The new France-Jersey and France- Guernsey Tax Information Exchange Agreement have now entered into force
New tax planning opportunities for real estate structures investing in France
In order to promote the transparency and exchange of information relating to global tax matters and in order to fight international tax fraud and evasion, France has signed with Jersey on 23 March 2009, and with Guernsey on 24 Mars 2009, a Tax Information Exchange Agreement (“TIEA”). Both TIEA have now been ratified, and have been entered in force on the 4 October 2010 (for Guernsey) and on the 11 October2010 (for Jersey).
France has signed similar agreements with Isle of Man (entered into force on the 4 October 2010), the BVI, San Marino, Andorra, Gibraltar, Liechtenstein, Turks & Caicos Islands, Caiman Islands, Bermudas, Vanuatu and Uruguay.
Historically for French 3% tax purposes, Jersey and Guernsey based entities could not apply for a conditional exemption. These two TIEA are to be deemed as a mutual assistance provision contained in tax treaty. Therefore, one of the key benefits of the TIEA is that Jersey and Guernsey investments funds and real estate holding structures should qualify for exemption from the 3% tax in France. The effect of this will be to put Jersey and Guernsey vehicles owning French real estate on a level playing field with EU member states. Such vehicles will, on the one hand, be able to enjoy the benefits of the efficient regulatory and tax environment offered by Jersey and Guernsey without, on the other hand, suffering a tax disadvantage in France.
The scope of the France-Jersey and Guernsey tax information exchange agreement
The TIEA is not a proper double tax treaty for the avoidance of double taxation and the prevention of fiscal evasion. Its scope is indeed limited to tax exchange of information between the two countries.
The object of the agreement is that the competent authorities of the two counties shall provide assistance through exchange of information that is foreseeably relevant to the administration and enforcement of their domestic tax laws. This includes information relevant to the determination, assessment, enforcement or collection of tax, or to investigation or prosecution of criminal tax matters. In the case of France, the taxes covered are income tax, corporation tax, taxes on salaries, wealth tax, inheritance and gift taxes, registration duties on transactions and VAT.
Each country shall ensure that its competent authorities have the authority to obtain and provide upon request:
a) information held by banks or other financial institutions;
b) information regarding the legal and beneficial ownership of companies, partnerships and other persons, including in the case of collective investment funds, information on shares, units or other interests;
c) in the case of a foundation, information on the founders, members of the foundation council and beneficiaries;
d) in the case of trusts, information on settlors, trustees, protectors and beneficiaries.
There is a requirement that the tax authorities have to act to obtain such information. Indeed, if the information in the possession of the tax authority of the requested country is not sufficient to enable it to comply with the request of information, that country can use at its own discretion all relevant information gathering measures necessary to provide the information requested. Also, each country will be able to visit the other country to conduct interviews of persons and copy their books and records (but only after obtaining the consent of those persons).
However, the TIEA contemplates only the exchange of information on specific requests and subject to strict conditions. It does not contemplate “fishing expeditions” by tax authorities.
Please note that only the Jersey treaty has a specific clause on pensions which was inserted at Jersey’s discretion.
The 3% property tax
The French 3% tax is a real estate tax that is assessed annually on the fair market value of real property in France, and owned directly or indirectly by French and foreign entities, including Trusts since 1 January 2008 (article 990 D of the French Tax Code). As this tax is based on the fair market value of the French properties, it is not possible to make deduction for any mortgage on the property.
The purpose of the 3% tax is to enable the French Tax Authorities to know the identity of the ultimate beneficial owners of the French real estate, in situation where French wealth tax could be applicable. In case such disclosure is not made or is not reliable, the 3% tax is due by all the interposed entities.
The French Tax Code provides with a list of exemptions from the 3% real estate tax, which include:
Non real estate companies (companies which French real estate represents less than 50% of the total French assets);
Entities whose shares are listed on a regulated stock exchange market;
French entities or entities established in the European Union (subject to certain filing obligations);
Or entities having their effective place of management located in a country with which France has signed a double tax treaty providing for mutual assistance or a non discrimination clause (subject to certain filing obligations).
Impact of the TIEA on the 3% property tax.
The TIEA is to be deemed as a mutual assistance clause contained in tax treaty.
Therefore, subject to compliance with certain reporting obligations, the 3% tax should apply neither to Jersey or Guernsey entities owning directly or indirectly real property in France, nor to Jersey or Guernsey entities without legal personality owning directly or indirectly real property in France, provided that they have been created under the laws of Jersey or Guernsey.
In practice, Jersey/Guernsey vehicles will, subject to making the requisite filings with the French Tax Authorities, be exempt from the 3% annual tax. This should concern:
Jersey/Guernsey companies directly or indirectly owning property in France
Jersey/Guernsey limited partnerships whose general partner is a Jersey/Guernsey company and which own property in France
Jersey/Guernsey companies which are trustees of Jersey/Guernsey Trusts which own directly or indirectly property in France
However a full disclosure to the French Tax Authorities is necessary in order to enjoy the 3% exemption. The disclosure obligations relate to the location of the French real estate, its description, its fair market value, the names and addresses of shareholders of the foreign entity and the number of shares held by each shareholder.
Regarding Trusts, the Trustees (or any persons mandated by them) will need to disclose, or annually disclose, information on the French real estate and on the members of the Trusts “owning” the real estate. In this respect, the French Tax Authorities consider that if the Trust is revocable, the settlor is supposed to have the “rights” over the real estate and must be disclosed, and that if the Trust is irrevocable the beneficiaries are supposed to have those rights and must be disclosed. In addition, for pure information purposes, the French Tax Authorities can also request that all the members of the Trusts are disclosed and ask for a copy of the Trust deed.
Some solutions may however exist to avoid such a heavy disclosure, as it can be a major bar to investments in French property through foreign structures.
Other impacts of the TIEA
According to article 164 C of the French Tax Code, non French residents (there are special rules if they are French nationals) are taxed on the notional income of any French residential property which they can enjoy, even if they do not own it. The notional income is calculated as 3 times the annual rental value of the property owned in France. If the property is rented out, notional income taxation still applies, but only if the notional income is greater than the real French rental income received.
The French Tax Authorities have expressed that the TIEA will not prevent the application of article 164 C of the French Tax Code, so Jersey or Guernsey nationals should be subject to this specific tax if they can enjoy a French property (whether they own it, have a free occupation, or are shareholders of a foreign company owning French real estate..). However, individuals resident in Jersey or Guernsey having British nationality, including those who are considered Channel Islanders or Manxmen under Article 6 of the 3rd Protocol to the Act of Accession of the United Kingdom to the European Communities of 1972, should be treated as individuals resident in Jersey or Guernsey having French nationality for the purposes this article 164C of the French Tax Code. They should therefore be able to enjoy a notional income tax exemption but only if they can justify that they are subject in their country to income tax of at least 2/3 of what it would have been if they were resident of France.
Heavier measures to penalize fraud linked to assets located abroad
France has recently introduced new measures providing heavier sanctions in case of fraud committed through countries that have no banking information exchange agreements with France. The status of limitation has been extended to 10 years, instead of 3 years, for failure to comply involving these countries. As explained in two new statements of practice dated 12 April 2010, failure for French residents to declare reference for opened, used or closed foreign account will trigger a fine of € 1,500 (compared to €750 before), or €10,000 for each account when it is held in a state that does not allow access to banking information. Also, failure to declare life insurance contracts subscribed will now be subject to the same penalties.
Jersey and Guernsey should now be included in the official list of states enabling the exchange of this banking information (this list is updated each year), and should therefore avoid those heavier measures.
This article is for general information only and is not intended to provide legal advice
©2010 Caroline Cohen, the French Law Practice