There have been a number of changes to EU laws recently that have had, or will have, a direct impact on your clients who have connections with France. There are six stand-out issues that are worth careful and immediate consideration.
Have Your Clients Reviewed Their Wills in Light of The New EU Succession Regulation?
The European Succession Regulation No. 650/2012 (the Regulation) applies as of 17 August 2015. Prior to the Regulation, diverse succession rules applied across different EU Member States. There is now just one law that applies to succession; it applies to both testate and intestate succession, and does not distinguish between moveable and immoveable property. The Regulation is binding in all EU Member States (the Regulation Area) except Denmark, Ireland and the United Kingdom.
The Regulation will apply to
- Assets located in the Regulation Area
- The estates of people who are habitually resident in the Regulation Area at their time of death
- Nationals of a country within the Regulation Area who have chosen that country’s succession law to apply to their affairs upon their death.
The Regulation therefore has widespread application and needs to be understood by practitioners inside and outside the European Union in order to assist clients with succession planning.
The general position under the Regulation is that the courts of the Member State where the individual had his or her “habitual residence” at the time of death will have jurisdiction over the succession as a whole, and the applicable law will be that of the same Member State. “Habitual residence” is based on an overall factual assessment of the life of the deceased in the years preceding and at the time of death.
It is important to note that individuals may choose the law of their nationality as the law that governs the succession as a whole, which could differ from the law of the Member State where they have their habitual residence at the time of death, for example with regard to features such as forced heirship. Where an individual has several nationalities, he or she may choose the law of any of the States to which those nationalities relate. The choice must be made expressly in a declaration taking the form of a disposition of property upon death, such as a will.
Many individuals will be affected by the Regulation, whether they live and work inside the Regulation Area, or live and work elsewhere but have assets located within the Regulation Area.
It is therefore vital that any client that lives in, owns property in, or is moving into or out of the Regulation Area, seeks advice on how the Regulation may affect his or her succession planning.
By electing the law of their nationality in their will, US citizens owning French real estate properties for example, will be able to avoid French forced heirship rules.
Does Your Client Hold French Real Estate Through a BVI Entity? Restructure!
British Virgin Islands Still On French Blacklist
In August 2013, France announced that the British Virgin Islands (BVI) would be placed on a blacklist of non-cooperative jurisdictions, owing to delayed responses to requests from France relating to the financial records and accounts of companies registered in the BVI. The BVI have still not been removed from this blacklist.
There are several negative consequences of being on the blacklist, the most significant one being that capital gains tax on the sale of real estate is 75 per cent for residents of the BVI, rather than 33.3 per cent for non-French residents outside the European Union, or 19 per cent for residents within the European Union or European Economic Area. In addition, French social taxes are payable by non-corporate sellers, which could result in a tax rate of over 90 per cent for BVI sellers.
Holding structures involving the BVI must be restructured owing to the BVI’s continuing placement on the French blacklist.
Does Your Client Hold French Real Estate Through Luxembourg Vehicles? Reconsider!
Double Tax Treaty: France and Luxembourg
In September 2014, a protocol was signed that changes the capital gains article of the 1958 double tax treaty between France and Luxembourg (the Protocol). The Protocol is likely to be effective from 1 January 2016 at the earliest, depending on when various national legislative procedures have been put in place.
The use of Luxembourg structures to hold French real estate has been popular during the last decade. Such structures, for example, involve holding French real estate through a French property company (Société Civile Immobilière), which is in turn held by a Luxembourg company, or holding French real estate through a chain of Luxembourg companies.
The sale of French real estate by a French property company is subject to French corporation tax when sold, but corporation tax is not levied when a Luxembourg company sells a French property company. It is not subject to tax in Luxembourg either. This explains why so many French real estate properties are held through Luxembourg. When the Protocol comes into force, however, the sale of a French property company by a Luxembourg company will be subject to French corporation tax at 34 per cent.
The Protocol provisions are further extended to shares that indirectly derive value from real estate. This means that a gain on the disposal of the shares of one Luxembourg company in a chain of Luxembourg companies could be subject to French corporation tax, if more than 50 per cent of the value of the company being sold derives indirectly from underlying French real estate.
Investors should reconsider any Luxembourg structures that they are using to hold French real estate in light of the changes that will come into force as a result of the Protocol.
Beware of Using an LLC to Hold French Real Estate Property
Some French tax inspectors recently took the view that US LLCs, which are treated as “transparent” entities for US tax purposes, should be treated as “opaque” i.e., taxable in their own right for French tax purposes, irrespective of their US tax treatment. The argument is that French limited liability companies, e.g., SARLs, are always subject to corporation tax.
It has been common to use US LLCs to hold French real estate, particularly as an alternative to the popular French “tax transparent” SCIs. In both cases, the objective is the same, i.e., avoiding French forced heirship provisions by transforming immovable assets that are subject to the French law of succession, to movable assets that are subject to the succession law of the domiciliary jurisdiction, typically the United States.
As long as the LLCs are also transparent for tax purposes, no French corporation tax is due, even if French real estate property is rented out. On the other hand, if LLCs are treated as opaque, they are then subject to French corporation tax. In that case, even in the absence of rental income when the French property is used free of charge, corporation tax is due on notional income.
Although we are litigating the issue as a first step, we do not recommend using an LLC to hold French real estate. If an LLC is already being used to hold French real estate, be ready to resist an attack and, if necessary, bring the case to court.
Is Your Client Eligible For a Refund of French Social Charges?
The general position under EU social security regulations is that an individual cannot pay contributions to more than one EU social security regime at any particular time. Since 2012, non-French residents have been obliged to pay social charges (at 15.5 per cent) on income arising from French real estate, in addition to capital gains and income taxes. The French tax authorities contended that such social charges were outside the scope of EU social security regulations and could be distinguished from “contributions” that supported the French social security system. On 26 February 2015, however, the European Court of Justice ruled that the social charges do support the French social security system and therefore fall within the EU social security regulations.
As a result of the ruling, non-French residents subject to another local social tax regime, who have paid social charges in 2012 (under certain circumstances), 2013 and 2014 on rental income or capital gains arising from French real estate, are entitled to claim a refund.
To claim for a refund, individuals must issue a claim to the French non-residents tax office before 31 December 2015.
Are Your Clients Aware of Their Potential Trust Reporting Requirements?
As of 1 January 2012, assets or rights held in trusts that have some French connection (see below) are deemed to be part of the original settlor’s estate and taxable in his or her hands or, after the original settlor’s death, in the hands of the beneficiaries thereafter deemed to be settlors, irrespective of the nature of the trust. Trustees are subject to extensive reporting requirements, and these reporting requirements apply not only in respect of intervivos trusts but also to testamentary trusts.
When the settlor of a trust, or one of the beneficiaries (existing or contingent), is resident in France, or if the trust fund contains French assets, the trustee must disclose to the tax authorities the formation of the trust, any variations to its terms and its termination (event-based reporting), and the market value of the trust assets each year (annual reporting). Annual reporting may or may not include the payment of a specific tax at a rate of 1.5 per cent of the trust assets depending on the circumstances. The penalty for failing to comply with the reporting requirements gives rise to a fine of €20,000 or 12.5 per cent of the value of the trust fund, whichever is the greater.
Many trusts have a French connection, such as a French resident beneficiary. Trustees must identify all beneficiaries (existing or future) of the trust and gather the information needed to comply with the extensive French reporting requirements. In the case of failure to report, an urgent voluntary regularisation is highly recommended, as it might avoid penalties being applied, at least in the case where no tax is due.