Many people purchase a holiday home in France and spend summers on the French Riviera and / or winters in the Alps. Some of them send their children in French schools or universities. They forget that France can be a high tax jurisdiction depending on circumstances. In case of tax residency in France, not only they could end up liable for French income tax and social charges on their worldwide income but legitimate tax planning they have carried out before may suddenly result in significant French tax burden (like French inheritance and foreign trust taxation).
This article gives you an idea about some of tax consequences that French tax residence can involve for any individual and his/her family and the precaution to be taken.
1/ Tax residence under French law
The notion of tax residence is at the heart of the problems and it is at the origin of many disputes with the French tax office and important case law.
The definition of tax residence (Article 4B of Tax Code), is wide and applies, except limited exceptions, to the couple as a single household. Under French law, you can be treated as French tax resident if:
You have your main home or main place of abode in France;
You carry on your main professional activity in France, either self-employed or as an employee;
The centre of your economic interests is in France, e.g. investments, business.
French law and practice state that any one of these three criteria need apply for you to be fiscally resident in France. Children going to school in France with one of the parent staying with them could be sufficient to attract French residency for the all family.
There is particular exposure for Monaco residents where their French holiday home is larger than their home in Monaco or they or their family spend a lot of time in France. There is no classical double tax treaty between France and Monaco, resident of Monaco who does not have the French or Monaco nationality would not be protected against double residency.
2/ Worldwide taxation
If you become resident in France you need to declare your worldwide income from all sources, unless a double tax treaties signed between France and the country where is income is generated deprive France from its taxation right.
As French tax resident, you should also to declare any of your bank accounts opened/closed/used abroad during the taxation year and, in some cases, file a specific trust declaration if you are settlor, beneficiary or trustee of a foreign trust. In case of non-compliance with above reporting requirements, specifics tax penalties can apply. You may also falls into the scope of loan reporting whereby you need to declare the loan you have made and the ones you have taken.
Please note that after 5 years of your tax residency in France, you will be liable for French wealth tax on all your worldwide assets and not only on those located within France.
3/ Exit tax when you leave France
When a taxpayer was a French tax resident for at least six of the ten preceding years, and transfers his/her tax domicile abroad it entails tax and social security contributions on latent capital gain on certain types of French or foreign company shares. Latent capital gain would be taxed unless specific conditions are fulfilled and guarantees are given to the French state.
4/ Taxation of offshore entities’ non-distributed profit
Article 123 bis of French tax code provides that French residents who own 10% or more in a financial investment holding entity situated in a low tax jurisdiction are taxed on a look-through basis on their share of the income arising within the entity, even in the absence of profit distribution. If such entity is registered in a blacklisted territory or a territory with no agreement with France to fight fraud and tax evasion, there is a presumption that the 10% holding limit is reached. In these cases the taxpayer can be assessed on a non-distributed taxable income of the holding entity (subject to the recent decision of French Constitutional Court of 01/03/2017).
5/ Inheritance tax planning
Where the deceased was resident for tax purposes in France, all worldwide assets are within the scope of French inheritance tax. Accordingly, even though a beneficiary may not be resident in France, the whole of the estate is liable to French inheritance tax. As France has a restricted number of tax inheritance treaties, French national law can apply in respect with many countries (like Russia, Cyprus).
Even if there is no taxation in case of the assets’ transfer between husband and wife, the marginal inherence tax in respect with children can do up to 45%.
Please note that the assets transferred by a French resident settlor to a trust established in a blacklisted jurisdiction are subject to 60% inheritance tax rate regardless of how the assets are allocated or distributed upon death. Any existing trust or foundation should be reviewed before moving to France on to avoid punitive taxes and penalties.
What should you do if you have a doubt?
If you think you could fall into the French tax residency scope, it is advisable to carry on a review and analyse your income and assets structuring. It has always been our advice to plan in advance what could be your tax in France, prevent mistakes and see how to benefit from certain specific tax laws which could allow you to reduce your tax burden in a legal way. We are specialised in doing this type of pre-moving tax planning. If you are intending to live mostly on capital or rental income from abroad, France could be a tax efficient jurisdiction. France also has interesting niche tax advantages. Entrepreneur benefit from interesting advantages when they sale their business to retire. Pieces or arts, agricultural and forests investments benefit from privileged tax regime. It also still allow its resident to sell their primary residency without capital gain tax.
You can also compare with a Monaco residency. The fiscal environment in Monaco offers residents the opportunity for financial planning, that may not be not available in other jurisdictions. Residents are not subject to tax in Monaco on their worldwide income and assets. Business environment is good to develop your activity. Furthermore, while inheritance and gift tax is levied it does not apply to the donor’s immediate family. However the cost of living especially the rents are higher and access to the property market is not available to all, so a case by case analysis should be done.
We are very experienced in assisting clients move to France and Monaco in the most tax efficient way possible and would be happy to help you or your family.
This article is published in issue 22 of MONACO БИЗНЕС (Monaco Business) Magazine -
https://issuu.com/monacobusinessmagazine/docs/monaco-business-22-web
Rosemont Consulting SARL assists clients to achieve their estate planning objectives through other alternative legitimate compliant structuring of their assets. Please feel free to contact us.
For further information on Rosemont Consulting SARL and services provided please visit www.rosemont.mc
For any enquiries in worldwide tax and inheritance planning and for French or Monaco tax residence planning, do not hesitate to contact us:
Cécile Acolas – Partner c.acolas@rosemont.mc