investment bond to significantly reduce their liability for French taxes down to a taxable rate of only between 0% and 10% of taxable investment income on the gains arising from withdrawals from their investments. Because the tax benefits associated with qualifying bonds increase to a maximum over an eight year period, the sooner a potential resident invests in a qualifying bond before becoming resident, the sooner they will benefit from the maximum tax advantage when they become resident in France. For a life assurance investment bond to work the bond must have a French approved fiscal representative. An offshore bond can be used so long as it is issued out of Dublin or Luxembourg or other EU member state and the life office has a French approved fiscal representative. The bond would be effective for UK tax purposes and achieve the tax planning goals of tax free roll up, taxation only on withdrawals and a discount/ taper on deferred gains.
The problem with these tax and inheritance issues is they will only emerge over time. For instance, Capital Gains Tax will emerge when the property is sold and will be enforced by the property agent who will not release the proceeds until he has seen proof a return has been submitted to the French Inland Revenue. It is therefore essential to look at all of the issues prior to purchasing a property and to plan to mitigate tax and ensure all compliance obligations will be met on time. The impact of penalties on tax being paid several years late can double the liability. Oh, and there is also an exit charge in France when an individual becomes non-resident after a period of residence.
The "guidance" in this article does not constitute professional advice and is intended only as an informal introduction. The views expressed are entirely the author's own and should not be relied or acted upon in any way. Professional advice should always be sought before undertaking tax or estate planning.
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