FRENCH TAX CHANGES 2011 WEALTH TAX

Transcription

1 FRENCH TAX CHANGES 2011 On 6 th July 2011, the French Senate adpted the draft bill cncerning the review f the French taxatin system ( Prject de Li de Finances Rectificative pur 2011). Subsequently, the text has been referred t the Cnstitutinal Cuncil and the Cuncil has a duty t rule within ne mnth, as t whether r nt the planned changes are acceptable, i.e. that they are in accrdance with French cnstitutinal law. Prviding that n changes are made (which can nly be nw n the grunds that the prpsals are fund t be uncnstitutinal), the next step wuld be that the text f the bill will be fficially published. Only at that stage, will it becme law. Shwn belw is a summary f ur understanding f the principle changes. WEALTH TAX The entry level fr wealth tax will be increased frm 800,000 t 1.3 millin, with effect frm The deadline fr wealth tax returns fr 2011 will be pstpned until 30 th September Taxpayers with net taxable assets f at least 1.3 millin will be taxed fr 2011 n the existing barème scale. The buclier fiscal and the plafnnement will be ablished in Hwever, fr thse husehlds f mdest means, there will be a system f capping the taxe fncière fr the principal residence nly, where this exceeds 50% f the taxable incme f the husehld. Furthermre, in rder t avid the Treasury having t send ut cheques in 2012 t thse wh benefit frm the buclier fiscal in 2011, it is ur understanding that yu will be able t estimate the amunt f yur buclier fiscal rebate and deduct this frm yur wealth tax bill in Frm 2012, there will be tw bands: 1,300,000 t 2,999,999; and 3,000,000 and abve. Frm 2012, there will be tw tax rates: 0.25% fr thse with assets between 1,300,000 and 2,999,999; and 0.50% fr assets in excess f 3,000,000.

2 The rates will nt be prgressive and the bands will nly be used t determine the tax rate that will apply t all assets frm the first eur. Hwever, t smth ut the effects f the tw separate threshlds, a discunt methd will be established fr assets between 1.3 millin and 1.4 millin, as well as fr assets between 3 millin and 3.2 millin. Fr thse in the first bracket, it will nt be necessary t cmplete a separate wealth tax return and yu will nly need t reprt the infrmatin n yur incme tax return. INHERITANCE TAX & GIFT TAX The last tw bands f the inheritance tax scale fr successins and dnatins made in direct line, as well as fr gifts between spuses and partners bund by a PACS, will be increased, as fllws: frm 35% t 40% frm 40% t 45% The gift tax allwance perid - which was previusly reduced t 6 years frm 10 years in is t be extended again t 10 years. It is expected that the new rules will apply with effect frm the date f entry int frce f the law. Cnsequently, fr dnatins already made between 6 and 10 years ag, the amunts will be reinstated in the calculatin f inheritance tax, in the event f the death f a dnr befre the end f the ten year perid frm the date f the dnatin. Fr an initial perid, hwever, dnatins already made will benefit frm a frm f taper relief depending upn hw lng ag the dnatin was made, as fllws: 10% if mre than 6 years and less than 7 years 20% if mre than 7 years and less than 8 years 30% if mre than 8 years and less than 9 years 40% if mre than 9 years and less than 10 years The current general reductin in gift tax (50% fr dnrs under age 70 and 30% fr dnrs between 70 and 80) is t be ablished. Hwever, sme discunt will be maintained in limited circumstances, fr example, fr the transmissin f shares in a family business, althugh this will be reduced frm 75% t 50%.

3 ASSURANCE VIE Currently, fr amunts invested befre age 70, n the death f the insured persn each beneficiary is liable t a fixed rate f tax f 20% (plus scial taxes ) n amunts exceeding an abatement f 152,500. Hwever, if the investment is made befre becming French resident, there is n liability fr the 20% tax. Frm the date f the law cming int effect: the tax rate will be increased frm 20% t 25%, but nly in respect f the part f the benefit which exceeds 902,838 (based n 2011 rate); and the French tax authrities will cnsider the residence situatin at the date f death (rather than at the date f investment) and arising ut f this the beneficiary will be liable t the tax rates indicated abve, in the fllwing circumstances: where the insured is resident in France at the date f death; r where the beneficiary has been resident in France fr six ut f the last ten years, as at the date f the insured persn s death. Currently, where the death benefits paid are divided, s that ne persn receives the life use and ther beneficiaries receive the bare wnership, it is the persn receiving the life use f the benefit that is liable fr the 20% tax. Thus, if it is the spuse/pacs d partner f the deceased wh has the life use, then there is n withhlding tax payable; this is due t the exemptin arising under the TEPA law. Subsequently, when the benefit eventually passes t the ther beneficiaries, there is n further liability fr tax. Fr the future, whilst the spuse/pacsd partner will remain exempt frm the 20% tax, the abatement f 152,500 will be shared prprtinally and the beneficiaries receiving the bare wnership will be liable t their share f the 20% tax, based n the value f the bare wnership f the benefit that they are entitled t receive. PENSION COMMENCEMENT LUMP SUM (PCLS) Except fr very limited circumstances, the UK PCLS has been taxable in France since the beginning f this year. Currently, in rder t minimise the effect f the taxatin f the PCLS n the verall taxable incme f the taxpayer, a special calculatin f the tax liability is applied t the PCLS. The new rules prpse t replace the existing calculatin f the incme tax with a fixed rate f withhlding tax f 7.5% plus the Cntributin pur le Rembursement de la Dette Sciale (CRDS) f 0.5%. In thery, if the persn receiving the PCLS is the hlder f a Certificate S1, they shuld be exempt frm the CRDS.

4 TRUSTS The new rules will cncern trusts with at least ne f the fllwing: French resident settlr; French resident beneficiary (unless exempted by a Duble Taxatin Treaty (DTT), fr example, the 1963 DTT n inheritance between the UK and France, due t the fact that this was in frce befre France changed its internal rules relating t French resident beneficiaries receiving inheritances); and French situated assets even if the settlr/beneficiaries are nt living in France. A new definitin f a trust has been included in the bill which, in effect, is based n a mixture f definitins frm different surces. Hwever, France des nt have any real cncept f trusts in the Angl-Saxn sense f the wrd, whereby the principle f separatin f prperty wnership between the settlr and the trustees is fundamental t the basis f trust law. Instead, it appears t have taken a view that the majrity f trusts have been created fr the sle purpse f evading taxes and s it is nw seeking t impse taxes at the highest levels pssible. France signed the Hague Cnventin f 1985 n the Recgnitin f Trusts, but has never ratified this Cnventin. Had it dne s, the text that has been included in the current bill wuld be ruled as uncnstitutinal. Hwever, there is ne hpeful light and that is centred n anther Hague Cnventin that France has ratified, which cncerns the law applicable t agency. Under this Cnventin, a trustee f a trust is excluded frm the definitin f an administrateur. Interestingly, in the new bill, the same wrd has been used ften in what appears t be a generic term used fr trustee r manager. Hence, in France s attempt t set the net far and wide, it may actually be pssible fr the Angl-Saxn style trust t escape the definitin, as a matter f French cnstitutinal law! Ntwithstanding the freging, ur understanding f the planned changes is detailed belw. Incme tax Incme received frm a trust will be treated as investment incme, in the hands f the taxpayer. Therefre: 100% f the incme received will be added t ther taxable incme f the husehld; depending upn the verall incme level f the husehld, this culd have the effect f increasing the marginal rate f incme tax f the husehld; and scial taxes, currently at the rate f 12.3% will be payable, in respect f the incme received frm the trust.

5 Trusts cntinued Gift & successin duty regimes The text f the bill lays dwn prvisins fr the attributin f capital between the settlr and the beneficiaries and als fr transfers fr gift and successin duties. Of fundamental imprtance is the cncept f when the taxable event will be deemed as a gift r an inheritance; verall, the emphasis is n the date f the transmissin. The fllwing will be subject t French gift and inheritance taxes: lifetime gifts and inheritance transfers t beneficiaries wh have been resident in France fr at least six ut f the last ten years; the transfer f assets t a trust; and the transfer f French assets wned by a trust. The market value f the relevant trust assets, as at the date f transmissin, will be used fr the basis f calculating the tax liability. Fr new trusts that are set up after 11 th May 2011, r where the trust is set up in a jurisdictin that has nt cncluded a Tax Infrmatin Exchange Agreement with France (referred t as a nn-cperative territry ), the tax rate is 60% in all cases. Fr existing trusts, which are set up in a cperative territry, the rate f tax will be determined, as fllws: if the relatinship between the settlr and the beneficiary can be identified, the tax rate and allwance will be accrding t the standard IHT barème scale. if the beneficiaries are, glbally, the descendants f the settlr, the tax rate will be the tp rate fr descendants in direct line, i.e. 45% (after the enactment f the bill). anything else will be subject t a tax rate f 60%, unless cvered by specific exemptins in the French tax cde, fr example, charities and ther limited cases. The administrateur will be respnsible fr paying the tax, hwever, if the trust is set up in a nn-cperative state, then the beneficiaries f the trust will be jintly and severally liable. In any event, when making a declaratin fr the purpse f calculating inheritance tax liability, beneficiaries will have a duty t declare assets received frm the trust - bth thse received at the time f death f the settlr and in respect f any gifts received frm the trust during the previus 10 years

6 Trusts cntinued Wealth tax (ISF) Generally, the prpsed changes aim t ensure that assets placed in trust will anyway be cnsidered as being wned by the settlr. Furthermre, in the case where the settlr is deceased and the beneficiary is French resident, the beneficiary will be deemed t be the settlr. With effect frm 1 st January 2012, there will be an annual levy f 0.5% f the underlying value f the trust s assets, even if these are less than 3 millin. The administrateur will be liable fr the payment f the levy, hwever, the settlr and/r beneficiaries will be severally liable. The administrateur will have an bligatin t declare the trust assets by 15 June each year and failure t d s will result in a penalty f the greater f 10,000 r 5% f the underlying value f the trust assets. The administrateur, settlr and beneficiaries will be jintly liable fr this penalty. Hwever, the levy will nt be payable where the relevant assets have been declared fr ISF, even if the ttal net taxable assets f the taxpayer are less than the ISF threshld f 1.3 millin. Where the trust is set up in a cperative territry, the levy will nt apply t a discretinary trust that has been set up fr charitable purpses and ther limited exceptins, r ne which has been set up t manage the pensin rights acquired by beneficiaries, as a result f their prfessinal activities, under a pensin plan established by a cmpany r a grup f cmpanies. Clearly, the abve brings all relevant assets int the ISF net fr French residents r fr French prperty held within a trust. Even where a trust is set up in a jurisdictin whereby, in accrdance with the internal rules f that jurisdictin, it wuld be a breach f trust fr the trustees t reprt the details f the settlr/beneficiaries, the bligatin t reprt the value f the trust assets is als impsed n the settlr/beneficiaries cncerned and s cannt escape the net. Applicatin f the rules relating t trusts Once the bill becmes law, the applicatin f the rules will cme via implementing decrees. Hence, we will have t wait t see what transpires befre we can be certain abut hw the abve will actually wrk, in practice.

7 OTHER PREVIOUSLY MENTIONED PROPOSALS RELATED TO SECOND PROPERTIES As has been widely reprted, the planned tax n the résidence secndaire fr nn-residents was quickly scrapped, almst befre it gt ff the starting blck. Sadly, it wuld appear that this was nt because f the deluge f prtests made by expatriates wh have invested in prperty in France, but mre because the gvernment realised that a large number f French natinals living utside f France wuld have been affected by this tax. In view f the fact that it is an electin year in 2012, the gvernment realised that there was a risk that this culd be a vte lser. There was als much written abut the ablitin f the taper relief in respect f capital gains n secnd prperties, at least as cncerned scial taxes. Hwever, this als disappeared frm the agenda as the bill made its passage thrugh parliament. Since this was nt the first time that this prpsal had been raised, hwever, ne cannt help thinking that it may be raised again after next year s electin. 27 July 2011 This utline is prvided fr infrmatin purpses nly. It des nt cnstitute advice r a recmmendatin frm The Spectrum IFA Grup t take any particular actin t mitigate the effects f any ptential changes in French tax legislatin. If yu wuld like t discuss hw these changes may affect yu, please d nt hesitate t cntact yur lcal Spectrum IFA Grup adviser.