Legal news

1 – The present study focuses on the exit tax system. Known in many legal systems, including in France, it is marked by an obvious technicality. It envisages the taxation of unrealized gains on social rights in the event of a transfer by the taxpayer of his fiscal domicile to another State. Regarding the French exit tax, it is necessary to distinguish whether the transfer takes place to another EU country, to Iceland or Norway, in which case a deferment of taxation (“sursis d’imposition”) can be obtained by right, or to another State.

According to recent studies, tax exile has attractions whose vigor does not weaken. Among the factors to be taken into account for candidates at departure, the transfer of the tax domicile of natural persons outside France entails the taxation of unrealized capital gains (“plus-values latentes”) on certain of their holdings. The related mechanism, known as the “exit tax”, is found, in varying modalities, in foreign legal systems (1). In general, the exit tax is a very technical mechanism, as the French case illustrates (2).

1. The exit tax, a widespread mechanism in State legislations

2 – One of the objectives pursued by the tax legislator is to combat certain forms of tax evasion, in particular when they result in the relocation of the most important incomes and assets. This explains why many countries, like France (A), have set up exit tax systems, showing a contrasting international tax landscape (B).

1. The exit tax, a mechanism known from French law

3 – Mechanism initially set up. – A first mechanism, repealed in positive law, was introduced by the Finance Act for 1999 (French General Tax Code, “Code General des impôts” hereinafter “GTC”, art. 167 bis).

It provided for the taxation of unrealized capital gains on the substantial investments held by natural persons transferring their tax domicile outside France.

At the date of transfer of domicile, were taxable the following assets:

• the unrealized capital gains realized on the substantial participations held by the French tax resident taxpayer in respect of at least 6 of the 10 years preceding his departure from France;

• and capital gains placed on deferral of taxation (“report d’imposition”) without condition of duration of tax residence.

In both cases, the taxpayer could benefit from a deferment of payment allowing deferring the effective taxation of capital gains on the transfer, redemption, redemption or cancellation of the securities concerned, on condition to provide sufficient guarantees for the recovery of the debt to the Treasury.

This system was sanctioned by the Court of Justice of the European Communities (CJEC) in 2004 and was repealed by the 2005 Amending Finance Law  (“Loi de Finances rectificative pour 2005”) because of the incompatibility of some of its provisions with Community law, concerning the need to systematically provide sufficient guarantees to benefit from the derferment of payment.

4 – New system introduced in 2011. – A new exit tax system was introduced by the Amending finance law for 2011 for transfers since March 3, 2011 appears in Article 167 bis of the GTC.
In its version of 2011, it provides that taxpayers who are taxpayers domiciled in France for at least 6 of the 10 years preceding the transfer of their domicile abroad are taxable on the unrealized gains on social rights, securities, Rights held in companies,
hold, on the date of the transfer, one or more direct or indirect participations:

• granting them at least 1% of the profits of a company;

• or whose cumulative value exceeds € 1,300,000.

In order to be compatible with European Union law, this new arrangement no longer determines the suspension of payment for the provision of adequate guarantees only in the event of a transfer of residence in a third State to the economic area (EEA) or Liechtenstein.

5 – Modulation of capital quotas in 2013. – The Amending finance law for 2013 modulated the capital quotas concerned by departures since January 1, 2014: the exit tax is now applicable to the holdings of more than 50% of the profits or of a cumulative value exceeding 800,000 €.

6 – Alignment of the exit tax rules with the internal tax regime for capital gains carried forward. – The Amending Finance Law for 2016 aligned the rules for determining the rate of taxation of capital gains placed under deferral pursuant to Article 150-0 B ter of the GTC, prior to the transfer of residence, On the rules governing the taxation of such capital gains under national law (GTC, Article 200a, 2b).

7 – Transfer of corporate headquarters. – The exit tax also concerns the transfer of company headquarters.

The Court of Justice of the European Union (CJEU) has transposed the principles set out in its case-law relating to the mechanisms of the exit tax of natural persons, in particular in the judgment “National Grid Indus BV” where it sanctioned the mechanism of taxation of unrealized capital gains during the transfer of business seats provided for by Dutch law, for infringement of freedom of establishment since the immediate recovery of taxation was disproportionate to the objective of preservation of the distribution of the tax burden between Member States.

In this judgment, a company had transferred its place of effective management from the Netherlands to the United Kingdom and had been taxed for an unrealized exchange gain (“gain de change latent”) on a receivable in connection with that transfer, whereas this tax did not exist in the event of a transfer of a seat within that State.

It should, however, be pointed out that the Court seems to have accepted the obligation for taxpayers wishing to benefit from a deferred tax, to provide guarantees, contrary to its previous position concerning the exit tax of natural persons. The position adopted in that judgment has been confirmed several times.

Accordingly, Article 221 §2 of the GTC has been amended in order to bring French legislation into conformity with European regulations and to allow companies to opt for the split payment over 5 years of the tax due on account of the unrealized capital gains on the assets of the company, when its head office is transferred to the European Union, Iceland or Norway.

It may be noted that the capital gains tax does not take place, in this case, if the transfer of the registered office is not accompanied by the transfer of the assets, that is to say if the latter remain on the balance sheet of a French permanent establishment of the company.

8 – ATA Directive. – The further development comes from the European Union. On January 26 2016, the European Commission published a “package on the fight against tax evasion”, including a proposal for a Directive, including a clause providing for an exit tax mechanism, which codifies the principles of the “National Grid Indus”, which was approved by the Member States on 21 June 2016 and adopted by the Council of the European Union on 12 July 2016. The Directive introduces an exit tax mechanism for companies which transfer their head offices in order to reserve for the State of origin the taxation of any unrealized capital gains in its territory. Member States have until December 31 2018, to transpose the Directive into their national law.

9 – Challenges. – In addition, it should be noted that the terms of the exit tax arrangements continue to be regularly challenged.

The French State Council (“Conseil d’Etat”) recently referred three questions to the CJEU for a preliminary ruling on the compatibility of the exit tax with the freedom of movement of persons under the Luxembourg Agreement of 21 June 1999, signed between the European Community and its Member States, on the one hand, and the Swiss Confederation, on the other hand, in the case of a taxpayer who has been taxed in respect of the exit tax (in the version prior to January 1 2005) his domicile for tax purposes in Switzerland.

In this case, the taxpayer claims that he moved to Switzerland in order to continue to engage in self-employment as part of the management of his holdings under conditions characterizing the pursuit of an economic activity

He was already practicing in France before his departure and therefore requests the discharge of the additional charges which have been charged to him in accordance with Article 167a of the GTC.

2. The exit tax, a mechanism which is in other legislations

10 – Some States sanction the transfer of residence of natural persons more heavily than France does. – Some States link the taxation of natural persons unlimitedly (United States) or limited in time (Germany: taxpayers continue to be taxed in Germany for the ten years following the transfer of their domicile in a State with lower taxation when they maintain economic links with Germany).

• United States. – This taxation of ordinary income according to nationality is sometimes cumulated with a mechanism similar to the exit tax. For example, the United States have introduced a system known as the “mark to market tax”, which affects American citizens renouncing their US citizenship and long-term residents who terminate their residence in the United States. Taxation applies to contributors of which:

• the average taxation of income over the 5 years preceding the transfer of tax residence exceeds a certain amount ($ 160,000 per year in 2015);

• or whose asset value exceeds $ 2 million at the date of the transfer of residence for tax purposes;

• or who have not filed the form n° 8854 certifying that they have fulfilled all their tax obligations during the 5 years preceding the transfer of their domicile.

Under this plan, the taxpayer is deemed to sell all assets at market value at the date of transfer of his or her domicile. The taxpayer is then taxed on unrealized capital gains after deduction of an allowance of $ 690,000 (for a transfer in 2015).

• Germany. – Germany provides that a taxpayer who has been subject to German income tax on the basis of all his income during the 10 years preceding the transfer of his tax domicile to another State and who, after the transfer of its tax residence, is no longer subject to German income tax, is taxed, during this transfer, on account of unrealized capital gains on its shareholdings in German companies, when he has held, directly or indirectly, at least 1% of the capital of the company at any time during the 5 years preceding the transfer of domicile.

11 – Other European states apply a similar scheme to the French exit tax.

• Norway. – Norway provides that the transfer by a taxpayer of his residence for tax purposes outside Norway makes him taxable on unrealized capital gains on certain of its financial assets (in particular shares and interests in Norwegian companies), with the possibility To apply for a deferral of tax under certain conditions. It is also provided that its liability to tax ends at the end of a period of 5 years following the date of his transfer if his has retained its assets.

• Denmark. – Denmark provides that the taxpayer who transfers his domicile outside Denmark shall be subject to an exit tax on account of his assets which are not subject to Danish tax (movable or immovable assets). More specifically, the exit tax applies to unrealized capital gains on all shares held by the taxpayer transferring his domicile when their cumulative value exceeds DKK 100 000, provided that he has been a Danish resident for at least 7 of the 10 years preceding the transfer of his residence Its fiscal domicile.

The taxpayer may benefit from a tax deferral under certain conditions, in particular on condition that he files a tax return with the Danish tax authorities each year following the transfer of the domicile. This option ends when the asset generates income or when it is sold, and in principle each year the contributor must pay 1/7 of the amount of the deferred tax.

• Netherlands. – The exit tax regime set up in the Netherlands and amended since September 15 2015 provides that a tax assessment formalizes the amount of the exit tax relating to the unrealized capital gains realized on the substantial participations Held by a Dutch taxpayer transferring its tax domicile outside the Netherlands, with a mechanism for deferral under guarantee. It is expected that the Dutch exit tax will have to be paid in the event of the distribution of reserves or the sale of shares. It should be noted that there is no longer a time limit allowing the taxpayer not to be taxed on the capital gain realized before the transfer of his residence.

12 – Other States have introduced different systems of taxation to penalize the transfer of residence.

• Ireland. – Ireland taxes taxpayers who are considered to be ordinary tax residents for three tax years and transfer their domicile outside Ireland, considering that they remain resident until the end of the third tax year following the transfer of their tax domicile: they will therefore be liable to pay Irish tax on some of their income.

• United Kingdom. – The United Kingdom does not have an exit tax as such but reserves the right to tax foreign income not taxed in the UK at the return of the taxpayer to UK, if this transfer of the domicile outside the UK took place less than 5 years before his return (so-called “temporary non-resident regime”). This system concerns all repatriated incomes and not exclusively capital gains.

13 – The issue of exit tax is now introduced in certain tax treaties.

An amendment to the Franco-German tax convention signed in 2015 introduced a specific clause to the exit tax in the Convention: Article 7 of the Convention now provides for a taxation shared between the two States in the event of the transfer of securities by a individual resident who has discharged an exit tax in the other State during the transfer of his domicile.

2. The French exit tax, a highly technical mechanism

14 – The technicality of exit tax devices can be illustrated from French law.

We will see the substantive aspects (A) and the declarative aspects (B), as well as the modalities of the suspension of payment and the events leading to the tax relief or refund (C).

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170208 Exit tax, inventory of a disputed mechanism

Please find bellow the procedure to follow and the list of the documents requested in order to obtain:

– In first part, the condition to obtain a long-stay visa, with distinction between the “residence card to be requested within 2 months of arrival” and the “temporary residence permit”.

– In second part, the conditions to get a short-stay visa. We hope that this legal opinion will help you for your application. Best regards.

I. Condition of application to the “long-stay visa”

A. “The long-stay visa”

There are several kinds of long-stay visas:

 Visa “Residence card to be requested within 2 months of arrival” This visa bears the mention “residence permit to be requeted within 2 months of arrival”. It allows you to enter France and to obtain a residence permit (1).

 Long-stay visa valid as a residence permit (VLS-TS): valid from 4 to 12 months This visa, known as VLS-TS, is unique. It is valid as a residence permit and prevents you from applying to the prefecture during its period of validity (2).

1. The long-stay visa “residence permit to be requested within the 2 next months arrival” If you wish to ask for a long-stay visa (valid 10 years), you must address to the French consular authorities in your home country.

This visa is granted to you in order to benefit from a residence permit (annual, multiannual or 10 years according to your situation), in particular in quality of:

– Family of a French citizen,

– Liberal or independent profession,

– Worker (employee on mission, European credit card, seasonal, competences and talents) or family of worker,

– Pensioner or spouse of pensioner,

– Artist.

2. The long-stay visa “temporary residence permit”

The long stay visa allows certain categories of foreigners to enter France and to stay from 4 months to 1 year without having to apply immediately for a residence permit. Once you are in France, some formalities must be completed with the French Office of Immigration and Integration (OFII) to validate the visa. You can obtain a long-stay visa equivalent to a residence permit for one of the following reasons:

– Husband of French,

– Student,

– Trainee,

– Employee (holder of a contract of indefinite duration),

– Temporary worker (with a fixed-term contract) or posted worker,

– Visitor (you must be able to live on your own resources in France and you undertake not to work),

– Spouse of a foreigner who is a beneficiary of a family reunification

3. Common conditions of delivery for both long-stay visas

1. Moment of the request

– As soon as your file is complete.

– You inform sufficiently early with advance near the qualified consulate.

2. Place of application

If you wish to ask for a long-stay visa, you must address yourselves to the French consular authorities in your home country.

3. Conditions of application

– To fill and sign the form CERFA n°14571*05 for a long-stay visa.

– You must present a passport : for a long-stay visa “residence permit to request in the 2 next months arrival”, at least 3 months after the date expiry of your visa, and for a “long-stay visa being worth residence permit”, at least during the validity your visa.

– Your biometric data are recorded in a file, called “Visabio”: These data are the digitized pictures of your photograph, and your digital fingerprints (child of less than 12 years is not concerned). The other documents required vary according to the duration and from object of the visa you ask.

– Proof of your livelihood (cash, travelers checks, international bank cards, etc.),

– Proofs of the guarantees of your repatriation (return ticket, etc.),

– Insurance covering medical and hospital expenses, including social assistance, for the care you may receive in France (the minimum coverage requested is € 30,000)

– If your stay is on a private or family visit, a certificate of welcome or proof of accommodation in a hotel or a host institution,

– Or if your trip is touristic or professional or for the purpose of hospitalization or research, documents on the subject and conditions of your stay in France. Information on these documents is available on the websites of the consulates or is sometimes posted outside of the consulates.

II. Condition of application to the short-stay visa « Schengen »

As a Chinese citizen, to be able to enter and stay up to 3 months in France, you must have a so-called “short-stay” visa. You must present your request near the French consular authorities or another Schengen country The short-stay visa allows you to enter and travel in France and in other Schengen countries. Unlike a long-stay national visa, the Schengen visa does not allow you to settle in France. This visa can be granted to you in particular for:

– a tourist trip,

– a professional trip,

– a family visit,

– receive a short training or an internship,

– perform a paid activity (i.e. if you are an artist on tour in France, sportsman, model, etc.), after obtaining a temporary work permit.

1. Length of stay allowed

The short stay visa allows you to stay up to 90 days in the Schengen countries. It can be issued to:

– One entry

– 2 or more entries

Thus, you have an overall period of 180 days to make an uninterrupted stay of 90 days or several stays of cumulative duration of 90 days maximum. At the end of this maximum period of 90 days, you must leave Schengen. You will be able to return only 180 days after your first entry for a new maximum stay of 90 days, and so on for any other trip.

2. Moment of the request

Not more than 3 months before the beginning of the travel envisaged.

3. Place of application

If you want to obtain a short stay visa “Schengen”, you must present your request to the French consular authorities or to the ones of another Schengen country:

– Either the single country of destination of the travel (thus, if France is the single destination of your travel, the French consulate is qualified),

– Either the principal country of destination of the travel (in terms of duration or object), it comprises several destinations (thus, if you want to spend one week to Germany and a month to France, is the French consulate which is qualified),

– That is to say the country entry in Schengen space, if the principal destination cannot be given (thus, if you intend to spend 15 days to Belgium and 15 days to France for tourism while arriving by Belgium, is the Belgian consulate, which is qualified).

4. Condition of registration

– To fill and sign the form “CERFA” n°14076*02 for the short-stay visa.

– To present a passport (for a visa “Schengen”, at least 3 months after the date expiry of your visa (your passport must also be delivered since less than 10 years).

– Your biometric data are recorded in a file, called “Visabio”:

– The other documents in proof required vary according to the duration and from object of the visa which you ask. Information on these documents in proof available on the websites of the consulates or is sometimes displayed with outside of the consulates.

III. Common part to both procedures (long-stay and short-stay visa)

1. Administrative fees

Your visa application will be examined only after the payment of these fees. If the visa is refused or if you cancel your travel, the paid fee is not refunded to you.

When the reception of the visa applications is delegated to a private person, you must also pay additional service fees to him. If your request is admissible, a receipt corresponding at the expenses of visa you paid is given to you. This receipt means acknowledgment of receipt of your visa application.

2. Deadline

The decision on your visa application “Schengen” must be taken by the consulate within a period of 15 maximum days according to the reception of your comprehensive directory, except typical cases where this time can be carried until 60 days. The time is variable for the national visas of long stay. It depends in particular on your nationality, the reason for your stay in France and on the need for checking some of your civil status documents.

3. Access to the office of the visa service

A certain number of services of the visas of the consulates receive only by prior appointment. In some countries, the management of these appointments is entrusted to private call centers. In other countries, the reception of the visa applications is outsourced: in fact, certified private agencies receive the files of visas solicitations. You can contact them by telephone or via their website to take appointment.

Lastly, in other countries, France ensure the role of “Schengen single window”, to represent the other countries. Contrarily, France can be represented by another Schengen country in some countries.

4. Validation of the visa

In the event of delivery of the visa, a label is affixed on your passport. In the event of refusal, you can present without delay a new visa application. You can also dispute this refusal before the Commission of recourse against the refusal of visa.

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170207 Legal opinion titre de séjour

1 – At a time when the sale in life annuity of real estate appears for a whole generation as a relevant alternative to supplement its income, it is useful to present the very special tax treatment that is reserved for the life annuity.

As the taxation of life annuity is as little known as it is complex, it sometimes constitutes an obstacle to the realization of a real estate sale in life annuity which must be aware. Life annuities can be taxed in different ways depending on their nature, their amount and the value of the assets of the creditor (“crédirentier”) and debtor (“débirentier”) concerned.

They may thus be included in the calculation of the income tax (“impôt sur le revenu”) of the creditor and must be taken into account in determining the basis of the solidarity tax on capital (“impôt de solidarité sur la fortune”). Indeed, the life annuity is special in that it is apprehended from a tax point of view as much as an income as a capitalizable element to be included in the estate of the creditor.

Beyond that, the life annuity gives rise to the levying of registration fees and, in certain cases, is not immune to the tax on personal gains (“impôt sur les plus-values des particuliers”).

1. Taxes affecting life annuity

2 – On the occasion of the sale of a building in life annuity, it is generally determined an annuity to be paid annually by the acquirer-debtor (“acquéreur-débirentier”) to the vendor-creditor (“vendeur- crédirentier”).

The amount of this annuity will be established at the end of a negotiation during which consideration will be given to various factors: the age of the creditor; the reversible nature of the annuity; if the life annuity is free or occupied. In any case, this annuity will be used to calculate the income tax of the creditor (A) and the solidarity tax on capital of the creditor and the debtor (B).

2 At the time of the sale, it will be necessary to establish the registration fees to be paid by the debtor (C) and to take into account the sums paid for the calculation of the tax on personal gains (D).

A. Life annuity versus income tax

3 – The payment of an annual life annuity by a debtor to a creditor will have an impact on the calculation of the income tax of the creditor (1°) and will oblige the debtor to carry out a certain number of formalities (2°).

1° The creditor situation

4 – The annuity arrears collected annually by the creditor are considered as taxable income taxable in the category of “salaries, wages, indemnities, emoluments, pensions and annuities”. However, the creditor has a preferential tax system since an adjustment of the taxable base is made according to the age of the creditor. For example, Article 158 (6°) of the French General Tax Code (“Code général des impôts”, hereafter “CGI”) provides for the tax rebates (“abattement”) rates applicable according to the age of the seller on the date on which the annuity comes into force. If the totality of the annuity received is not taxed, the taxpayer will still have to declare the entire amount collected to the tax administration, which will include the taxable portion of the annuity to the income of the tax household (“foyer fiscal”).

On this basis, the social levies payable by the creditor in respect of income from capital will also be calculated, in the case of an annuity received for a fee (“à titre onéreux”).

5 – If the transaction is carried out by a couple of creditors, the tax administration agrees that the age of the oldest of the two spouses should be retained in the first installment. However, if this solution is more favorable, it is possible to take into account the age of the last survivor at the moment when he receives the annuity for the first time. On the other hand, if each of the married or “pacsé” (i.e. living together under a civil partnership, called PACS) spouses personally receives a life annuity, the age of each of them will be retained in order to calculate the tax base for each of the life annuities collected.

6 – If the annuity is reversible and is received successively by unmarried (or “pacsé”) persons, the age of the new beneficiary will be retained at the time when he receives the pension for the first time.

2° The debtor situation

7 – While the creditor must declare as an income the life annuity received during the year, the debtor cannot deduct from his taxable income the annuity he has paid. Indeed, arrears paid to the creditor are not considered as tax-deductible interests.

8 – However, the debtor must submit himself to a declaratory obligation under penalty of a fine (CGI, article 1768). Each year before 1st of February he must send to the Department of Tax Services (“Direction départementale des services fiscaux”) a printout No. 2466 indicating the identity of the beneficiaries of the annuity and the sums paid during the previous year. Besides, under section 86 of the CGI, the debtor must keep a payroll record of the amount of the annuities paid during the year.

B. Life annuity versus solidarity tax on capital

9 – When a natural person has a property worth more than 1.3 million euros, he is liable for the solidarity tax on capital (ISF). This raises the question of the impact of the payment of a life annuity on the creditor’s estate (1°) as well as the debtor (2 °) in order to measure the impact of an a real estate sale in life annuity on the “ISF” potentially owed by each.

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1° The creditor situation

10 – The real estate transfer in life annuity does not allow the creditor to escape the solidarity tax on capital since it is necessary to capitalize the annuity paid annually to the creditor, pursuant to Article 885 E of the CGI.

11 – Indeed, unlike a classical real estate transfer, the life annuity does not truly “take out” the real estate property from the creditor’s estate. Therefore, it will be necessary to integrate into the base of the “ISF” the life annuity for its capital value.

12 – To assess the property transferred in life annuity, the creditor will take into account the annuity received during the fiscal year concerned, his age in the year of the declaration, his sex and indicate whether the annuity is reversible: these last three criteria determine the multiplier rate. The product of the annual annuity and of this rate makes it possible to determine the capitalization value to be declared.

13 – It is also possible to refer to the scales of life annuities drawn up by the Directorate-General of Taxes (“Direction générale des impôts”). These scales are re-evaluated every year to take account of changes in life expectancy. However, the scales used by the Directorate-General of Taxes are different from those applied by insurance companies and are less realistic.

14 – If a “bouquet” has been paid to the creditor at the time of the conclusion of the real estate transfer in life annuity deed, this will not affect the calculation of the capitalization value: the “bouquet” will simply be integrated into the assets of the taxpayer in the category of deposits and will be included in the basis on which the tax will be calculated.

15 – When the life annuity is “occupied”, the creditor must also declare the value of his usufruct which will be determined by application of the scale provided for in Article 669, I of the CGI. The tax scale for usufruct applies in the same way if it is a usufruct reserve or a right of use and habitation. By comparison, when the life annuity is “free”, only the capitalization value of the annuity will be taken into account in the tax base of the creditor for the “ISF”, which he will have to pay to the public treasury.

2° The debtor situation

16 – The debtor subject to the solidarity tax on capital may deduct the capitalization value of the life annuity from his taxable assets. That being the case, housing acquired in life annuity is part of his taxable assets. The property in life annuity is part of his estate and he will have to register it.

17 – More precisely, the debtor will have to declare the value in full ownership if the life annuity is free. On the other hand, it will have to declare its value in bare ownership if the life annuity is occupied.

C. Life annuity versus transfer taxes (“droits de mutation”)

18 – When the transfer is not subject to VAT – and this will generally be the case with regard to the sale of real estate in life annuities, since the creditor is not a taxable person – the transferee will have to pay the transfer duties at the common rate.

As a matter of principle, the overall rate applicable is 5.09%. However, the Finance Act for 2014 (“Loi de Finances pour 2014”) has introduced a provision enabling the General Councils (“conseils généraux”) to raise, on a provisional basis, the rate of the land registration tax (“taxe de publicité foncière”) or the registration fee provided for in Article 1594 D of the CGI, above 3.80% and within the limit of 4.50%.

4 From now on, most departments have voted an increase in the tax rate up to the authorized 4.50%. Only five departments retained the rate of 3.80%, namely Indre (36), Isère (38), Morbihan (56), Martinique (972) and Mayotte (976). Côte d’Or (21) voted a rate of 4.45% (not 4.50%). The overall tax rate therefore falls for most of the departments at 5.8% [4.50 + 1.20 + (2.37% * 4.50%)].

19 – As regards the basis of registration fees (“droits d’enregistrement”), it is again necessary to distinguish between “free” and “busy” life annuity. If it is free, transfer taxes will be calculated on the sale price constituted by the bouquet and the capitalization value of the annuity. The tax base will therefore correspond to the value indicated in the deed of sale. The same rule applies if the sale takes place with reservation of the right of use and habitation.

20. On the other hand, where the sale takes place with a reservation of usufruct, transfer rights for consideration will be calculated by using as the basis the value of the bare ownership determined in accordance with the scale established by Article 669 of the CGI.

D. Life annuity versus the taxation of capital gains (“imposition des plus-values”)

21 – Finally, it is necessary to mention the tax on capital gains of individuals, which can heavily weigh on the vendor-creditor when he is not covered by an exemption under the law (1°), but which may above all dissuade the acquirer-debtor from disposing of the property acquired in life annuity (2°).

1° The creditor situation

22 – Since life annuity constitutes an immovable property transfer for a fee, it is taxed as a taxable transaction under Article 150 U of the GTC. Thus, the net realized capital gain will be taxed, after deductions, at the proportional rate of 19% for income tax and 15.5% for social contributions (CSG- CRDS). However, the text provides for various exemption assumptions which very often benefit the vendor-creditor.

23 – Indeed, an immovable property transfer in life annuities generally concerns the principal residence of the creditor. Pursuant to Article 150 U II 1° of the CGI, it will therefore be exempt from capital gains tax. However, it is necessary to be vigilant because the property will cease to be considered as the principal residence of the creditor if during the period preceding the transfer of the immovable property, it is leased or occupied for free by a third party, and even for a short time.

24 – Exemption will also be granted if the transferor has held the property for more than 30 years.

25 – On the other hand, if the creditor or his spouse is entitled to a retirement pension or a second or third category invalidity card, he shall be exempt from tax on the real estate gains of individuals. This cause of exemption applies only if the reference tax income of the creditor for the penultimate year preceding that of the sale is less than 10 697 euros for the first part of the family quotient, plus € 2,856 for any additional half-share. In addition, to benefit from this exemption, the creditor must not be subject to the solidarity tax on capital.

26 – If he cannot be exempt from taxation on the capital gains of individuals at the time of the sale of the immovable property in life annuity, the creditor shall be subject to double taxation in respect of arrears actually received. Indeed, regarding the taxation of capital gains on immovable property, the annuities that are to be collected subsequently are included in the calculation of the sale price since the capital value of the annuity is added to the bouquet.

Thus, this sum increases the amount of the gross taxable gain. In addition, these annuities are again subject to income tax and social security contributions (“prélèvements sociaux”) when they are paid in the form of arrears to the creditor.

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27 – In this regard, it has already been pointed out that the validity of this tax scheme could be challenged on the basis of Article 13 of the French Declaration of the Rights of Man and the Citizen (DDHC), where there is the constitutional principle of equal taxpayers. In applying this principle, an income cannot be declared in two separate categories of income tax. However, this seems to be the case for the life annuities collected by a creditor imposed at the time of the operation for the capital gains on immovable properties of individuals, and then later as annuities are paid.

2° The debtor situation

28 – The debtor may be liable for capital gains tax if he decides to sell the property before the expiry of a period of 30 years, if the property acquired in life annuity is not his principal residence.

29 – The debtor or his heirs may first wish to resell the property acquired in life annuity before the death of the creditor. In this case, in order to determine the amount of the taxable gross capital gain taxable regarding the tax on capital gains on immovable property, the purchase price to be retained corresponds in principle to the value of the capital representing the annuity established at the time of acquisition of the property plus, where applicable, the portion of the acquisition price paid in cash.

However, in order to take into account for the calculation of the taxable capital gain, of the random nature of the real estate transfer in life annuity deed, the taxpayer can substitute the capital represented by the annuity established at the time of acquisition, the total made up by arrears actually paid to the creditor, to which must be added the capital representing the annuity remaining to be paid on the date of the assignment (the latter being indicated in the notarial deed).

30 – Another situation is much more frequent in practice: the building may be transferred by the debtor after the death of the creditor. A first difficulty results from the establishment of the date that will be taken as the date of acquisition when the creditor had a usufruct reserve. The tax administration accepts in this case that the date of entry of the bare ownership into the estate of the transferor constitutes the starting point of the period of detention of the property.

31 – The dismemberment of property in the context of a real estate sale in life annuities arouses another difficulty related to the calculation of the acquisition price by the transferor, which was debitor. It is then assumed that the transferor can retain the free market value of the property at the date of entry of the bare ownership in the estate of the transferor, that is to say on the date of acquisition in life insurance.

32 – When there is no reserve of usufruct, concerning the calculation of the taxable gross capital gain and more specifically the calculation of the acquisition price, two scenarios can then occur: either the debtor has paid an amount less than the estimated capitalization value at the time of the sale; or the debtor has paid more than the estimated value.

33 – In the first case, if the debtor financially comes out a winner from the transaction, he will have an interest in retaining the estimated value indicated in the purchase deed as purchase price to calculate the tax on the capital gains to be paid at the time of the resale of the property.

34 – In the second case, if the debtor has paid to the receiver a sum greater than what was initially estimated, he will wish to retain the amount of money actually paid.

35 – The tax administration then considers that the contributor has an option: he may retain the transfer price used to calculate the capital gain realized by the creditor; but if it is more favorable for him, he can retain the sum of the annuities paid, from the fraction of the price paid in cash and the acquisition costs re-evaluated using the coefficients of monetary erosion.

36 – As the taxes liable to weigh on the life annuity have been henceforth presented, it is necessary to mention the risks incurred by the taxpayer who – in one way or another – would try to escape or to reduce this tax burden.

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2. The risks of tax adjustment threatening the life annuity

37 – As we have seen, life annuities are very difficult to escape from taxation. Worse, it arouses the mistrust of the tax administration which does not hesitate to rely on Article L. 64 of the Book of Fiscal Proceedings (“Livre des Procédures Fiscales”) to sanction the disguised donations (B) and, at least, Article L. 17 of this same book to recalculate the registration fees to be levied for the market value of the property (A).

A. The risk of revaluation of the annuity

38 – The disguised donation is not the only hypothesis of tax reorganization in the face of suspicious  sales transactions in life annuities. Thus, when the tax administration considers that the debtor is abnormally profitable in the transaction, it is possible to recalculate the registration rights in relation to the price that should have been charged by reference to the market value of the asset. Article L. 17 of the Book of Fiscal Proceedings provides that “as regards registration fees and the land registration tax or tax on added value (“taxe sur la valeur ajoutée”) where it is due in place of those rights or tax, the tax administration may rectify the price or valuation of a property that served as a basis for a tax levy, when that price or valuation appears to be less than the actual market value of the goods transmitted or designated in the deeds or declaration “.

B. The risk of requalification of the sale

39 – The tax regime for the sale of immovable property in life annuities may seem attractive to the taxpayer who wishes to transfer property to relatives, friends or relatives because it proves to be more advantageous than the tax regime applicable to donations. Indeed, transfer duties free of charge (“droits de mutation à titre gratuit”) are particularly high in France, especially when the donation does not benefit the direct descendants or the spouse.

Thus, Article 777 of the CGI provides for tax rates varying according to the family relationship between the deceased and his beneficiary and up to 60%. By comparison, a sale of immovable property in life annuities is simply subject to registration fees, although the rate has increased in most departments, but never exceeds 5.8%.

40 – Such an assembly must however be discouraged because, under these circumstances, the risk ofrequalification in disguised donation is very real.

41 – The tax administration will seek to establish the existence of an abuse of rights on the basis of Article L. 64 of the LPF. In order to establish the existence of a disguised donation in the sale of immovable property in life annuities, the tax authorities must establish the existence of a cluster of indices.

42 – In order to do this, various elements could have be retained by the Administration to characterize the existence of a disguised donation. Thus, the life annuity established at an unusually high amount, compared with the value of the property transferred; the waiver by the creditor of the security interest usually requested to the debtor; the existence of a relationship between the creditor and the debtor; the high age of the creditor and his precarious state of health at the time of the sale followed by the death of the creditor in a short period of time, leading to the absence of any hazard; the lack of income of the debtor to pay the annuity; the absence of “bouquet” are elements constituting indices, verified by the tax authorities in order to establish the existence of an abusive arrangement.

43 – Admittedly, the existence of an abuse of rights is rarely obvious, but such a requalification has already been validly accepted. At the same time, attempts to qualify sales as a donation disguised by the tax administration are not all accepted, in particular because some indices used, such as the death in the short term of the creditor, result from the necessarily random nature of the sale in life annuity.

7 Thus, the Advisory Committee (“comité consultatif”), which is often called upon to supervise the operation, may have considered in certain cases that the tax administration was justified in using the procedure provided for in Article L. 64 of the LPF, and in other circumstances, have considered that the abuse of right was not established.

44 – But in any event, if the tax administration succeeds in establishing the existence of a disguised donation behind a sale in life annuity, the fraud is characterized. Not only will the fraudster have to pay the tax that he would have had to pay at the time of the lifetime sale, but he would have to pay a particularly heavy penalty to the tax authorities. If an abuse of rights is established, a penalty of 80% in bad faith is incurred, to which interest at the rate of 0.40% per month, deducted from the date at which the donation is presumed to have been made, on the basis of the duties evaded by the taxpayer.

If it remains possible to deduct the transfer tax paid by the taxpayer, in practice such a requalification can result in a financial penalty exceeding the value of the property.

45 – Moreover, in addition to the risk of abuse of rights, in the context of family transmission analyzed, when the sale is accompanied by a reservation of usufruct, if the purchaser is a successor or an intermediary, it will be sufficient for the tax administration to rely on Article 1751 of the CGI to establish a presumption of ownership. The latter can only fall after demonstration of the reality of the payments of the life annuity.

46 – Conclusion. – The sale of immovable properties in life annuities is an old institution that is gradually rediscovered in the face of the ageing of an age group that aspires more and more to increase its purchasing power by making its real estate assets liquid.

However, the sale of an immovable in life annuity is complex to put in place and suffers from an unfavorable tax treatment, which it would be opportune to rethink if one wishes to see its use democratized.

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161227 The taxation of life annuity

Order No. 2016-827 of 23 June 2016 on markets in financial instruments adapts French legislation to several European texts.

In particular, it transposes Directive 2014/65/EU, known as ‘MiFID II’, and takes the measures implementing European Union Regulation No 600/2014, known as ‘MiFIR’, both of 15 May 2014. These two texts introduce a new organization of the markets for financial instruments which fills the gaps in the current legal framework – resulting from Directive 2004/39/EC of 21 April 2004, known as “MiFID I” – and ensures that the negotiation takes place on regulated platforms where appropriate, in particular by creating a new category of platforms: organized trading systems.

They also strengthen investor protection and the supervisory role and powers of regulators by giving them new powers to prohibit or restrict the distribution of financial instruments. Order of June 23, 2016 specifies in particular certain conditions of access and exercise of the financial investment advisor (hereinafter “CIF “), such as adhering to an accredited professional association. This Order comes into force on January 3, 2018.

1. Conditions of age, good repute and establishment

Pursuant to Article L. 541-2 of the French Monetary and Financial Code (hereinafter “CMF”), the CIF must ordinarily reside or be established in France. According to the same article, he must also satisfy the conditions of age, professional competence, and good repute, set out in Article D541-8 of the CMF, namely:

– The CIF must have the legal majority ;

– He must not be subjected to:

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a) A prohibition of temporary or permanent exercise of an activity or a service pursuant to the provisions of Article L. 621-15 of the CMF or on the basis of a sanction pronounced before 24 November 2003 by the Securities and Exchange Commission, the Financial Market Council (“Conseil des marches financiers”) or the Disciplinary Council of Financial Management (“Conseil de discipline de la gestion financière”);

b) The sanctions provided for in Articles 4 and 5 of Article L. 613-21 of the CMF or paragraphs 3° to 5° of Article L. 310-18 of the French Insurance Code. When the CIF is a legal entity, it shall be the natural persons having the power to manage or administer that legal person who must satisfy the conditions of age, good repute and professional competence.

2. To subscribe to a professional liability insurance Under Article L. 541-3 of the CMF, the CIF must be able to justify at any time the existence of an insurance contract covering it against the pecuniary consequences of its professional civil liability in case of breach of his professional obligations. The minimum levels of coverage for the professional liability insurance contract are set out in art. D. 541-9 of the CMF.

3. To join a professional association Under Article L. 541-4 of the CMF, all CIF must adhere to one – and only one – professional association approved by the French Financial Markets Authority (Autorité des Marchés Financiers).

This association is responsible for monitoring the individual professional activity of its members, their collective representation and the defense of their rights and interests. For the purpose of the membership of the financial investments advisor, the association verifies that he has a program of activities. It assesses the quality of this program in the light of the obligations laid down in Articles L. 541-2, L. 541-3 and L. 541-8 of the CMF, as well as the conditions under which the CIF intends to exercise his activity.

4. Be registered with the Single Register of Insurance, Banking and Finance Intermediaries (hereinafter “ORIAS”) Under Article L. 541-4-1 of the CMF, each CIF must be registered in a register maintained by ORIAS after verification that the CIF fulfils the conditions for access to the profession in terms of professional competence, good repute, underwriting of an insurance contract and membership of an association of CIF. To that end, he provides supporting documents at the time of his registration, and must pay an amount of 30 euros to the ORIAS.

5. Not to receive funds unrelated to the performance of the CIF functions nor financial instruments According to Article L. 541-6 of the CMF, the CIF must not receive from its clients any funds other than those intended for the remuneration of its financial investment advice activity. Furthermore, he cannot receive financial instruments from its clients.

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6. To pay an annual contribution to the AMF Finally, the CIF must pay the AMF an annual contribution of a fixed amount of 450 euros due in respect of the AMF’s audit mission concerning compliance by the CIF with the provisions applicable to them.

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161229 The conditions of access and exercise of the Financial Investment…

Object : Implementation of the French exit tax

CONTEXT

The fight against tax evasion processes, and in particular when they result in the relocation of the most important incomes and patrimonies, is one of the objectives of the legislator. The French exit tax, put in place to try to slow French tax relocations, is a very technical mechanism on both substantive and declarative aspects, but also on the modalities of the suspension of payment and events leading to tax relief or refund. We are going to present the implementation of this scheme, in a synthetic and practical way, through concrete examples concerning relocation in the EU in Iceland or Norway, the articulation of exit tax and deferrals, and relocation outside the EU.

COMMENTS

1. Relocation in the EU, Iceland or Norway A taxpayer who transfers his fiscal domicile on year N must submit on N+1 a declaration n° 2042, accompanied if necessary by its exhibits (No. 2042-C and No. 2042 NR in particular)

2 and form No. 2074-ETD, to the personal income tax service (“Service des impôts des particuliers”) on which his tax domicile depended before the transfer.

• For the period between January 1 and the day of departure of year N: the taxpayer declares on the form No. 2042 the amount of his worldwide income, excluding income acquired before his departure but not available to him.

• For the period after the transfer of domicile: pursuant to the provisions of Article 167 of the French Tax Code, the taxpayer declares the amount of his French source income taxable in France by application of the applicable tax treaty (exhibit No. 2042 NR). Information is given on the terms of return (“declaration”) in Information Document No. 2041 E – Persons domiciled outside France – Income tax 2015.

• For the exit tax, the taxpayer must declare on Form n° 2074-ETD:

– Unrealized capital gains, receivables of additional price and capital gains in deferral (“plus-values en report”) that became taxable in accordance with Article 167 bis of the French General Tax Code (GTC);

– The amount of tax attributable to such capital gains and receivables and the items required for its calculation;

– The date of the transfer of his tax domicile outside France;

– The address of his new fiscal residence.

• The following years, and throughout the period of residence abroad, the taxpayer who intends to benefit from the suspension of payment must subscribe annually for 15 years forms 2042, 2042-C and 2074 -ETS precising the amount of initial capital gains and receivables, the amount of capital gains carried forward and the amount of tax that is deferred of payment (“sursis de paiement”).

These returns are to be filed with the tax department of non-resident individuals. Failure to comply with these obligations or the inaccuracy of the data which must be included in it shall make the amount of the deferred tax payable. However, if the taxpayer regularizes his situation within 30 days of receiving the official notice (“mise en demeure”) from the Administration, the deferment is maintained.

• In the event of an event terminating the deferment, the taxpayer must file Forms 2042, 2042-C and 2074-ETS in the year following the expiry of the deferment of payment in the deadline for the submission of the overall declaration. He shall declare on form No. 2074- ETS the nature and date of the event terminating the suspension, the amount of the unrealized capital gains concerned and the calculation of the tax that has become due. In the event of a disposal for valuable consideration of the securities, if a depreciation is recognized, it may be offset against the gain realized on the transfer of the tax domicile.

• At the expiration of the 15-year period, the taxpayer declares the nature and date of the event that justifies the request for automatic relief from tax deferred payments or the refund of tax paid upon the departure of France.

• In the case of a new transfer of residence: the taxpayer must inform the tax office of non- resident individuals of any transfer of the tax domicile after his initial transfer with the address of the new domicile in the two months following this new transfer. In the event of the second transfer of fiscal domicile taking place outside the EU, Iceland or Norway, suspension of full payment of rights shall cease. The taxpayer must therefore pay the tax that became payable on his transfer, except if he claims the benefit of the deferment of payment on option.

2. Articulation of exit tax and tax deferral arrangements

3 • Departure after the exchange of securities which resulted in the recognition of a capital gain in deferral (“en report”) or deferment (“en sursis”). – The exit tax relates in particular to all capital gains on disposals or exchanges placed under one of the deferment or

deferral regimes in years prior to the transfer of the tax domicile. Thus, the capital gains contributions to a company subject to the corporate tax and controlled by the contributor (GTC, Article 150-0 B ter) must be declared and taxed in respect of the exit tax, except for the benefit of deferment of payment. In this case, a 2074-ETD and lines 1047 and 1048 of Form 2074 should be completed.

Example: By way of illustration: A taxpayer brings the shares he holds in a company subject to the corporate tax he has created for less than 2 years (A) to a personal holding he holds by 100% (B), then he transfers its tax domicile to Luxembourg with assets valued at € 1 million. The purchase price per share A is assumed to be 1.

– At the date of the contribution, the shares held by the taxpayer in company A are each valued at 101. This contribution transaction therefore yields a capital gain on each A share of 100 that can be placed under tax deferral by the taxpayer pursuant to the provisions of Article 150-0 B ter of the CGI.

– The departure of the taxpayer in Luxembourg immediately after this supply operation entails questioning the deferral of taxation in respect of the exit tax. Thus, the capital gain per share of 100 placed in deferral becomes taxable when the taxpayer leaves. However, the tax on income and social contributions due on the basis of this surplus value may benefit from the deferment of payment.

The transfer of the tax domicile of the taxpayer outside France also results in the end of the deferment of taxation provided for in Article 150-0 B of the CGI and the recognition of a unrealized capital gain calculated on the basis of the purchase price of the securities whose capital gain had been suspended. A taxpayer whose taxable capital gain is taxable as a result of the transfer of his tax domicile outside France may also benefit from the deferment of automatic payment on account of this capital gain.

It should be noted that the Amending Finance Law for 2016 (Law n° 2016-1918, Dec. 29 th 2016) applicable to transfers since January 1 st 2016 has specified the procedures for determining the applicable tax rate for the income tax (in application of CGI, Article 150-0 B ter) in order to bring the exit tax rules into line with the rules governing the taxation of capital gains in deferral in domestic law.

However, the income tax rate applicable to capital gains realized since January 1 st 2013 is no longer determined according to the rules applicable on the day of the transfer of residence but on the basis of the ones applicable at the date of the contribution of shares: it corresponds to the marginal tax rate at which these capital gains would have been taxed if they had been imposed in the year of contribution in accordance with the provisions of Article 200 A 2b of the GTC.

• Contribution of securities after relocation. – In the case of transfers prior to January 1 st 2014, the contribution of securities subsequent to the transfer to a company controlled by the contributor within the meaning of Article 150-0 B ter of the GTC constituted an event terminating the deferment.

Henceforth, the deferment of payment provided for by Article 167a of the GTC is not questioned when the contribution of securities subject to exit tax falls within the scope of the

4 tax deferral system of Article 150-0 B ter of the GTC or suspended by Article 150-0 B of the GTC.

In practice : The taxpayer will report the contribution in the annual follow-up declaration (“déclaration annuelle de suivi”). For example, regarding the follow-up status of 2015, for a transfer of residence in 2014, the taxpayer would fill in box 0 of form 2074-ETS3, indicating the characteristics of the contribution operation: date and nature of the transaction, number of securities contributed and received, total value of securities received.

In this case, the transfer of securities is an inter-bank transaction, and the 15-year period at the end of which the exit tax is terminated is continued at the level of securities received at the exchange.

Example: By way of illustration: The same taxpayer transfers his tax domicile to Luxembourg while he holds securities held in company A for a unit value of 101 and then brings his A’s securities to a holding company subject to corporate tax in France that he controls (B) for a value of 151.

– When leaving France, the taxpayer must declare unrealized capital gains on securities A (capital gain equal to 100) and assess the income tax and social security contributions due for this capital gain, before automatically obtaining a deferment of payment.

– After settling in Luxembourg, the taxpayer contributes its A securities to its holding B. This contribution does not lead to the end of the deferment of payment in France in proportion to the tax due on the securities contributed, i.e. the tax due on the capital gain of 100: this mechanism makes it possible to defer to obligations B the obligations linked to the maintenance of the suspension of payment. In addition, reference should be made to the rules governing the taxation of capital gains in Luxembourg in order to determine the tax treatment of the additional capital gain of 50 on A securities at the time of such contribution.

3. Relocation outside the European Union A taxpayer who transfers his or her tax domicile to a state outside the EU, Iceland and Norway may be granted an optional tax deferment. In order to exercise this option, he must send form 2074-ETD no later than 30 days before the date of the transfer of his tax domicile outside France, accompanied by a proposal for guarantees in the service of private non-residents individuals, and the appointment of a tax representative established in France authorized to receive communications relating to tax assessment, collection and litigation. The amount of the guarantees must be equal to 30% of the total amount of capital gains and receivables. However, the amount of the guarantees relating to the tax on capital gains deferred in accordance with Article 150-0 B ter of the CGI after 1 January 2013 shall be determined by application of the rate mentioned in Article 200 A 2 ter of the CGI.

Example: By way of illustration: the same taxpayer decides to transfer his tax domicile to Singapore on 1 March 2017. He will have to offer guarantees for an amount equal to 30

5 (i.e. 30% of the amount of the capital gain equal to 100) not later than January 30 th 2017, in the service of non-resident individuals if he wishes to apply for the deferment of payment. Those guarantees can take the form of a pledge of securities. The amount of guarantees proposed at this stage should not take into account the tax due but only the value of the unrealized capital gain on the transferred assets. The taxpayer must enter on Form 2074-ETD the amount of the unrealized capital gains, the amount of tax corresponding to these capital gains and the calculation of that tax. In addition, he expressly mentions his intention to benefit from the deferment of payment on option. In this case, the taxpayer must appoint a tax representative in France who undertakes to carry out all the formalities required of him.

The taxpayer must then file the same 2074-ETD declaration that was filed before his departure within the same period as the taxpayers who transfer their residence in the European Economic Area (EEA) i(n N + 1), to the Tax Service of Individuals (“Service des impôts des particuliers”) on which his domicile in France depended before his transfer, along with with his income tax declaration n° 2042, stating that it is a "second filing in the case of an optional deferment".

In the month following the receipt of the tax assessment issued in respect of the tax on unrealized capital gains, the taxpayer shall, if necessary, provide additional guarantees for the recovery of the tax, or demands the restitution of the difference between the amount of the guarantees constituted and that of the tax thus calculated.

Example: By way of illustration: the notice received by the taxpayer in September 2017 may indicate an amount of tax deferred differently from the amount of the guarantees granted by the taxpayer prior to his departure.

– If the income tax is equal to 17: if the amount of the tax is less than the proposed guarantees, the taxpayer may claim part of the guarantees offered up to 13 (= 17-30).

– However, if the tax calculated by the Administration is equal to 40: the taxpayer will have to constitute a supplement of guarantees for a value of 10 (= 40-30). In subsequent years, and for the duration of the deferment of payment, the taxpayer will have to file a 2074-ETS return to the Tax Service of non-resident Individuals to track its taxation. It should be noted that each year, different versions of this form are published by the tax authorities, depending on the year of transfer of the taxpayer's fiscal domicile.

However, the creation of guarantees is not required if the taxpayer justifies the transfer for professional reasons and if the State not party to the EEA Agreement has concluded with France an administrative assistance agreement to fight fraud and tax evasion and a mutual assistance agreement on tax collection, with a scope similar to that laid down in Council Directive 2010/24/EU of March 16 th 2010 concerning the mutual assistance in the collection of receivables relating to taxes, duties and other measures.

Thus, this requirement is one of the issues involved in the negotiation of new versions of tax treaties. Practitioners have thus regretted the absence of a recovery assistance clause in the new version of the tax treaty concluded between France and Singapore signed on January

15 th 2015. In practice : In the event of a transfer for professional reasons in one of the States complying with this condition, the taxpayer must provide in support of his application for deferment of payment on declaration No 2074-ETD a document attesting his change of

6 professional activity, his location and the date of the start of the activity (form 2074-ETD- NOT, transfers in 2015, III.B).

Once the taxpayer makes a second transfer, which results in a repatriation of his tax residence within the EU or the EEA, the deferment of payment of duty replaces the suspension of payment on option. The taxpayer may therefore request the guarantee-release to the Tax Service of non-resident Individuals.

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170208 Implementation of the French exit tax

Objet : Tax audit of the computerized accountings: legal and litigation aspects

The regime of the tax audit of the computerized accountings (TACA, French CFCI – contrôle fiscal des comptabilités informatisées) establishes a legal framework convenient to the efficiency of the tax audit. In spite of the apparent complexity of the procedure and the contentious traps, having entailed a number of unfavorable decisions for the Administration, the law offers both to the Administration a vast scope and to the taxpayer a specific guarantee particularly circumscribed. The real guarantees of the taxpayers are the ones which are common to all accounting audits. The procedures of TACA (CFCI) have to fit within the framework of the well-tried methods of tax audit, contributing in the same time to their renewal.

Introduction

The recourse to the computing can only be a lever favorable to the efficiency of the tax audit. Companies produce massively data which exceed the capacities of a manual treatment. In numerous situations, only the appeal to the computing may reveal the error or the fraud: accounting which is neither sincere nor convincing in spite of its regularity in the shape, provisions or unjustified transfer prices. Solely a feeble part of tax audit has recourse to CFCI (approximately 1% on average and fewer than 5% for medium and big companies). The complexity of implementation and coordination of the necessary skills, legal and fiscal on one hand, computing and technological on the other hand, is certainly the main cause of this state of fact.

In spite of its complexity, the legal regime of TACA is favorable to the development and to the efficiency of the controls. It has been modified four times within five years. There are few definitions of the basic terms of the regime – to say what covers the term “computerized accounting ” or “IT processing”. The jurisprudence shows a panorama of some few, isolated decisions the underlying principles of which remain little explicit.

In order to better understand this regime, one should dwell then on the following questions:

1. What is the scope of TACA?

2. In which cases the specific guarantees of TACA apply?

Besides TACA, “classic” tax auditing preserves entirely its relevance.

1. Article’s L.13, IV of TPB(tax procedures book) (French-LPF) field of application

2. The possibility of checking the accountings held by means of computer systems was created in 1982 by introducing the third paragraph in the article 54 of the General Tax Code: “If the accounting is established by means of a computerized system, the control extends to the documentation relative to analyses, to programming and to the execution of processing. To make sure of the reliability of the automated processing of the accounting, the Tax agents can proceed to control tests over the equipment used by the company, whose conditions will be further defined by decree”. But the creation of a specific control procedure intervened only eight years later with the modification of the article L.13 of TPB.

This article defines the field of application of the tax audit concerning the taxpayers compelled to keeping and presenting accounting records. Since 1990, a second paragraph has been introduced which allows auditors to accede “information, data, processing and

documentation “ if accounting held by computing means. Since 1st of January 2014, it is mentioned in a paragraph IV, but its wording remained unchanged for about twenty seven years. It is the heart of the legal regime:

“When accounting is held by means of computing systems, the audit concerns the whole of information, data and IT processing which participate directly or indirectly to the formation of accounting or fiscal results and to elaboration of declarations held as obligatory by the

General Code of Taxes, and also on the documentation concerning analysis, programming and execution of treatments.”.

3. Demarcation test

The aim of Article L.13, IV is to allow the Administration to comprehend the logic of the processing of the accounting information made by a company, in order to trace the different phases leading to the result and to the declarations. Administration ought to be able to collect all necessary information, data, processing and documentation in order to understand the result and the declarations. Therefore, all the general accounting is naturally part of TACA’s field, when held by means of a computing system. Every element, transmitted directly to the general accounting by the computing system, without any manual intervention, is equally part of the field. Thus, companies that use ERP (Enterprise resources planning systems), let in the main part of the information which they handle in the field of the procedure. It is the consequence of the integration of their information system.

3 It will be thus easy for the Administration to show how a module, for example SAP, of logistics (MM), of production (PP), of sales (SD) or human resources (HR) is letting in directly the data it process into the accounting and financial module (FI) and even into the management control module (CO).

Finally, there is a third level – the most delicate in litigation – which is the one of computerized devices producing aggregated data, manually taken over by the accounting or financial information system, without however direct integration.

According to the Administration, the primary datum is the one that contribute to the establishment of accounting records or to the justification of an event or of a transcribed situation in the books, registers, documents, pieces and declarations controlled by the fiscal Administration. The integrated datum is the one resulting from a processing made by the company- manually or by computing – of the elementary datum. The definition is difficult but generally it is not such a daunting question to agree if one is in the presence of a primary or integrated datum.

For example, the accounting held on management software is part of the field (first level). If the cash register software makes data that enter directly into the accounting modules, it makes also part of the field (second level). Otherwise, it doesn’t mean that it is necessarily excluded. If it provides for example some integrated data, which is registered even manually afterwards in the accounting software, the processing is part of the field (third level). If a production or logistics software which is included in an invoicing processing – for example, the company charges every time 10 parts are produced as it produces only to order – this processing is necessarily related to the accounting, if made by computing system (second level) as the operation is realized manually (third level): it makes part of the field.

4. The regime of TACA, as issued by the Statute of 29th of December 20121 treats directly the place of the analytic accounting within the field of the regime (TPB, art. L.13, II). Since 1st of January 2014, if the company keeps an analytic accounting and if its business figure exceeds the threshold of 152,4 millions of Euros for the sales and the half of it for service delivery, then the analytic accounting is part of the field.

For the other companies, i.e. those whose business figure does not exceed the above threshold or those not holding an analytic accounting, the test described above applies. If the management information is purely prospective and it has no connection with general accounting (this will surely interest the auditor), it is not part of the field. Conversely, if the management information has an impact on the general accounting, then it enters the field.

5. To sum up, an element is part of the field every time the Auditor establishes that he is not able to understand or control the result, or if such a declaration is made obligatory by the Code, if he has no access to the information, data, processing or documentation of such points X,Y or Z, notwithstanding the domain to which those points are related and even if it is a module of HR, Sale, Production, Logistics, Marketing etc. or a SI integrated or owner.

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L.n°2012-1510, 29 December 2012, art.14

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6. The specific case of cash registers – A particularly debated question has been if connected cash registers are the premise for a computerized accounting.

By decision rendered on 9th of April, 20142, the State Council (Conseil d’Etat) estimated that if the general accounting is not held by computing system, then the three cash registers connected between them do not form a computerized accounting.

No computerized general accounting, no auditing of computerized accounting, this seemed to be quite logical… However, even in this extreme case, the field of application of the regime as legally defined is vast enough to question the possible application of a TACA proceeding in various similar cases.

First of all, the Council revealed that on one hand that there was no IT system for the general accounting and secondly that the Administration was not challenging the manager’s allegations that “he would never proceed to the totalization of daily receipts from the three cash registers, not even partially” and that the cash register’s draft would have been be kept manually. Inversely, one would have had some integrated datum that got into the IT accounting system, certainly not computerized, but the Administration killed two birds with one stone: on one hand it proved that it should have access to those processing in order to understand the accounting and, on the other hand, as those processing were computed, it proved the existence of computerized accounting. This is the case appearing in a State Council decision of 29th of October 20123

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7. What are the criteria in order to know when the Auditor can treat a cash register’s data? If no cash register whatsoever or in case of a manual cash register without any data registered, there is no possibility of TACA and the Administration cannot go on the other side of the counter (from an IT point of view).

But a cash register is, as in the case Gamboni, almost always, a computed cash register, as it beholds cash register software. As seen above, the cash register book can be manually kept. But the cash register ribbon is a computed draft of the cash register.

It seemed to follow from the above decision that if the taxpayer keeps a manual draft of the cash register, by confronting this one to the cash register ribbon, which is the same but on IT support, it does not mean that the cash register is computerized. One could accept this small restriction, however surprising, which may not be significant.

Because there is another obvious condition to rule out the possibility of TACA: it should that every other functionality, even the simplest one, of the cash register software not to have been used: no stock management, no orders, no distinction of VAT rates, not even of totalization of receipts from other cash registers. The existence of a cash register book with all the data summed up should legally entail the change of the data to the TACA field. Thus, except for the ribbon, the cash register has to have been used as a non-computerized cash register.

2 CE, 3rd and 8th subsections, n° 369929, 9th of April 2014

3 CE, (author’s note), 9th subsection, 29th of October 2012, n° 352797

5 Finally, one should keep in mind that businesses not justifying their receipts by invoicing, every detail of every sale should be registered in the accounting books. Exception is made for cash sales, that Administration extend – out of pragmatism and convenience- for payments by credit cards and checks, of a total of 76 Euros by customer.

Therefore, if the accounting is not taking over the whole of the elementary data which supposedly should have been included, or if the data are incoherent, following the principle stated above, the Administration is justified in accessing the computerized data in the cash registers and consequently process them. This last point generates however some hesitation.

In short, the test established by the legislator allows a vast comprehension and one simple justification of the application field of the regime and solely few data remain outside if the company uses IT. That is why the trap of the exit of the field, if it exists, is not an inherent important risk in regimes of the TACA.

Respect of the specific guarantee accorded by law to the taxpayer, object of a processing request, in application of the art. L.47 A II of TPB, is the second apparent trap of the regime. The specific guarantee to TACA (TPB, art.L.47 A, II)

8. The article L.47 A, II of TPB gives the possibility to the Administration of auditing accountings by proceeding to processing.

The law offers to the taxpayers a guarantee consisting in the choice of one from the following three modalities:

– the Auditor performs the processing directly on the taxpayer material;

– the taxpayer carries out the processing for himself;

– the taxpayer gives to the Auditor the necessary files in order for the latter to perform the processing outside the business.

The reason behind this guarantee was to prevent paralyzing the business’s IT system during the tax audit. But this is a major procedural risk for the Administration. The compulsory delivery of accounting records file (ARF, French-FEC), starting as of the 1st of January 2014 (TPB, art. L.47 A, I), even though it allows to better circumscribe the guarantee doesn’t modify its substance.

Let’s illustrate the risk during litigation, by means of an example. In its decision of 24th of August 20114, the State Council stated that the Auditor having used the functionalities of the cash register software of the business, not connected to the accounting software, had performed an IT processing that would obliged him to previously inform the SARL of the different existing options. The State Council annulled the Court of appeal’s decision and discharged the SARL on the whole of its tax impositions.

Therefore it is crucial for the Administration to know when to propose the three modalities of processing above, on one hand to prevent paralyzing the audit by some time-consuming writings or exchanges, as every processing request is object to formalization by the

4 CE, 10th and 9th subsections, 24th of August 2011, n°318144

6 Administration and of the taxpayer’s choice, and on the other hand to secure the procedure. The ideal is for the guarantee to be systematically proposed and as widely as possible.

9. The test to know when the guarantee should be granted is the “processing”. The Law specifies that the test is the “processing” itself. If the Auditor wants to perform a processing, he will apply art. L.47A, II and grant the guarantees attached, namely the three processing modalities above. No processing means no specific guarantee.

Therefore, one should distinguish between:

– Is there the case of computerized accounting (TPB, art. L13, IV and TPB, art. L.47 A) or not? On this question, see n°3 above;

– If yes, is there the case for a processing request (TPB, art. 47A,II) or not (so then TPB, art. L.47, A, I)?

By its decision of 23rd December 20105, the State Council had clearly reminded that the guarantee provided by art. L.47 A, II is applicable only if the Administration wants to proceed to a specific processing ad hoc, on the basis of the business’s IT system.

From now on, the article L. 47 A, I of TPB obliges the taxpayer to give the ARF, but the guarantee linked to the processing does not apply, as the Administration can only perform sorting, ranking and calculations on the ARF. Thus, it is necessary to distinguish between “processing” and “calculation, sorting, ranking”, as the term “processing” has different meanings, whether is the Administration or the business that perform it.

10. Distinguishing between “processing” and “calculation, sorting, ranking”. The article L.47A, I of TPB states that “Administration can perform sorting, ranking and anycalculation in order to ensure there is a matching between the accounting records and the

fiscal (income) declarations of the taxpayer”. This article is combined with art. 102 B of TPB, which obliges the taxpayer to collect the whole of primary data in an electronic form. The ARF needs to allow the tracing of the history of all accounting movements such as orders, deliveries, stock movement, invoices, cost prices, sale prices, amount of the subscriptions, withdrawals (direct-debits), and securities transactions. Inevitably, the consequence is the following: if the Auditor makes sorting, rating and calculations on the basis of the elements that the taxpayer is bound to keep at the

Administration’s disposition, then there is no processing. Processing is therefore an operation more complex than sorting, ranking or calculations. A large part of so-called “processing” are in fact solely operations of sorting (and even less, as IT specialists, familiar with the “Turing” machine, know it so well).

There are many cases where the Administration has simply performed a “matching control” (contrôle de concordance) (as the term appears in the regulation) and discussed it afterwards in an oral and adversarial debate with the checked person, without being a processing.

5 CE, 9th and 10th subsections, 23rd of December 2010, n° 307780

7 Except for the cases when the Administration had explicitly and directly placed itself within the scope of the article L.47 A, II, the judge has to determine if terms as “requests” (“requêtes”) or “specifications of extraction criteria” (“spécifications de critères d’extraction”) constitute a processing or simply operations to obtain the data that is sorted afterwards for the “matching control”, terms that send to I. As the business is required to keep the ARF (FEC) available, a large part of the uncertainty has now disappeared, as the Administration is able to perform by itself its sorting, ranking and calculations without claiming anything else from the taxpayer, on the basis of the provided elements, whenever it may deem it appropriate.

11. Distinguishing between business’s processing (TPB, art. L.13, IV) and Administration’s processing (TPB, art.L.47 A, II).- As seen above, the business that keeps computerized accounting performs itself the necessary processing for the determination of the accounting or fiscal result and the production of declarations and processing that it is bound to keep available for the Administration.(TPB, art.L.13,IV)

It is thus necessary to distinguish the processing of the company and those of the administration:

-the processing of the company are management rules of the data and the files implemented in computer programs having a direct or indirect incidence on the determination of the accounting or fiscal results;

-the processing asked by the Administration are not management rules but an investigation, a control by the Administration which implies the use of the taxpayer’s computing system or the making of a computer program put into production in the taxpayer’s IT system. ,Unfortunately for the clarity of the regime and the certainty of the procedure, when the Administration wishes to simply identify a processing implemented by the business in the sense of a “management rule”, it uses the word “processing”.

Another case, a mixed one, is when the Administration, during the TACA, is controlling the processing performed by the business itself, when the latter has opted to perform itself the processing wished by the Administration.

The Administrative Court of Appeal of Versailles has judged that such a control was a processing following a non-optional method and thus violating the guarantee. The State Council has censored it in a decision dated of 20th of November 20136, as the Court of Appeal omitted to check out if the processing had been realized with the taxpayer’s material or software. The Council followed the Public Rapporteur’s conclusions who, after revealing the origin of the guarantee, has underlined that censure is needed only if the Administration has recourse to the business’s IT system.

This criterion is perfectly justified, even though it is only a necessary condition of the existence of a processing, and not solely a sufficient one, as seen above because of the specific characteristics of the guarantee and of the processing.

6 CE, 9th and 10th subsections, 20th of November 2013, n°334896

8It seems that the area of the guarantee is particularly restrained insomuch of questioning if the legislator had foreseen every possible consequence of the regime as it was created and

modified. Faced with the inefficiency of the regime between 1982 and 1990, without any ad hoc procedure, the legislator had eventually conferred powerful means of investigation to the Administration.

As the field of application of the TACA is quite vast and the specific guarantee is quite slim, it is fundamental that taxpayers benefit of traditional guarantees attached to all tax audit procedures. The relevance of the complement of a “classical” audit

12. The research of the “reality” by exploiting only the data obtained from the IT system, cannot replace traditional methods of extra-accounting reconstitution of receipts which is based on the real conditions of business’s exploitation.

Example 1: the Administration performs processing on the cash register software of a pizza delivery shop. Generally, the pizza is delivered within half an hour of the order. The date and hour of the order and the date and hour of the delivery appear in a file. When delivery’s date does not appear, the system takes on the date of the order and adds thirty minutes.

As the shop has three locations, another file takes over the date of the order, the location code and the ticket number of the delivery. A processing request allowed to the Administration to realize that, in the second file, numerous orders were posterior of their delivery, which meant that tickets have been modified afterwards.

By censing the whole of the modified tickets and comparing them with the others, it found a more important number of offered and some amounts invoiced feeble in absolute value. Then, by crossing the files, the Administration was able to replace the modified date of the order with the real restored one. It compared the percentage of free-of-charge in the two groups, roughly 75% in the modified tickets and 35% in the normal ones. In order to restore the receipts, it crossed the sales with the registered payments, the difference being considered as the dissimulated business figure.

The interesting point is to see that the computerized accounting was the only means to realize that the accounting was not sincere and to allow restoring the receipts, but this restoration of the receipts should have been made by classical means drawn from the real exploitation of the shop. Example 2: in a car renting shop, IT processing allowed the Auditor to realize that some vehicles were provisioned whereas the sale itself of the vehicle intervened before the closing, or the sale has been done without any loss. By this approach, he finds that provisions are approximately 30% superior to the reality., Evidently, if the vehicle is resold before the closing of the exercise, one needs to take into account the sale price and note the “cote argus”. But when discount is based on “argus” of an used car whose listing is inferior of the purchase price, an ulterior sale superior to the “argus” is not sufficient in itself to call into question the provision. This is a basic rule of provisions. Thus, the elements provided by the processing should take into consideration the closing date.

9 IT allows analyzing provisions for thousands of parts, better identifying the statistical analysis of the risk of obsolesce. One should remember that the provision corresponds to the risk of the shop of not finding a buyer for an article become obsolete that must be put to the scrap, and that the only fact of the resale with a loss inferior to the estimated one is not by itself sufficient to call it into question neither in its principle nor in its amount, which means that one should refer to the traditional principles of Tax Law.

13. Generally speaking, the processing performed during the TACA, must be accompanied by a grammar. Its syntax will be constituted by time-tested methods inspired by those done in other audits by integrating the new possibilities offered by IT and the possibility of processing a large amount of data. Its semantics should express itself in clear, usual terms drawn from businesses’ activities. Enhancement cannot be justified only by the crossing of data and files. If TACAs will necessarily allow the development of new methods of reconstitution of taxpayers’ tax bases, they must also be debated in a meaningful way by those interested.

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