TRUST THE FRENCH…!FRENCH TAX REFORMS 2011

EDWARD REED

THURSDAY, 23 FEBRUARY 2012

Loi de Finances Rectificative du 29 juillet 2011

• Wealth tax (ISF) reform

• “Shield” abolition (bouclier fiscal)

• Gift/inheritance taxes

• Exit tax

• Trust (anti-avoidance) taxation

• What is still in store…

Law no 2011-900, published 30 July in Official Journal, in force 31 July

http://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000024413775

French tax reforms 2011FRENCH TAX REFORMS 2011

WEALTH TAX (ISF)

Changes in 2011

• Lower threshold raised from €800,000 to €1.3m

• Assets over €1.3m taxed under original 2011 progressive rates

– i.e. @ 0.55% from €800,000 to

– a max of 1.8% on €16.79m

• Tax return deadline extended to 30 September 2011

• No material change to directly-held exempted assets

WEALTH TAX (ISF)

Changes effective 1 January 2012

• Under €1.3m = zero

• Assets between €1.3m and €3m @ 0.25%

• Assets whose value equals or exceeds €3m @ 0.5%

• Tax rate will be charged from the first €

• So there is a reduction for those whose wealth is on the thresholds or just over (€1.3m-€1.4m and €3.0m-€3.2m)

• If wealth below €3m, you no longer file a separate return but use your income tax return (due 15 June)

€0 <€3m

Tax rate 0.25% pa

Net value of French sited assets

€0 >=€3m

Tax rate 0.5% pa

WEALTH TAX (ISF)

Old rates (ignoring bouclier)

€800k - €1.31m @ 0.55% = €2,805

€1.31m - €2.57m @ 0.75% = €9,450€2.57m - €4.04m @ 1% = €14,700€4.04m - €5m @ 1.3% = €12,480

Total ISF = €39,435

2012 rates

€5m @ 0.5% = €25,000

Total ISF = €25,000

Illustration – assets €5m

WEALTH TAX (ISF)

ANTI-AVOIDANCE re pre-2012 planning

• Non-res. shareholder lends to SCI (shareholder loan a/c)

• This reduces net value of shares

• Loan situs = shareholder residence

• From 2012, shareholder debts no longer deductible

• High investigation risk

• Some requalification risk even if loan replaced by commercial loan

Real estate holding company

(SCI)

Loan Non-resident

France

WEALTH TAX (ISF)

TRUSTS (from 2012) – effectively transparent

• Settlor French resident = trust assets includible in settlor’s wealth, whatever terms…

• If ISF cannot be levied on settlor, tax must be paid by trustees or French-resident beneficiaries

• “Penal” rate of 0.5%, irrespective of trust fund value

• ISF exemption for anyone in first 5 years of residence does apply

• Issue also where French assets even if no settlor/trustee/beneficiary

• NOT CLEAR that one of many beneficiaries liable on pro rata ‘share’…

• Room for double taxation where several residents

CONTEXT

• ISF reforms estimated to cost government €900m.

• €70bn trade deficit in 2011

• French public debt is 89.1% of GDP (2012 est.) (eurozone average 87.4%)

• Plan

– increase rates; and

– limit tax incentives and reliefs

• Credit rating downgrade + 05/2012 election: watch this space…

BOUCLIER FISCAL

Tax shield

• Refund right existed since 1988 to prevent you paying over 50% of tax

• In 2010, helped 14,400 people (residents) reclaim average €41,041

• For 2010 (i.e. in 2011) cost the state €591m

• Abolished from end 2012 (2011 income benefits)

INHERITANCE AND GIFT TAXES

• 5% increase in the top two tax rates for direct lines and gifts between spouses:

– €902,838 → taxed at 40%

– €1,805,677 → taxed at 45%

• All other rates remain unchanged

• Parents could make gifts to children of up to €159,325 every 6 years - now extended to 10

• Rapport fiscal extended from 6 to 10 years

• Abolished: 35% or 50% tax deductions for gifts according to donor’s age

EXIT TAX (1/2)

With effect from 3 March 2011

• 6 years + French tax resident leaves France with a latent capital gain: gain crystallises on day preceding exit date

• Securities must have a value exceeding €1.3m or 1% of share capital

• Tax irrespective of whether the company is French or foreign

• Can be deferred depending on where the person is migrating to e.g. EU member states or EEA treaty states with TIEA

• Social tax component cannot be deferred (12.3%) – global rate 31.3%

EXIT TAX (2/2)

• Charge on unrealised capital gains may be cancelled or refunded if:

– holding still held 8 years after exit;

– on date of resumption of tax residency (if

securities still held); or

– upon taxpayer’s death

• Will be reduced/cancelled if actual capital gain less than the latent capital gain

• Credit given for foreign tax paid abroad

TAXATION OF TRUSTS

• Civil law: no equivalent to trusts in French Civil Code

• Tax law: till now no detailed regime; see new Art 792-0 bis of tax code (+ 885G ter, 990J, 1649AB)

• Government aims to prevent tax avoidance through the use of trusts

• For 1st time, tax definitions of “trust” and “settlor” (very wide)

• If you escape wealth tax, “sui generis” tax is there to sweep you up!

• Income tax on distributions (amended Art 120-9), so accumulated income OK

• Anti-avoidance Art 123 bis untouched

INHERITANCE/GIFT TAXATION OF TRUSTS

Creation of new trusts that qualify as

gifts

• Gift tax will apply:

– 60% in all cases where the settlor is

resident in France

– 45% if beneficiaries are descendants of

the (non-resident) settlor but the trust

assets are French

– 60% if beneficiaries are not descendants

of the (non-resident) settlor but the trust

assets are French

Taxation of existing trusts and trusts

where no gift tax has been paid

• Inheritance tax at death of settlor:

– If beneficiary’s interest is known it will

be taxed according to his relationship

with the settlor (45% - 60%)

– If the beneficiary’s interest is not

known the whole trust will be taxed

(45% - 60%)

– Trusts in “uncooperative” states will be

taxed at 60%

ENFORCEMENT BY DISCLOSURE

Main ISF rules described above, but how will “they” find out…?

• New disclosure obligation on trustees

– re existence, modification and extinction of trusts if

– settlor or one of the beneficiaries French-resident or trust contains French assets

• Fine + non-disclosure penalty 5%, even if no tax loss

• Pension and charitable trusts should be ok, but what about EBTs?

DISCLOSURE OBLIGATIONS

• Ruling issued on 23 December 2012 implies that any trust with French resident settlor/beneficiaries or French assets on 31 July 2011 will need to report:

– existence of trust and contents of trust deed;

– amendments to trust or closing of trust; and

– value of assets as at 1 January

• Where changes were made (e.g. exclusions) between 29 July 2011 and 1 January 2012, position is unclear – watch this space

– Trustees will need to obtain up-to-date advice as further guidance etc is published

CHARITABLE TRUSTS

• Exclusively charitable trusts can avoid new wealth tax and inheritance tax, if irrevocable

• Beneficiaries must qualify as eligible charities under Article 795 French tax code

• French charities? Check the “list” at Article 795

• Other European charities? Rely on EU case law and/or obtain ruling from French tax authorities

– Consider “hiving off” assets into exclusively charitable trust where settlor wishes to benefit charity

KEY ISSUES STILL TO BE RESOLVED/ACTION POINTS

• Think twice before creating a trust with a French connection

• Trustees need to

– check their structures and

– identify any French-resident settlors/beneficiaries and assets

• Think about estates in trust/will trusts…

• Trustees need to source advice on

– onerous reporting duties

– how to re-structure

• All shareholders’ loans into SCIs should be identified and reviewed

KEY ISSUES STILL TO BE RESOLVED/ACTION POINTS

• Range of possible planning identified so far:

– settlor/beneficiary emigrates – but check exit tax

– French-resident beneficiaries excluded generically (?)

– named French-residents excluded (?irrevocably)

– trust split into funds e.g. pro rata, with suitable exclusions

– trust “grantorised” to non-French resident “settlor”, with personal, general

power of appointment

• Watch default provisions and cross-accruers; watch gift tax…

• Revocability a potential issue

• Strengthened “fraude à la loi” anti-avoidance doctrine

OTHER NEWS + WHAT’S IN THE PIPELINE?

• Tax on foreign owners of second homes has been dumped

• From 31 July 2011, flat levy on insurance policy wrappers outside IHT increased to

25% over €902,838 (still 20% below)

• Second law passed 19 September (No 2011-1117), published 20th:

– special income tax of 3% on incomes over €500k till deficit down to below 3% of GDP

– social security taxes on capital revenues up from 12.3% to 13.5%

– tax at 2% on hotel nights worth over €200!

– CGT on homes: 10% annual reduction after 5 years’ ownership goes – from 1

February 2012 will go to 30 years (NB from 25 August 2011 re SCI-held properties)

• VAT raised to 21.2% from 01 October 2012

• 0.1% “Tobin” financial transactions tax

TRUST THE FRENCH…!FRENCH TAX REFORMS 2011

EDWARD REED

Macfarlanes LLP 20 Cursitor Street London EC4A 1LTT +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com

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