Legal news

The new accounting proceeding, introduced recently, and commented by the Administration even more recently, has not raised many discussions so far.

Yet, this new procedure, which relocates the place of the accounting audit in the premises of the Administration, compromises the “sacred” territory of the oral and adversarial debate.

That the tax creates a pecuniary debt for individuals, as well as for companies, and thus, affects the constitutional right of private property, is an evident truth.

Or, since the French tax system is essentially based on tax returns that taxpayers file spontaneously, important means to verify its veracity are recognized to the Administration by the State.

For the businesses, these tax returns are based on social accounting, which serves, on one hand, to establish the principal tax base (CGI ann. III, art 38 quater) and, on the other hand, as a tool to verify the sincerity of the tax returns (LPE, art L. 10).

To this matter, in order to make a critical comparison between the accountancy and the tax return, the Administration has in its disposal the procedure of “accounting audit”, defined as the operation by which the tax administration “controls on the spot, the sincerity of the statements subscribed [by the company] by comparing them with the ledger entries or other supporting documents brought to its knowledge and if needed, can call into question its accuracy “.

As an outcome of the accounting audit, an additional tax may be established, a drawdown that will affect the company’s assets, once again.

Therefore, tax cohabitation exists between the value-creating enterprise, most often with private capital, and the State.

The taxpayers’ rights of defense are at stake, and a solution must be found to balance the rapports between the powerful Administration and the taxpayers.

This is why the procedure of accounting audit, which is an external procedure for the Administration, but binding and intrusive for the company, is strictly framed by the law in the articles L. 47 and sequels of the LPF, and this for a long time now, following the serious incidents between the public authorities and the world of artisans and tradesmen in 1955.

Hence, the law (LPF, Articles L. 13 and L. 47 and seq.) and the regulation provide for (i) the prior sending of an accounting audit notice to the firm, mentioning the years audited and the possibility for the company to have recourse to the counsel of its choice, (ii) the performance of the control operations “on-the-spot” (LPE, art L. 13), and (iii) in principle the prohibition to take files out of the company premises, in order to respect the obligation of an oral and adversarial debate on the spot.

Finally, the duration of intervention on the spot is limited.

If a proposal of rectification is then sent, it must be duly motivated.

The accounting auditing operations are also framed by the judge.

The Council of State, in a judgment of 21st May 1976 specified the four necessary conditions in order to derogate from the principle according to which the auditor cannot take files out of the company premises.

Moreover, the right for the taxpayer, eventually assisted by an advisor, to meet and discuss with the auditor at the headquarters of his company is an essential condition.

This is a procedure which “allows the Administration to be aware of the concrete conditions of the enterprise operations and forces the taxpayer to admit this effort to apprehend the reality through dialogue” or, according to others, to encourage the Administration to ensure the irreplaceable human contact “allowing the auditor to explain himself in the intimacy of a head-to-head”.

This “on-the-spot” debate is based on the idea that only the possibility of an evolutionary and constructive dialogue in the company’s premises is likely to allow the taxpayer to usefully present its first observations, or, depending on the case, to learn from the Administration the innumerable subtleties of the French tax law.

Furthermore, it allows the taxpayer to apprehend in serene conditions the confrontation with the auditing department.

For a long time now, this double legislative and jurisdictional structure allows a moderate and effective fiscal control and the establishment of an entrepreneurial management which is adapted to the requirements of the tax audit.

So, a balance admitted and recognized by all the actors of the tax audit. But, under the impetus of the Secretary of State for Budget and Public Accounts at the time, initiated by a concern for “modernity”, the 2016-1918 law of 29th December 2016 about amended finance for 2016, allowed to the agents of the Administration, when taxpayers are compelled to keep and submit accounting documents by means of computerized systems, to examine the accounts without being present on-the-spot (LPF, Articles L. 13 and L. 47 AA new).

It emerges, from the summary of the reasons of the mentioned law, that this new legislation aims to modernize the procedures of tax audit in business accounting by creating a new world of remote control called “accounting exam”.

The Government has outlined the scope of this new procedure, stating that it “will be particularly appropriate for companies presenting low risk or low complexity issues, thus, not requiring an on-the-spot control.

The administration can in this way, be able to concretize the biggest operations on the taxpayers who justify it “.

Normally, an accounting notice, will specify the period of the review and indicate the ability of the taxpayer to be assisted by the counsel of their choice.

The taxpayer will later be informed of the results of the accounting review, within 6 months at the latest.

Actually, the on-the-spot control, which as has been pointed, is fundamentally protective and really important for companies in the management of tax auditing, can be dismissed at the discretion of the tax authorities.

In her report on behalf of the Finance Committee of the National Assembly, Valérie Rabaul, general rapporteur, reminds that the accounting audit is surrounded by many guarantees for the taxpayer under Article L.47 of the LPF.

She quotes a case law of the Council of State which has held in particular, that this procedure does not exceed “the needs related to the economic well-being of the country”, does not violate “the right of the taxpayer for respect to his private life”, nor the “freedom of information and expression” or the “right to a fair trial” provided in Articles 6, 8 and 10 of the Convention for the Protection of Human Rights and Fundamental Freedoms.

Referring to the important decision of the Council of State in 1976, the report also points out the principle, pursuant to which, the accounting audit must be conducted on the spot in order to provide the taxpayer with “opportunities for an oral and adversarial debate” and to allow it to meet the auditor in order to discuss its point of view.

Further, the report also states that, in accordance with the general principle issued by the Council of State, and even if the text does not provide it, the Administration, in case of an accounting exam, is obliged to offer to the taxpayer, the possibility of an oral and adversarial debate.

In addition, the Council of State ensures the respect of a minimum investigation at the headquarters of the company, since it is a fundamental guarantee to allow the taxpayer to profit from the oral or adversarial debate to which he is entitled to, in case of an accounting audit.

This protection is affirmed even against the opinion of the eminent Commissioner of the Government, Mr. Jacques Arrighi de Casanova, who, in his conclusions under a decision of the Council of State on December 10, 1999, proposed to separate the place where the accounting audit is exercised from the proof of the existence of an oral and adversarial debate, by considering that a dialogue between the taxpayer and the auditor on the spot was, in his opinion, irrelevant and that “the tax judge would demonstrate excessive formalism by canceling an imposition, on the sole ground that the auditor did not carry out a minimum of investigation at the headquarters of the company”.

By not retaining the position of its Government Commissioner, the Council of State demonstrates the importance that it attaches to the respect of the on-the-spot control, a guarantee that the debate between the audited taxpayer and the Administration is oral and adversarial.

It goes even more far and poses a presumption of an oral and adversarial debate, when the accounting audit has taken place on the premises of the audited taxpayer.

The pre-assessment of this new “accounting exam” indicated that the Government’s objective was to increase the number of controls, by benefiting from the time saved by this new procedure.

The general reporter, Mrs. Valérie Rabault précised that this period “aims to allow the Administration to effectuate more controls.

Rather than the on-the-spot audit, in which dialogue is certainly possible, the proposed provisions offer the possibility of controls by the Administration from its own offices, […] without further displacement of the staff of the General Directorate of public finances.”

The main purpose of the new scheme is to increase the profits and, therefore, it is comprehensive to question about the impact that this objective will going to have on the quality of the audits.

In the pre-evaluation is further specified that “these simplifications should not be aimed at reducing the taxpayers’ guarantees but at stopping the delaying tactics”, without specifying whether the “debate on-the-spot” was considered as “dilatory”.

The number of the additional controls envisaged which should justify this measure, has not been quantified by the Government either.

It is because nothing seems to change in appearance, that particular vigilance is required.

The accounting exam is effectuated without the presence of the auditor on the spot, without the head-to-head meeting between the economic sphere of the company and the Administration, in favorable conditions for the defense of the taxpayer.

Actually, many elements are now afforded by the taxpayer, and no longer by the Administration. This is the contribution of “modernity”, linked to the existence of computerized accounting.

The Constitutional Council does not seem to identify a problem, as, in its decision about the financial law for 2016, it has declared conform to the Constitution the procedure of accounting exam, stating that the new legal dispositions “do not confer [to the Administration] an enforcement power” and that ” do not deprive the taxpayer of the guarantees provided in the Tax Procedures Book in case the Administration exercises its right of control” ; as a result, they “do not violate the rights of defense or any other constitutional requirement”.

The parliamentarians who seized the Constitutional Council in application of Article 61 of the Constitution, nevertheless, argued that this measure affects the respect of the rights of the defense, by not allowing an oral and adversarial debate.

The administrative doctrine confirms both the parliamentary debates and the remarks of the Central Audit Office and states that the “audit” is the operation which ensures the sincerity of a tax return by comparing it with external elements, and that it may be for a company: either an accounting audit, which we shall call “classical”, or an accounting exam, which must now be described as “modern”.

In the latter case, the service will perform, from the office, the examination of the accounts without visiting the company, even if the taxpayer expressly requests it. The latter may still, fortunately, ask to be heard by the audit department to discuss about the case, but, this interview takes place on the premises of the Administration.

Once the accounting examination terminated, the administrative doctrine specifies that a point must be made with the taxpayer by phone, prior to sending the proposal for rectification. If the taxpayer asks to be received, the appointment will take place on the premises of the Administration.

The procedures to “audit” the companies’ are now well established.

The accounting audit by the service, and the verification of legal and accounting documents, has as a corollary the protection of the company through an oral and adversarial debate, itself guaranteed by the presence of the auditor on the spot.

The accounting exam by the service, and the verification of legal and accounting documents, has as a corollary the protection of the company through an oral and adversarial debate, itself substantially guaranteed by the absolute prohibition of the auditor to be present on the spot…

From the practitioners’ point of view, what about the rights of defense for the taxpayer?

What about the understanding of the economic structure investigated by the service?

What about the protection of the entrepreneur?

Finally, what will the qualitative and quantitative use of this new procedure by the Administration be?

The tax audit is based, since a very long time, on dialogue and a consensual approach between the Administration and the audited taxpayer.

For the latter, this is an external audit to determine whether the tax law has been correctly applied.

A constructive and non-conflictual relationship should be established, allowing the Administration to become aware of the way the activity is exercised.

The on-the-spot control is thus, a prerequisite, for oral and adversarial debate.

In absence of such an on-the-spot presence, the need for assistance by advisers experienced in the tax procedure field is considerably strengthened.

It will be up to these councils, to maintain the oral and adversarial debate even outside the premises of the company, in order to compensate, as much as possible it may be, the immense deficit of protection created by this “modernity of everything digital”.

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180226 ACCOUNTING AUDIT

Application of the long-term capital gains (“plus-values à long terme”) regime to securities not recorded on the balance sheet

Securities not recorded in the balance sheet may benefit from the long-term capital gains regime, provided that they qualify as fixed assets by their nature and are sold after a period of retention of two years.

Council of State, 9th and 10th Chamber, December 23rd 2016, n° 375746, “Company Cap Gemini”.

We know that professional gains are divided into two categories, which determine their tax regime: short-term capital gains, taxed at the common law rate, and long-term capital gains, which follow a particular regime, according to whether the business is subject to income tax (“impôt sur le revenu”) or is subject to corporation tax (“impôt sur les sociétés”).

The long-term capital gains regime is defined as opposed to the short-term capital gains regime. Thus, Article 39 (3) of the General Tax Code (“Code Général des Impôts”) provides that this regime applies to capital gains which are not subject to the short-term regime. Article 39 (2) specifies that the short-term capital gains regime applies to capital gains from the sale of items acquired or created less than two years ago.

Only the disposal of fixed assets entitles the holder to the long-term capital gains regime. These securities are defined as those that the company intends to hold on a long-term basis or that it is not able to resell at short notice. They are representative of capital shares or long-term investments.

Gains from the sale of marketable securities (“valeurs mobilières de placement”) are taxable as revenue (“produit d’exploitation”) at the standard rate of tax. This category includes securities acquired with a view to realizing a gain at short term.

In addition, if it is not possible to claim the record of the accounting entry, the company must be able to justify the holding period by elements that can give certain date to its acquisition of the security.

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170510 Application of the long-term capital gains regime to securities n…

Despite an uncertain financial environment and a dense and complex legislation, the life insurance remains in 2017 the first financial investment for French. Indeed, this one still represent an excellent technique of current income optimization, and a great means of future income incorporation, gathering liquidities and relative safety.

1- Despite the doubts raised by the Sapin 2 law which grants to the Financial Stability Board the possibility to adopt, under certain conditions, with respect to all or part of the insurers and reinsurers, some interim measures, such as repurchase limitation, advance, or arbitrations (C. mon. fin., art. L. 631-2-1, 5° ter), the life-insurance remains at this day the long-term investment support for French financial assets.

2- This finding is no surprise in itself: the current state of law and fiscal environment of this investment offer to the subscriber a placement of incomparable usefulness.

Indeed, the allocation of part of the incomes or part of the product of patrimonial rearrangement on a single or multiple life-insurance contracts will allow the investor to build an actual or future flow of income, in a very interesting fiscal framework.

3- Life-insurance hold numerous perks that made it a remarkable investment, and a quite unique one.

4- First of all, with the ability of repurchase, or with the mechanism of advance, life-insurance is an investment relatively liquid. Thus, the investor can adapt his resources to his needs, with capitalization as boundary.

There is an essential advantage over real estate physical ownership. In particular, life-insurance allow efficient response to challenges raised by life span elongation and its relative, the increase in time of dependency risk. This issue is more than ever actual, since baby boomers are currently more than 70 years old.

Thanks to repurchase, the subscriber can benefit immediately of the amount of resources he needs, without being limited by the result of his investment. Thus, he can cope with any rapid increase of expenses, due to a brutal degradation of his health.

5- Also, the fiscal regime of repurchase or life security is extremely favorable, particularly when compared to financial placement. With a limited mandatory levy rate, after 8 years, at 23%, life-insurance is fiscally a most interesting investment, especially for heavy taxed household.

More interesting also is the fact that capitalized products are not submit to taxation as long as they are not repurchased. In a situation of damaged public account, which means of patrimonial tax increase, the reorientation of patrimonial revenues into life-insurance (or capitalization contract) become in consequence an income tax-efficiency strategy. This strategy is simple and efficient, especially for the management of surplus incomes, which means incomes that are not necessary to the payment of charges and daily life needs. Because in order to neutralize these incomes, it is necessary to favor capitalization investment, as life-insurance, capitalization contract, or PEA, to the detriment of investment that imply income distribution.

This strategy appears even more interesting when considered that life-insurance placement, especially for funds in euro currency, can also be part of a wealth-tax reduction strategy, with the capping mechanism.

6- Finally, life-insurance allow to gather incomes and optimize in the meantime civilly and fiscally, the transmission of assets that the subscriber would not have consumed, without the need to resort, during his lifetime, to ownership dismemberment. No doubt, to consider only the fiscal angle, the transmission to his descendants of the bare ownership of a financial asset or real estate in dismemberment, especially housed in a civil society, can be a less expensive operation than the allocation to his children from the death benefit after settlement of the contract. However, for the reasons set out above, it is patrimonially very important, when age increases and over time the risks of new spending, to maintain freehold assets in assets to increase if needed liquidity immediately available beyond investment returns. Now, the characteristic of the usufruct is that its value decreases with time. In the case of a need for the assets in full ownership, the fraction of the price that the usufructuary can receive decreases as his age advances, and thus correlatively the income that he could derive from the placement of the price. It is therefore preferable to delay as far as possible transfers at death.

7- Of course, investment in life insurance is a transaction with limits, some of which are cyclical. Thus, we see an exceptional period in which the selection of the euro fund, which still accounts for 80% of outstanding life insurance, offered the investor both the guarantee of an interest rate substantially higher than inflation (And therefore the possibility of recovering at any time the totality of the invested capital, plus interest) and the liquidity of the investment, through the right of repurchase. Today, and probably for a long time, the average yield of the euro fund is low or even zero, especially if it is considered net of inflation. And this decline in yield is probably not complete, especially as inflation risks increase.

Optimizing current income by life insurance.

The simplest way to increase the net cash available to the investor is to reduce the taxation resulting from the holding of assets.

The sale of a heavily taxed asset and the reclaiming of the sale price on a life insurance contract can achieve such a result because of its tax regime (A).

However, the optimal transaction must consider the risk of taxable capital gain and the other objectives of the transferor, in particular its transmission strategy (B).

A – Life insurance fiscal regime.

12 – The tax regime for the taxation of the proceeds of life insurance contracts is essentially based on an incentive for long-term savings based on the degree of taxation depending on the duration of the contract.

It follows that:

– The absence of taxation of products during the formation phase of savings.

– The option for the subscriber to choose a withholding tax at the time of the availability of savings, rather than subjecting the income to the progressive scale.

– The degressivity of the rate of the flat-rate withholding tax according to the duration of the contract

The profit after 8 years of a reduction of a variable amount according to the family situation of the subscriber (4600 € or 9200 €).

The main tax benefit to which the proceeds of a capitalization or life insurance contract accrue is the definition of the tax term of the contract. Since the amending finance law for 1989, this is assessed in relation to the date of the first installment payment on the life insurance contract and not in relation to the amount of the premium paid.

This principle is applicable to all contracts concluded from 1 January 1990.

13 – This definition of tax time favors deal strategies based firstly on the purchase of one or more contracts for the sole purpose of taking a date, then on the payment of a significant premium a few years later, resulting for example from a patrimonial arbitration, and finally a series of partial repurchases benefiting from a reduced rate.

A traditional strategy is to sell an asset of average profitability, lower in any case after tax, to the cash available to the subscriber setting up a policy of partial repurchase.

Example

For example, X, 65, owns a building of 500,000 €. Its gross income from land amounts to 18,500 €. The deductible expenses are 3,000 €. It is taxed in the marginal bracket of 41%. That is a tax of 6 355 €. Amount of social security contributions: 2,402 €. Income after taxes and charges is thus 6,743 €.

The comparison with the life insurance is without appeal (comparison with yield to 3%).

The taxable base = amount of the partial repurchase – [total premiums paid on the date of the partial repurchase X (amount of the partial repurchase / total repurchase value at the date of the partial repurchase)]: Thus 15,000 € – [500,000 € X (15,000 € / 515,000 €)] = 437 €.

Income tax: if the proceeds of the sale have been reinvested on a contract for more than 8 years, the deduction will be 32.77 € (437 € X 7.5%), but the subscriber will receive a tax credit equal to the corresponding percentage of the amount of these products, retained within the limit equal to the difference between the amount of the abatement (€ 4,600 or € 9,200, as the case may be) and the total amount of these products allowing this abatement to be declared to income tax with progressive scale.

Social levy: 437 X 15.5% = 61.73 €

Available income: 14,932.27 €

14 – The higher the marginal tax rate, the more the taxpayer has an interest in opting for the PFL. However, in choosing the option, the underwriter must consider several parameters.

First, the social contributions paid on the investment interest of the assets are deductible at 5.1% on the total income of the tax household in the year of collection of social security contributions. This deduction is not possible in the case of an option for the PFL.

In the case of a total premium exceeding the average of the net income from which the taxpayer has been subject to income tax for the past 3 years, the taxpayer who opts for optimization on the scale may Benefit from the quotient regime of Article 163-0 A General Tax Code. This is an exceptional income which, by its nature, is not likely to be collected annually. Moreover, there is no reason to treat, in this respect, the capital received when the life insurance contract was terminated differently from pension benefits paid in the form of capital. However, it must be borne in mind that only the fraction of products which are taxable in the redemption must be taken into account for the assessment of its exceptional nature and for its taxation.

Can the partial repurchase benefit from the same favor? In fact, the question can only arise for very large repurchase, which therefore constitute an exceptional income. For these repurchases, the quotient mechanism could apply.

B. – Replacement of Life Insurance Funds

15 – Restructuring the wealth to life insurance or the capitalization contract can therefore be an income strategy. This operation can take many different forms. For example, an investor may wish to sell an asset and reinvest the proceeds in one of these contracts in order to increase the liquidity of his assets and optimize the taxation of income. On the contrary, it may wish to retain the asset but to neutralize the taxation, for example in the context of an OBO strategy (sell to himself : Owner Buy Out), with the proceeds being transferred in part on a life insurance policy for partial repurchase and for another on the loan guarantee support.

Depending on the strategy chosen, the size of the life insurance or the capitalization contract will vary.

In any case, to be fully effective, the transaction must neutralize the capital gain on sale, if this is important, and satisfy the other objectives of the investor, such as transmission, for example.

16 – Given the narrow framework of this chronicle, we will only consider the simplest strategy that takes the following form: asset sale (real estate for example) and replaces the proceeds of sale on a life insurance contract or capitalization with scheduled repurchases in order to benefit from the tax advantages of Article 125-0 A of the French General Tax Code.

17 – Example. For example, X, 65, two children, 40 and 38, each with two descendants, wants to sell a 1 million-euro building held for 13 years, with a capital gain of 600,000 €.

If X sells, then places the funds in a life insurance contract the total cost of the transaction is as follows:

18 – Cost of the sell. – For transfers made since 1 September 2014 and regardless of the nature of the assets, the rate and the rate of the deduction for a different holding period for the determination of the tax base of capital gains on property tax on income and social contributions. In this case, the taxable capital gain would be 312,000 € (600,000 X 52%). It results in the following charges:

– Income Tax = 312,000 X 19%, thus 59,280 € ;

– Taxable Capital Gain (CG, 312,000 €) being superior to 50,000 €, the high capital gains tax applies. The amount of the surplus value being greater than 260,000 €, the tax is 6% of the capital gain, ie 18,720 €;

– Social security contributions amounted to 80,724 € (520,800 € [ie 600,000 € X 86.8%] X 15.5%).

The total cost of the sale, excluding legal fees, would therefore be 59,280 € + 18,720 € + 80,724 € = 158,724 €

19 – Cost of transmission. – If the transferor wishes to transfer the proceeds of the sale to a life insurance or an accumulation contract while still following a strategy of transmission to the children, the choice of capitalization contract seems to be necessary:

A) Placement of the sale price in life insurance with yield repurchases and beneficiary clauses designating the children in equal shares. Suppose that the value of the guarantee is € 840,000 at the death of the insured. Due to the insured’s age at the time of the premium payment, the provisions of article 990 I of the General Tax Code apply

Plate of levy per child: 420,000 €

Abatement per child: 152,500 €.

Levy due: € 267,500 X 20% = € 53,500. That is € 106,000.

B) Contribution of the price (€ 840,000) to a civil society that subscribes to a capitalization agreement and donation-sharing of the bare ownership of the shares for the benefit of the children. Given the age of X, the bare ownership of the shares is worth 60% of their market value. X therefore gives per child: 840,000 / 2 X 60% or 252,000 €. Taxable assets after direct deduction: € 152,000. Cost of the donation of X: 152,000 X 20% – 1,806 = 28,594 € per child i.e. 57,188 €.

The total cost of the transfer + donation transaction is € 215,912.

20 – Several strategies can be put in place to reduce this cost. The most radical one is a donation of the full ownership of the building before the transfer. The operation could be envisaged in the following way: donation of the full ownership to its children, transfer of the property, advance of the price of sale by children in current account to a civil society with weak capital constituted by X and its children (by Donation of the bare ownership of the shares to these). Finally, subscription by civil society of a capitalization contract.

Tax cost of the operation: each donor child is taxed on the following basis: 500,000 € – 100,000 € = 400,000 €. Either a cost per child of € 400,000 X 20% – € 1,806 = € 78,194. That is a total cost of 156,388 € (excluding legal fees).

21 – The operation may also be carried out in the following way: donation to the children of the bare ownership of the building with a charge to sell at the request of the disposer who reserves the usufruct.

Cost of the donation: gross taxable base 60% of the market value of the property, or 600,000 €.

Net taxable amount per child: 600,000 € / 2 – 100,000 € = 200,000 €.
Rights due per child = 200,000 € X 20% – 1,806 € or 38,194 €
Total cost of € 76,388 (excluding legal fees)

22 – Cost of transfer of usufruct. – By hypothesis, the cession is concomitant with the donation. According to article 669 of the General Tax Code, X usufructuary, aged 65, usufruct is worth 40% of the total ownership, which leads to taxing 40% of the total capital gain (312,000 € X 40% = 124.800 €). The cost of the transfer, excluding transaction costs, will be:

– income tax: 124,800 X 19% = € 23,712;

– the taxable capital gain exceeding € 50,000, the tax on high capital gains applies. The amount of the capital gain being between 110,001 € and 150,000 €, the tax is 3% of the capital gain i.e. 3,720 €.

– Social contributions: € 520,800 X 40% X 15,5% or € 32,290.

The sale therefore has a cost of € 59,722 in respect of its capital gain on usufruct.

Total cost of the operation: 76,388 € + 59,722 € = 136,110 €.

23 – In principle, pursuant to Article 621 of the Civil Code: “In the event of the simultaneous sale of the usufruct and the bare ownership of a property, the price is divided between the usufruct and the bare ownership according to the value of each of these rights, unless the parties agree to redirect the usufruct on the price “. The replenishment of the price is indispensable to the satisfaction of the objectives. There are several possibilities. The simplest and most effective regarding the objectives is to stipulate a report of usufruct on the price with re-use of it in the subscription of shares of a civil society, which subscribes a contract of capitalization.

24 – Undoubtedly, in order to confer maximum rights on X, a quasi-usufruct agreement could be signed before the sale, with the sale price being invested by him on a capitalization contract. It would even be possible to envisage a subsequent arrangement which in this case would considerably reduce the tax cost of transferring X’s other assets to his children and optimize the transmission to the grandchildren. As a result of the assignment, X subscribes to two life insurance contracts, each for the benefit of a usufructuary child and two children designated as bare owners in equal shares.

Assume a death in 15 years.

Value of each contract at death: 420,000 €

Tax Costs:

* For the usufructuary (age at death of the insured respectively 54 and 55):

Basis of the levy: 420,000 € X 50%. That is € 105,000

Abatement: 152,500 €

Amount subject to the levy: 57,500 €.

Levy: 11,500 €

* For each bare-owner :

Basis of the levy: 420,000 € / 2 X 50% thus 105,000 €

Abatement: 152,500 € / 2 (General Tax Code art. 990 I) = 76,250 €

Amount subject to the levy: 28,750 €.

Levy: 5,750 €

Total cost: 23,000 €

25 – This strategy is all the more advisable given that the Conseil d’Etat has ruled on the exclusion of abuse of rights when the quasi-usufruct agreement is signed at the same time as the donation. By choosing to donate the bare ownership and transferring the sale price on the shares of a civil society to the CG, the investor has both changed the taxation of his income and anticipated the transfer.

2. The construction of future income by life insurance

Except for a major catastrophe, a man aged 60 has an average of 22.7 years of life expectancy, compared with 27.3 years for a woman.

As a result, in a long-term income-building policy, there is need to take into account the lifetime, after the liquidation of his pension rights and above all the foreseeable duration of the life expectancy in good health, or more precisely the life span in poor health.

In this context, it is essential for the investor to manage the contract over the long term (A) and to anticipate the method of exit from the contract (B).

A – Contract management on long-term

27 – For the reasons set out in the preamble, strategies for building future income based on life insurance can only be based on contracts where a part of the rights is more or less important (depending on different criteria). Expressed in units of account. Only multi-unit contracts offer the subscriber the possibility of controlling the management of the contract over the long term, mainly through arbitration. This makes it possible to adapt asset allocation to market developments and to the needs of the investor.

Regarding arbitration, particular attention should be paid, not only to the quality of the eligible funds, but also to other elements of the contract, such as arbitration costs, which can be negotiated, or the conditions for the exercise of arbitration, since these are not organized by the Insurance Code.

28 – If the eligible funds provided for in the contract are not sufficiently diversified to allow such adjustment, the subscriber may amend the contract. The latter may retain the fiscal precedence of the contract if the conditions of the transformation are respected.

For the record, does not entail the tax consequences of a denouement transformation:

– a life insurance contract or a capitalization bond or contract in euros in a bond or contract in which a share or the whole of the premiums paid is allocated to the acquisition of rights expressed in units of account;

– A life insurance contract or a capitalization bond or contract in euros or for which a part or all the premiums paid are allocated to the acquisition of rights expressed in units of account into a bond or contract of which a portion or all of the premiums paid are allocated to the acquisition of rights giving rise to the creation of a diversification reserve.

– A diversified life insurance policy to a Euro-growth contract

B – Contract bail out

29 – Under the contracts, the guarantee can be issued in capital, but also in securities or annuities.

Exit in securities is possible for insurance with all or part of the rights expressed in units of account. According to Article L. 131-1 of the Insurance Code, in the case of life insurance or capitalization transactions, the guaranteed capital or annuity may be expressed in units of account consisting of transferable securities or assets, granting sufficient protection for the savings invested and listed by the Conseil d’Etat. The Contractor or the beneficiary shall obtain the settlement in cash. However, a securities issue is possible, but only for shares and securities which do not confer any voting rights.

Such an exit is however not advised, the option being irrevocable.

30 – In the strategy for constructing future income, the choice of contracts offering a retirement (Perp, Madelin, Perco) may be an opportunity, particularly when the investor has not, during the formation phase, invested all the premiums from its net savings capacity, either because a third party (the company) abounds in the contract, or because it benefits from a tax saving resulting from the payment of the premiums. But even in these schemes, the exit in rent is exceptional because of the weakness of this rent for the member.

For life insurance contracts per se, which do not offer this type of benefit at the time of incorporation, the annuity issue is not attractive from a financial point of view unless the subscriber bets on A long life and that the conditions for the revaluation of the rent are attractive.

In the inverse hypotheses, exit in annuity presents major disadvantages compared to a strategy of partial repurchases.

In addition, the annuities paid by the insurer under a life insurance policy are taxed according to the rules of article 158.6 of the General Tax Code.

However, according to this text, if during the life annuity phase for consideration, the products are exempt from all taxes, irrespective of the lifetime of the contract and the amount of these products (General Tax Code, art 125-OA), on leaving a part of the pension is included in the taxable income according to a scale established by the 1963 Finance Law:

– 70% if the annuitant is less than 50 years of age;

– 50% if it is between the ages of 50 and 59 inclusive;

– 40% if aged between 60 and 69 inclusive;

– And 30% if he is more than 69 years old.

The absence of any change in this scale compared to the rules determining the tax base in the event of repurchase, obviously leads to a strategy based on partial repurchases up to 70 years and then an exit with pension.

Finally, the contract must offer the possibility of an option with guaranteed annuities, so as not to reduce the amount of the pension and allow the beneficiaries to pay the beneficiaries on the death of the remaining guaranteed annuities.

31 – In an income-generating strategy, individual life insurance, considered in addition to specific retirement schemes, still remains an essential investment today. Undoubtedly, this choice has become more complicated than before, due to the irreversible decline of euro funds, the difficulty of choosing a contract, the allocation of assets is understandable for the investor and the financial risks resulting from a market Financial system exposed to a risk of systemic crisis. Yet despite this, this placement still presents incomparable advantages, which make it an indispensable element of the heritage strategy.

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170606 – Income strategy based on life-insurance

The trusts continue to give a hard time to the tax payers, as well as to the practitioners, and, even though, now it really exists in a French Tax Law, there are a lot of uncertainties rest concerning number of issues.

This law concept is polymorph and it brings all the difficulties that we face to understand.

The question of the taxation of the trust incomes was not waiting for the corrected financial law from the 29th July 2011(L. n° 2011-900, 29 juill. 2011, art. 14 : Dr.fisc. 2011, n°30, comm. 461) to arise and the answers, brought by the French legislator, articulate around two texts the cooperation of which is not always evident.

TAXATION OF THE INCOMES OF THE TRUST: THE LEGAL BASIS

Article 120,9° of the French General Tax Code (CGI): taxation of the distributed products

Among two existing legal bases, the article 120,9° is the most ancient one. It specified in the first version, that « The production of «trusts», regardless the consistency of the assets composing the trusts is considered as the incomes under the present article (…)9°».

The aforementioned corrected financial law for the 2011 was intended to modify the text which since that moment is as follows: «The distributed products of trust, defined in the article 792-0 bis, regardless the consistency of the assets or the rights put in the trust, are considered as the revenus under the present article (…)9°».

This last modification is present in the report by the Financial Commission of the National Assembly as the will to «limit a taxation of the distributed products, thus to exempt the reinvested products».

Thus, this article issues the rule of taxation of only the distributed profits or provided to the natural person by the foreign entity.

Hence, it follows from the only fact that the production is made by the trust established abroad, that the complex of those products is liable to taxation without proving by the taxation authority that those incomes come, partly or in the whole, from the foreign chattel or from the foreign debt obligations (BOI-RPPM-RCM-10-30-10-10, 4 mars 2016, § 130).

Indeed, and according to this rule, the production acquired of the capital, but which stays placed and capitalized in the foreign entity is not liable to taxation in France.

At the time of the adoption of the financial law of the 1999 ( L. n° 98-1266, 30 déc. 1998, art. 101 : Dr. fisc. 1999, n° 1, comm. 1), having created the article 123 bis of the French General Tax Code (CGI), the target was clear: to prevent tax evasion by non-distribution of the incomes of the assets indirectly held in the entity located in the State or on the territory with the privileged taxation politics.

Article 123 bis of the French General Taxation Code (CGI): the taxation increased by transparency of the capitalized production

This article that tends to finish with a principle of liability of limitless taxation, constitutes the principle of the taxation in France of the incomes, acquired by a natural person, a French tax resident, who holds directly or indirectly, participation of minimum 10% in the entity, established in the country, where it benefits a privileged tax system for the incomes or not distributed results of activity.

Thus, the taxation is based on the rights, held by the tax payer on the benefits and positive results of the foreign entity, which, in conformity with an article 209B, is a «natural person».

The type of the aimed structure is very vast as along with the notions of the legal entity, of institution and trusts, we find also the notion of «comparable institutions», so as not to exclude anything of the scope of the text.

The trusts were, besides, specifically aimed by the report of the Financial Commission that justified the non-use of the word «trust» by the constitutional obligation that is «the language of the French Republic is French» and that which concluded, on this «francophonic» note, that it did not have intention not to comprehend the structure, specifically cited in 9° of the article 120 (that is trust).

Uncollected incomes, corresponding, thus, to the category of the incomes of the real estate and are liable to taxation on the increased tax base of the 25% (CGI, art. 158, 7,2°) of the tax rate from the scale without tax allowance of 40% (CGI, art. 158, 2,3°), applicable to the dividends as well as to the social security contributions of the current year in which they were acquired.

Combination of the legal bases

A combination of the texts without collision

Since the conditions of the application of the article 123 bis are fulfilled, it is suitable to put a tax on the incomes of the foreign entity on that basis.

The article 120,9° should not be applied except than residually and without putting tax second time on the same incomes, which were already subject to the taxation under the article 123 bis.

The risk of cumulation of the taxation bound with a principle of the taxation of the non-distributed incomes was already pointed out by the parliamentary works of 1999.

The report of the Financial Commission specified that it was necessary «to be sure that the incomes are not levied for the second time at the time of their distribution, as the article 120 of the French General Tax Code (CGI) provides that the paid out and, therefore, collected abroad financial profits should be liable to the taxation in the France».

This risk was excluded by the 4° of the article 123 bis, providing that the distributed or payed to the natural person, liable to tax, incomes, constitute the taxable income only in the part exceeding the sum on which the tax was put as on the acquired incomes.

On the practice, the case of the exceeding distributed incomes to the acquired incomes stay rare, thus the articles 123 bis and 120,9° are combined in very seldom cases.

A possibility to go out of the scope of the article 123 bis of the French General Tax Code (CGI)

Till recently, since it was proved that conditions of application of the article 123 bis were fulfilled, the positive incomes of the entity, which are considered to constitute a chattel capital of the natural person in the proportion of the rights, which it holds directly or indirectly.

It is about irrefragable presumption and the tax payer could not go out of the scope of the article 123 bis from the moment it went in.

In the recurrent context of the censorship by the Constitutional Council of the irrefragable presumption, the Priority Question of Constitutionality (QPC), raised in the case Nabitz, came just at the right moment.

The Council have drawn a direct line of its previous decisions and, if it has validated the conformity of those derogatory rules to the Constitution it is under condition that the natural person will be able to prove, that the participation that it holds in the entity established in this State neither aims nor allows for the purpose of the fraud or tax avoidance, the localization of the incomes abroad (Cons. const., 6 oct. 2017, n° 2017-659 QPC, Nabitz : Dr. fisc. 2017, n°41, act. 552).

Such a demonstration, from now on, helps tax payer to avoid the application of an article 123 bis to benefice the common rights of an article 120,9°.

A difficult application of an article 123 bis of the General Tax Code (CGI) to the trusts

Since the mechanism of an article 123 bis implicate that the natural person holds at least 10% of an entity, the application of the article to the trusts seems delicate and difficult.

On this point, the report of the Financial Commission of National Assembly about the project of the corrected financial law for the 2011 was clear: «the article 123 bis, assuming that the natural person pays taxes transparently and holds 10% of the entity, the provision which is, in the reality, applied rarely (almost never) to the trusts».

On this point, we totally agree with Bruno Gouthière who estimates that the application of the article 123 bis to the trusts requires that the founders would decide beforehead that the trustees should actually distribute to the beneficiaries the sums representing at least 10% of the trust’s incomes (B. Gouthièr, Les impôts dans les affaires internationales: Ed. Francis Lefebvre, 11e éd., n° 50385). Even if this hypothesis is not unlikely, but it is not the one we face very often.

However, there are still the cases in which the trust’s incomes could be taxed under article 123 bis, it is the case of the entities established on the not-co-operative territory or in state (ETNC).

In this situation actually, the article 123 bis, 4 ter specifies that the condition of the holding of 10 % is supposed to be fulfilled and that the taxable incomes of a natural person, thus, cannot be inferior the fixed amount, which represents a taxable minimum: if the application of the EC law leads to the superior taxable incomes, it will be the latter that will be liable to tax – on the product of the fraction  of the net assets or the net values of the entity,  corresponding to the rights of the tax payer  on the profit, resulted of the average interest rates applied by the credit organizations (currently 1,67%, V. avis, 28 juin 2017).

This very same rule of taxation is applied to the States of the Territories, which have not entered into the convention of the administrative assistance, but the presumption of the holding is not applied.

Since the decision of the  Constitutional Council of the 1st March 2017 ( Cons. const., 1er mars 2017, n° 2016-614 – QPC : Dr. fisc. 2017, n° 10, act. 159. – V.C. Acard, Fiscalité financière : Dr. fisc. 2017, n° 21, étude 318, n° 20) it only a simple presumption.

The tax payers, thus, are justifiable to avoid this particularly strict rule of a taxation, providing an evidence that the incomes actually received by the intermediary of the entity, are inferior to the incomes defined as a fixed sum applying this provision.

The Grid of Reading and application of the texts

It seems possible to indicate different situations and to join there the basis, serving to tax the incomes.

We present this grid of the synthesis in the form of a hypothesis and sub-hypothesis.

Hypothesis 1: The trust is the structure about which we can affirm that the natural person holds at least 10% of the entity.

Hypothesis 1.1: The trust is situated in the country with a privileged tax politics.

Hypothesis 1.1.1: The natural person is capable to demonstrate that the participation, holding by it in the entity, do not aim and do not allow the localization of the incomes abroad for the purpose of fraud or tax avoidance: application of only the article 120,9°.

Hypothesis 1.1.2: The natural person cannot report such a prove: application of the article 123 bis and, if needed, of the article 120,9°, if the distributed incomes exceed the acquired incomes.

Hypothesis 1.2: The trust is not situated in the Country of Privileged Tax Politics: application of only the article 120,9°.

Hypothesis 2: The trust is not structured and it is not possible to relate any participation to the natural person: application of only the article 120,9°.

Hypothesis 3: The trust is located in the not-co-operative territory or state (ETNC): the incomes liable to tax cannot be lower than the product of the fraction of the net assets or net values of the entity corresponding to the rights of a tax payer on the profit resulting from the average interest rates habitual for the credit organization (CGI, art. 123 bis, 3°, al. 2).

Hypothesis 3.1: The tax payer is capable to report the prove that the incomes, actually received by the intermediary of a moral person are inferior to the incomes, defined in a fixed sum: application of an article 123 bis, 1°. It seems, thus, consistent to admit that in this situation, the natural person can also prove that the participation, held by it in the entity, established in the not-co-operative territory or state (ETNC), does not aim and does not allow localization of the incomes abroad for the purpose of fraud and tax avoidance, to be able to go out of the scope of the article 123 bis and to enter to the scope of the article 120,0°.

Hypothesis 3.2: The tax payer is not capable to demonstrate that the incomes, actually received by the tax payer of an entity are inferior to the minimal limit of the incomes, defined as a fixed sum: application of a derogatory rule of the article 123 bis, 3°, al.2.

In the sense of transparency imposed today to the trusts and assimilated entities by the law of 29 July 2011, the administrators should fulfill the restrictive declarative obligations (CGI, ann. III, art. 344 G sexies et septies).

These obligations have surely the function to show that the settlors and, moreover, the beneficiaries considered as settlors or the simple beneficiaries were not led by the willing to use the trust to localize their incomes abroad for the purpose of fraud or tax avoidance.

The traceability of the assets and the capitalized production was made possible by the subscription of the factual declarations.

Thus, it helps to know with all the transparency:

– the distributed incomes taxable by the application of the article 120,9°;

– the allocated capital, not representing the incomes and not characterizing a free transmission, because they are captured by the settlor himself after contribution to the trust, or by the beneficiary, considered as a settlor after a regularly declared transmission;

– the attribution of the incomes, coming from the capitalized production of the free transmission of the property including this production.

It is clear, the case of the taxation of the incomes of the trust under the rules of the article 123 bis should be relatively rare.

The majority of the taxation should be made in conformity with the article 120,9° and only the distributed incomes should be aimed.

In this regard, the solution imposed by the Tax Authority in the frame of the regularization the assets, held abroad that consisted the taxe base of the production of the trust and other similar entities under the article 123 bis, could be justified in the majority of the cases treated by the Corrected Declarations Treatment Service (STDR).

Actually, the regularization concerned the time when the contribution was held as a secret and when the incomes were subtracted of the tax.

Now it is not the case and it is a time to feel the consequences that arise while applicating the tax politics to the incomes, generated by the trust, which is in conformity with the constitutional principles, as well as with the international obligations of France.

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171214 THE DELICATE QUESTION OF THE TAX TREATMENT OF TRUST’s INCOMES (la délicate question du traitement fiscal des revenus des trusts)

Generally moved aside by the International Convention Against Double Taxation – or reduced to 5% or 10% for the royalty tax, the withholding, provided by the article 182 B of the French General Tax Code (CGI) for the services remunerations, rendered by the non-residents is applied at the full rate in the absence of the convention.

The recent decisions and current numerous adjustments show that this in the case, when the convention is denounced or when the foreign tax payer cannot enjoy the advantages provided by the later, he should be liable to tax in his State of residence.

The withholding is, thus, payable on the gross sum at the tax rate of 33,1/3% – 33,1/3/66,2/3=50% in the event of the auditing, or the rate on the basis superior to the corporate tax, to which the entities-tax payers would be liable if it were established in France. The purpose of the present

article is to show, in the light of the recent decisions, that this disadvantageous treatment is not compatible with the equity principle and that the right of defence requires that tax payer should be invited to participate in the rectification process before the taxation is applied towards the established debtor, or who has an activity in France.

171212 WITHHOLDING TAX la retenue à la source de l article 182 B à l épreuve du principe d égalité et des droits de la défence

A Fixed Place of Business (établissement stable) and a Veiled Real Estate Activity (activité immobilière occulte): the interesting details by the Council of State in the Frame of the French-Luxembourg convention

By the two decisions of the 17 March 2017, the Council of State gave a ruling on the notion of a Fixed Place of business (établissement stable) in the frame of the operations of the real estate promotion, realized by the Luxembourg entity.

It results from this decision, that the organizational structure of the Real Estate Operators seem to be a determining factor on the characterization of the Fixed Place of Business (établissement stable) (allocation of roles between the Program Company and the Service Company and the link between them, drafting of the project ownership contracts (maîtrise d’ouvrage), a control of the carried out constructional operations by a foreign society).

Besides, the Council of State took an opportunity to remind its interpretation of a veiled activity (activité occulte).

According to the High Jurisdiction, the notification of an exercise of the activity by the means of tax declaration does not prevent the Administration from considering that the other activity carried out by the same entity is veiled.

CE, 8e et 3e ch., 31 mars 2017, n° 389573, SARL Estienne d’Orves (1re esp.), concl. R. Victor, note F. Lugand et P. Lucas

Inédit au recueil Lebon

20171212 Fixed Place of Business and Veiled Activity – the interesting details by the Council of State in the Frame of the french-Luxembourg convention