French Tax Changes - 2011

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French Tax Changes - 2011

New Law on Trusts

This law represents the first real attempt by French legislators to define the relationship between the different parties to a trust and the way a trust might be treated within the French Tax Code. The law published on 31 July 2011, was followed by a rescrit on 28 December 2011 offering further guidance on the obligations of trustees acting for settlements in the situation described below. Nevertheless, there are still a number of unconfirmed areas which we hope will be clarified with the Décrêt and Instruction which are expected in the first half of 2012.

The new French trust law concerns trusts with French resident settlors and/or beneficiaries or trusts which own French assets, even if the parties to the trust are not living in France. The definition of French assets includes French property holding companies shares, regardless of where the entity is registered. French financial investments such as French company shares in an underlying portfolio do not need to be reported, except if they represent over 10 percent of a French company’s share capital.

Trusts which are set up by a company to manage occupational pension rights also escape the reporting requirement. The treatment of RATS, QROPS and QNUPS remains uncertain and require a proper assessment on a case by case basis.

The taxable party as defined under the new law is the settlor. If the original settlor has passed away, the beneficiary(ies) are treated as “deemed settlors” and become the taxable party(ies). Exposure to French taxes may vary considerably depending on whether the taxable party is resident in France or not.

Trustees acting for entities which meet one (or more) of the above criteria are required to make an annual disclosure to the French authorities. The filing date and tax form have yet to be confirmed but it is expected that the first reporting date will be around May or June 2012. The rescrit stipulates that the reporting will apply in respect of the following:

1. trusts in existence as at 31 July 2011 including the parties to the trust and details of underlying assets
2. trusts set up after that date
3. any trust amendment or termination carried out since 31 July 2011

Trusts are subject to a 0.5 percent annual charge unless the information is duly reported and the taxable parties under the new trust law are reporting their share of the trust assets on their personal wealth tax return if the tax applies to them. The 2012 wealth tax limit is set at €1.3M. The absence of wealth tax exposure of any given taxable party cancels the 0.5% trust charge but it does not preclude the trust reporting. Failure to comply with the trust declaration - and payment of the charge if applicable - triggers a penalty of €10,000 or 5 percent of the underlying assets whichever is the greatest. The trustees are severally and jointly liable for the charge along with the settlor and/or beneficiaries.

The new law provides the French tax administration with the required information to identify the taxable party and the basis of taxation. The French taxes likely to be encountered in this context are as follows:

1. inheritance or gifts tax
2. income tax
3. transfer charges upon the transfer of assets into trust
4. capital gains tax on the sale of a trust asset
5. 0.5% trust charge or wealth tax

Income Tax Measures

With the bands of the French income tax scale rates being frozen, liabilities will increase overall (see below). All tax allowances and tax deduction limits are to remain unchanged as well.

The withholding tax rate on dividends increased from 19 percent to 21 percent and the rate for fixed bank and investment income increased 24 percent from 19 percent. The social surcharges known as CGS, CRDS and PS of 13.5 percent have to be added to these rates.

The benefit of various tax credits in respect of home expenditure etc has been further capped.

Furnished Lettings

The 2012 limit for the application of the Micro BIC regime remains at €32,600 with a deduction of 50 percent of the turnover which is supposed to cover all charges. The specific Micro BIC regime limit of €81,500 and deduction of 71 percent for furnished lettings registered as Gîte de France, Résidence de Tourisme Classée or Chambres d’Hôtes was also left unchanged. The registration process to have properties registered as Résidences de Tourisme Classées (to benefit from the higher deduction) advertised as available on Atout France seems to only function online in respect of applications made by hotels. Many owners have had to register manually.

• For further information on this aspect of French taxation: Click here

Most communes now apply a local business tax known as CET to properties rented out on a furnished basis. The rates vary depending on the region in which the property is situated. Some communes have voted the exemption of the “taxe d’habitation” when the CET applies.

Capital Gains Tax (CGT) on Real Estate

Taxpayers selling their principal private residence benefit from a capital gains tax exemption. This is valid for up to one year in cases where the owners have left their main home before the sale.

The basic real estate CGT rate remains set at 19 percent and French residents have to add the social surcharges leading to a total charge of 32.5 percent on real estate gains which do not benefit from any specific exemption.

The advantageous taper relief system which reduced the taxable gain by 10% for every full year of ownership beyond the second has been heavily amended. The taper relief rates are now as follows: 0 percent for the first 5 years, 2 percent between 5 and 15 years, 4 percent between 16 and 24 years and 8 percent thereafter. Sadly, this means that a second home has to be owned for a full 30 years for the resale gain to be totally exempt when up until now, it only took fifteen years to achieve this.

VAT Change

The reduced VAT rate of 5.5 percent is now increased to 7 percent, except for “necessity” goods such as food, special equipment for the disabled and school canteens.

Exit Tax

An exit tax was re-introduced and extended to anyone leaving France after 03 March 2011 if they hold a shareholding in excess of €1.3M in any company.

France/UK Double Tax Treaty

The effects of the new France/UK Double Tax Treaty, which came into force on 1 January 2010, were visible on the 2011 tax assessments and more particularly on the avis de contributions sociales received by those who reported UK source income to be taken into account when determining the overall rate of French income tax.

Indeed, in a great number of cases UK rental income, UK government pensions or UK directors’ fees were subjected for the first time to the CSG, CRDS and PS. The double tax treaty states that a tax credit is granted if the income in question is subject to UK tax. There seems to be different interpretation on this particular term as in some cases, even though such an income is subject to UK tax, the resulting UK liability is in fact nil - through the deduction of expenditure or simply the application of UK personal allowance, for instance.

Many French tax offices request a full copy of UK returns and tax assessments. Refunds of the CSG, CRDS and PS applied to UK source income seem to be more readily granted when the taxpayer can provide evidence of the UK tax paid. In the absence of any written guidance from the central legislator’s office on this issue, the outcome of any claim is not guaranteed. Taxpayers may claim against any “perceived” error of assessment up to 31 December of the third year following the tax year in question.  For instance, claims in respect of the CSG, CRDS and PS or indeed the income tax liability on 2010 income may be queried at the local tax office up to 31 December 2013.

Anti-Tax Evasion Measures

France’s list of harmful tax territories currently includes the following: Anguilla, Belize, Brunei, Cook Islands, Costa Rica, Dominican Republic, Grenada, Guatemala, Liberia, Montserrat, Nauru, Niue Island, Panama, Philippines, St Kitts & Nevis, St Lucia, St Vincent and the Grenadine Islands and The Marshall Islands.

Undeclared assets, accounts, life assurance policies etc held outside France by French taxpayers may now give rise to re-assessment up to ten years in arrears instead of three years. This tax audit window was also recently extended to assets situated in the EU or even in double tax treaty partner countries.

This is in line with the wealth tax rules as the authorities can assess up to ten years in arrears in respect of omitted assets or if wealth tax returns were not filed despite an exposure to this tax.

• For further information on this subject: Click here

Life Assurance, Life Bonds – New Treatment on Foreign Policies

Life assurance policies taken out by individuals “on their way to France” are now brought into the scope of the 20 percent levy. The charge applies to the proceeds paid to beneficiaries if the policyholder dies in France. The deduction of €152,500 per beneficiary continues to apply provided the premiums were paid before the policyholder reached 70 years of age.

Couverture Maladie Universelle (CMU)

The income limit (2010 revenu fiscal de référence) to benefit from the Couverture Maladie Universelle (basic cover) without paying any contributions is set at €9,164 for the period from 1 October 2011 to 30 September 2012.

2012 French Tax Rates

All French tax scale bands, allowances and tax limits have been frozen and remain the same as those applicable last year. These are therefore likely to result in higher tax liabilities in 2012. The resulting tax scales applicable are shown below:

Income tax scale for 2011 income

2012 Wealth Tax Rates

Non-residents who hold net French assets (excluding investments) or French residents whose worldwide net wealth exceed €1.3M as at 1 January 2012, must file a wealth tax return with the payment of the liability. The fling deadline depends on the total value of taxable assets. If this is between €1.3M and €3M then the details of taxable assets are filed at the same time as the income tax return and the tax is payable then, i.e. end of May 2012.

The filing deadline of 15 June 2012 continues to apply to residents if their total taxable assets exceed €3M. EU residents have until 15 July 2012.

Individuals who arrived in France after 6 August 2008 continue to benefit from a temporary five year wealth tax exemption in respect of their non-French assets.

The liability is calculated at 0.25 percent of net asset value between €1.3M and €3M and 0.50% for any wealth exceeding €3M. It is important to note that the appropriate rate applies to the full amount once the limits are exceeded. Penalties for late filing have increased from 5 percent to 10 percent.

Gifts Tax and Estate Duties Payable in 2012

• Transfers between spouses or members of a PACS agreement are exempt from French inheritance tax. The following rates apply however to lifetime gifts, after a tax-free allowance of €80,724:

• Transfers (through lifetime gifts or succession) between parents and children are taxed on the following sliding scale after a tax-free allowance of €159,325:

• Transfers between siblings benefit from a €15,932 tax free abatement and the excess gives rise to a charge calculated as follows:

• The rate of inheritance tax for transfers of assets to nephews and nieces is 55 percent after a tax-free allowance of €7,967 each. Where nephews and nieces inherit in lieu of their mother or father the rate applicable may be that used for transfers between siblings but the €15,932 is shared.
• Transfers of assets to other relations up to the fourth degree are taxed at 55 percent and all other transfers (to remote relatives or unrelated individuals) are taxed at 60 percent after a small tax-free allowance of €1,594.
• The gift tax allowance for a lifetime gifts from a grandparent to a grandchild is €31,865. It is fixed at €5,310 for lifetime gifts made by a great-grandparent.

This document has been prepared as a general guide.  It is not a substitute for professional advice.  Neither PKF (Channel Islands) Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document.

PKF (Channel Islands) Limited is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.