New tax measures for French tax planning
New French tax measures, and planning for non-residents
The French Finance Bill 2014
I. SALE OF PROPERTIES
A. Temporary exceptional allowance
A temporary exceptional allowance of 25% will apply on the sale of a property from 1st September 2013 to 31st August 2014. The allowance, applies to CGT, social contributions and additional CGT applicable to capital gains in excess of €50,000.
Excluded from the allowance are disposals -
a) Of certain assets (including building plots and shares of real estate companies/SPI (1)); or
b) To certain persons (e.g. spouse; civil partner, other close relative).
B. Allowance for length of ownership:
There is good news, as the full exemption from income tax on the capital gain applies after 22 years of ownership, a reduction from the previous requirement of 30 years continuous ownership. However, full exemption from social contributions remains 30 years.
New methods of calculating the allowance:
Allowance for length of ownership (for income tax):
6% for each year beyond the 5th until the 21st
4% for the 22nd year of ownership
Full exemption of income tax after 22 years.
Allowance for length of ownership (for social contributions):
1,65 % for each year beyond the 5th until the 21st.
1,60 % for the 22nd year of ownership.
9% for each year under the 22nd.
Full exemption of social contributions after 30 years.
C. Transfer duties
Transfer duties may be increased in some “départements” (administrative counties) on transfers completing between 1st March 2014 and 29th February 2016. The maximum rate could increase to 4.5% a temporary potential maximum increase of 0.7% on the current rate of 3.8%.
D. Capital Gain Tax
For residents of EEA States: 34.5% (19% + 15.50% social contributions).
For non-EEA residents (ETNC excluded): in principle 48.83% (33.33% + 15.5% social contributions).
For residents of a non-cooperative country (ETNC): 90.5% (75% + 15.5% social contributions).
Capital gains in excess of €50,000 are additionally taxed at variable rates from 2% to 6%. A temporary income tax applicable to high levels of income will also be levied at 3% or 4% depending on the capital gain received in France.
- Implement an appropriate structure on purchase which takes into account future capital gains tax regime.
- For new acquisitions and current ownership: analyse the impact of the private capital gain regime versus the professional capital gain regime (French corporation tax) to select the more appropriate regime.
From the 1st January 2014, new rates apply:
The standard rate of 19.6% increased to 20%.
The intermediate rate of 7% increased to 10%.
The reduced rate of 5.5% decreased to 5%.
The specific rate of 2.1% remains unchanged.
- Take care to ensure the conditions are fulfilled to benefit from intermediate VAT rate on building works and related services.
- Check work type to ensure the correct tax rate is applied.
III. SALE OF SECURITIES
The rates of the general tax allowance have increased to:
50% after 2 years ownership.
65% after 8 years ownership.
In addition, specific tax allowances can apply rates of up to 85%. (Companies incorporated less than 10 years, family restructuring and retirement).
The new general and specific rates are retroactively applicable from 1st January 2013.
Who is concerned by new general and specific rates?
- French tax residents with foreign shareholdings (subject to the provisions of the relevant tax treaty)
- In principle, non-French tax residents are not subject to French tax on capital gains on the disposal of French securities, except in two cases:
When at any time in the last five years a non-resident shareholder and close family members hold more than 25% of the shares in a French company; tax at 45% will be levied on the capital gain.
A resident of a non-cooperative country (ETNC) will be subject to 75% tax on the capital gain with no minimum shareholding requirement.
- Analyse the pros and cons of using holding companies to own securities and to reduce tax on future sale.
- Choose an appropriate holding jurisdiction depending on your country of residence.
IV. ADVANTAGES FOR NEW RESIDENTS
Interest and dividends received in 2013 by French tax residents will be subject for the first time to the progressive income tax rate. The allowance of 40% on dividends remains unchanged subject to certain conditions.
Some re-structuring plans may still be efficient for new French tax residents, to optimize their future dividends.
- Convert future dividends into life insurance policy income;
- Incorporate an ultimate holding structure to locate future dividends outside of the jurisdiction;
- Use capital for living expenses and defer receiving income.
B. Inheritance tax
Inheritance tax on the transfer of life insurance contracts of over €700,000 (after deduction of €152,500 allowance) will increase from 25% to 31.25%. This new rate will apply to demise after 30 June 2014.
Premiums paid by the deceased after the age of 70 will form part of the estate and therefore are subject to inheritance after a deduction of €30,500.
However, interest generated on the premiums paid after 70 years of age remain exempt from inheritance tax.
NB: If the beneficiary is the surviving spouse or civil partner, their inheritance is exempt from inheritance tax.
- Life insurance policies remain a useful tool when planning French residency. The Conseil Constitutionnel, when considering the Finance Bill 2014, refused to include income from life insurance contracts within income to be taken into account when calculating the 75% wealth tax ceiling for French residents. It is good news.
- It is worth remembering that life insurance still allows income tax optimization on investment income as well as estate planning advantages.
C. Wealth tax
For the first five years of tax residence in France, new residents continue to benefit from an exemption to wealth tax of their non-French assets.
Recent case law for non-residents with “French connections”
I. REDUCED SCOPE OF FRENCH SUCCESSION TAXES FOR MONACO RESIDENTS
Good news: the Double Tax Treaty (DTA) signed between France and Monaco for inheritance purpose, has been applied to non-French & Monegasque national resident in Monaco. It was previously limited to French and Monaco nationals.
In a recent decision, the French Civil High Court decided that the Treaty applied to a succession of a Moroccan citizen, who was resident in Monaco for over 5 years at the time of his death thus avoiding the application of French law.
Monaco residents should review their estate planning regarding either French assets or French resident heirs.
II. FRENCH CGT TAX RATE OF 19% APPLICABLE TO SWISS RESIDENT
A Swiss resident, who sells real estate in France or shares of a SPI (1), will benefit from a reduced tax of 19% on the capital gain under the provisions of the Franco-Swiss Double Taxation Agreement.
Non-EU residents, which include Monaco residents, who are subject to 33.33% CGT in France, should consider how they could benefit from the lower 19% CGT rate for past and future transactions.
If a property has already been sold and tax paid at 33.33% consideration should be given to apply the 19% rate.
III. (The end of) 164 C FOR MONACO RESIDENTS
Late last year the French Administrative High Court decided that a non-French tax resident who has available for their use French real estate (such as secondary residence), are not subject to tax on the notional rental income of that real estate. The Court considered that such tax amounted to restriction on the free movement of capital within the EU. In consequence, Monaco residents are no longer subject to this forfeit taxation in France.
This is a significant decision and a significant tax change to resolve what had become an area of considerable uncertainty.
- Claims for the repayment of tax paid under article 164 C can still be submitted for a limited period of time.
- A foreigner holding a secondary home in France could consider taking Monaco residence.
IV. NEW NON COOPERATIVE COUNTRY LIST: WHAT IS THE IMPACT?
The new list of non-cooperative countries was published on 17 January 2014, with from 1st January 2014. Additions to the list are eight countries: Nauru, Guatemala, Brunei, Marshall Islands, Montserrat, Botswana and British Virgin Islands (Bermuda and Jersey have been removed).
Residents of countries on the list are subject in France to maximum tax liability (75%) when selling (even only one) share(s) (“droits sociaux”) of French companies that are subject to French corporate tax or on receipt of income on French bonds.
- Care is required when choosing the jurisdiction of an offshore company localization, to avoid countries which are or risk being in the ETNC list, if the company is to be used to hold French investments.
- Consideration must be given to restructuring in view of punitive tax measures that affect ETNC companies which own or finance French property or SPI (1).
V. EUROPEAN COMMISSION
The European Commission started infringement procedure against France (n°2013/4168), in August 2013, concerning the levying of social contributions on non-French residents.
(1) SPI “Société a Preponderance Immobilière”: refers to all companies which are considered to be French for tax purposes because of their direct or indirect French real estate ownership.
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