Legal news

Facing an emergence of the rivals, the life insurance loses progressively its «Swiss knife » status of the investments world.

STRATEGY It is a continues love story. The French people adore life insurance. Frankly speaking, because the investment offers an unequal status in terms of the capital transmission and allows to make investments on funds in euro, a UFO in the investment world. Investing their savings to these fonds, consumers are certain indeed, thanks to the «ratchet effect», not to lose their acquired ownings. However, several changes spoil the game: first of all, yield erosion of the funds in euro (1,80% the last year on average according to the firm Facts & Figures and the new decrease is expected this year). Then, the creation the uniform standard deduction (prélèvement forfaitaire unique) beginning from the 2018, which reinforces likewise an attraction of the securities account.

The first question arising for the investors: should they give up hope on the funds in euro? Being disappointing these last years the product is not exhausted. «The insurance agents should encourage the investors once again to bring savings to their fonds in euro as soon as the rate will increase significantly, then they can appear to be more generous than today», – hopes Cyrille Chartier-Kastler, the president of the Facts & Figures. The clients of the privet banks ask questions about a new tax system.

Most of them want to know if the real estate part of their life insurance (real estate investment trust (SCPI), lands) will be subject to the real estate tax (IFI), which will replace the solidarity wealth tax (ISF). According to the current condition of the text, it is the case: it is necessary to reintegrate to the real estate tax the quota of the real estate kept in the life insurance contract. «But there is no need to make quick decisions or make urgent trade-offs, the text is still neither definitely voted for nor validated by the Constitutional Council ( Conseil constitutionnel)», highlights Xavier Richard, the director of the capital planning (l’ingénierie patrimoniale) department of the HSBC France. The other question: is it better to keep their stock portfolios (sicav) in the life insurance contract of in the securities accounts Equity Savings Plan (PEA)?

«Life insurance will stay an important device of the capital managing, but probably with a little bit less wide spectre than today», estimates Xavier Richards.

The «Swiss knife» of the investor, the life insurance witnesses an emergence of the new rivals. Keeping their stock portfolios (sicav) on the securities accounts or Equity Savings Plan (PEA), the private persons avoid paying the fee to the insurance agent (about 0,9%). As the fees are charged year after a year, in the last analysis they are quite heavy», highlights Cyrille Chartier-Kastler. The rate level, the assets valuation and tax reform will make the investors think first about their capital strategy. «There is no more evident choice. And the capital planning has become preponderant: for the given assets, depending on the investment conditions, the yield can vary from 1 to 3!», explains Meyer Azogui, the president of Cyrus.

The life insurance stays, however, unbeatable in the succession domain. In particular, for the big heritage. «Let’s take an example of the couple who has three children and who transmitted to each more than 700 000 euro. In the frame on life insurance, the 31,25% will be imposed on them, whereas it will be 35% outside this contract», counts Xavier Richard. It also allows not to be imposed on a gain (after the cession of the stock portfolio (sicav) or of the shares) as long as the assets rest in the contract. Finally, for the consumers who has set up a ceiling strategy (the income taxes, solidarity wealth tax (ISF) and supplementary social security contribution (CSG can’t represent more than 75% of the incomes et certain consumers try to limit the incomes to be imposed less), the life insurance is a good device. The incomes which are coming from the life insurance actually include a part of the capital, which limits the income taxation.

INVESTMENT An adoption of a uniform standard deduction on the life insurance will be profitable for one and disadvantageous for the others. But there is no reason to call into question its place in the estate managing. After twenty years of stability the taxation of the life insurance is facing the big changes with the introduction of the uniform standard deduction of 30% (prélèvement forfaitaire unique). The evolution which incites to revise the place of the life insurance but certainly not to wipe it off the map.

Which of the changes for the investments are already introduced?

First statement: the reform doesn’t imply any changes for the already invested sums before the 27 September 2017. It saves the previous tax regime, and therefore there is no reason to go backwards. For the sums withdrawn from the contracts after 8 years, the insured persons continue to benefit an annual tax allowance on the gains of 4 600 euro and 9 200 euro for the couple being subject to the common taxation, then the rate of the exempting standard deduction of the reduced rate of 7,5% is applied. «To the extent where each redemption contains at the same time a part of the initial capital, which is not taxable, and a part of the gains, which is taxable, the possibilities of a withdrawal are much broader than those sums let believe», specifies Gerard Bekerman, the president of the Afer. A life insurance containing for example a half of the premiums payed and half of the accrued gains authorizes, thus, to a yearly withdrawal of 9 200 euro in the investor is single and 18 400 euro for the couple. It will satisfy a good number of needs of the complementary incomes, as this tax allowance is valid every year.

And what about the new remittance?

The same statement for the sums invested after 27 September since they do not exceed 150 000 euro. Still, since the withdraw is effected after 8 years, the investors will have the right for the tax allowance and a reduced tax rate of 7,5% on the fraction of the withdrawn gains.

Thus, the principal change concerns the new installments but only for the part exceeding 150 000 euro. In the reality, this threshold is applied not only to the new installments, but to the totality of the sums placed to the life insurance. So, the person who invested 150 000 euro before the 27 September, then 100 000 euros after this date will be subject to the two different taxation regimes for its withdrawals. The tax authorities will apply the previous rules to the first 150 000 euros and new rules to the newly invested 100 000 euros. It is an insurance agency liability to communicate the data to determine the part of gains withdrawn corresponding to those two compartments.

Thus, there is a principal change: the part of the gains included to the withdrawal of the contract fed by the sum exceeding 150 000 euro will be subject to a new uniform standard deduction of 30%, that is 12,8% of the tax against 7,5% which existed till the present moment. The increase of the tax for 5,3%, but which will be applied only to the fractions of the withdrawals higher than tax allowance (4 600 and 9 200 euro), as this tax «deduction» (franchise) remains.

Hence, the wealthiest possessors of the contracts of the life insurance will become the main victims of this tax hardening, but only if they process the withdrawals exceeding the tax allowance. In reality, they will be affected a bit: «In general, our clients ask us to settle the sum of their withdrawal on the sum of the tax allowance in order to not pay the taxes», explains Jean Malhomme, a responsible of the individual deposits in Axa. Besides, the persons which can become more probably a subject to taxation generally keep their money as the investment to the life insurance during all their life, so their relatives could benefit the important tax exonerations on the succession rights which are still effective.

Who are the winners?

There will be persons who will benefit from the reform: from now on, it will be applied a rate or 30% of the uniform standard deduction to all the new contracts, even for the withdrawal made during 8 first years. The profit will be very significant for the withdrawal effected before 4 years, to which the rate of 35% was applied, and now it will decrease to 12,8%. And for the withdrawal of the contracts lasting between 4 and 8 years, it will decline from 15% 12,8%. A modest gain, but still good to have it!

Thus, the reform will introduce an unexpected element; it will imply a taxation more beneficial for the life insurance for the short and average term, smaller tax rate than before. It sounds like an invitation to use a life insurance for the short-term deposits, for example in the guaranteed fonds in euro, which, despite of the erosion of the performance, stay the most profitable security solution.
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171128 HOW TO RESTRUCTURE OWN CAPITAL (Comment remodeler son patrimoine)

Bare ownership (nue-propriété) donation of the shares under condition of reinvestment and postponement of the unsecured usufruct

By the court decision of the 31 march 2017 the Council of the State it was admitted the validity of the bare ownership (nue-propriété) donation of the shares under condition of reinvestment and postponement of the unsecured usufruct. By this the supreme judges confirm their position of the 10 February (CE, 9e et 10e ch., 10 févr. 2017, no 387960 : JurisData no 2017-002348; RFP 2017, comm. 8, note S. Torricelli-Chrifi ; JCP N 2017, no 18, 1172, note J.-J. Lubin ; Dr. Fisc. 2017, no 14, comm. 239, note R. Mortier). Little by little, at will of the court decision appears the supervision of the donation cession of the shares in the vis-à-vis abuse of rights process.

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Bare ownership donation (Donation de la nue-propriété) 20171002.docx

Deductibility of the loan and acquisition interests on the bare ownership (nue-propriété) on the part of the property society (SCI): a missed appointment for equalizing harmonization.

On the combined legal basis of the articles 8, 13, 1o и 31,I, 1o, d of the General Taxation Code of France (CGI) the loan interests are acquired personally by the holder of the bare ownership(nue-propriété) to finance the acquisition of the bare ownership (nue-propriété) from its part, within SCI as a holder of the rented real estate, the property interests are not deductible if the interested person would receive them for other property or property rights since those interests cannot be considered as the exposed obligation for the acquisition or the conservation of the estate income in conformity if the administrative doctrine prescriptions.

On the other hand, on this very same legal basis the loan interests supported by the usufruct holder from the part of society to finance this acquisition since it the only subject to the income tax for the quota corresponding to the right in the social Income that he receives.

Finally, the loan interests actually paid by the bare ownership holder of the rented property (not a part of the SCI) and intended to finance either acquisition of the bare ownership either expenses of repairing, maintenance or improvement of such property are deductible from the property income coming from their other property if necessary.

CE, 8e et 3e ch., 24 févr . 2017, no 395983, Frank, concl. B. Bohnert, note P.-Y. Di Malta: JurisData no 2017 -004184.
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Deductibility of the loan and acquisition interests (déductibilité des intérêts d’emprunts et acquisition) 20171002.docx

Economic substance became a central notion in the struggle against a tax fraud and tax evasion, a consensus seeming to have been found by the authorities to make a new reference norm in the field. This article aims to demonstrate in which aspects the use of this notion is superabundant, at best, and a source of insecurity for economic actors at worst. Thus, it invites judges and taxation authorities to place their reflection to the limits determined by legal certainty principle.

– The struggle against a tax fraud and tax evasion has a vital importance. The state of public finances consequent of the financial crisis of the 2008 as well as multiplication of aggressive tax optimizations of the transnational companies has persuaded the decision-makers to pass from the legal evaluation of situation to economical one. The uniform term for the complex of actions is economic substance.

– This notion constitutes a keystone of the international and European projects of struggle against a tax fraud and tax evasion. The plan of action BEPS of OCDE (OCDE, Plan d’action concernant l’érosion de la base d’imposition et le transfert de bénéfices, dit. projet BEPS :Edition OCDE, 2013) tends to line up the rules of taxation on the economic substance, preventing the artificial movement of the taxable benefits from the country where the values were created to the another one. The notion of the substance has an essential place in this project for the purpose of integration of the taxation to the economic reality in the most systematic way. The plan includes six actions aiming to dispose the taxation rights on the economic substance:

– Action 5 aims to guarantee benefit taxation under the preferential regime in the state which is the place of the actual activity Implicating that it will be actually provided the taxpayer for the aimed activity in any concrete country to benefit those advantages;

– Action 6 aims to prevent the use of the dummy companies without any economic substance to gain a double exoneration;
– Action 7 leads to modification of the definition of the stable company in such way that it could prevent the artificial avoidance of the stable company status for the purpose of tax base decrease and transfer of the benefit;
– Finally, actions 8, 9, 10 are intended to guarantee that the price of the transfer calculated between linked societies comply with the value creation. Thus, benefit taxation of the group of companies should be lined up better with the economic substance of the societies members, dividing more correctly the taxable income between the tax jurisdictions.

– The State Members of the European Union likewise the OCDE members were engaged to Implement the results of the elaboration of the 15 actions of plan BEPS. Thus, it is consistent that the states will take the measures to inhibit the practice of tax invasion and to guarantee the fair and effective taxation in the Union in the way which would be sufficiently consistent and coordinated. (Cons. EU, dir.

Those considerations were materialized by the adoption of the anti-evasion tax directives of the 12 July 2016. (Cons. EU, no 2016/1164, 12 juill. 2016, préc.)
– The spirit of this directive is summed up by the Council which states that «the current politic priorities in the international taxation domain highlights the necessity to make sure that the taxes would be played in the place where the benefit and values were created» (Ibidem, consid.1.). As
usual, the general anti-abuse clause was included in the directive. This clause refers implicitly to the notion of the economic substance refusing application an assemblage regime which were not set up for the valid commercial reasons reflecting economic reality. The aspects which were innovative in the initial proposition of this directive are those which referred expressly to the notion of the economic substance indicating that the of the assemblage «the tax liability is calculated on the basis of the economic substance in conformity with the national legislation” (Article 7 de la proposition de directive du Conseil établissant des régles pur lutter contre les pratiques d’évasion fiscal qui ont une incidence directe sur le fonctionnement du marché intérieur, 28 janv. 2016), the reference which does not appear anymore in the adopted final version.

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Economic substance and abuse of rights (Substance économique et abus de droit) 20171002

Luxembourg life insurance (l’assurance-vie luxembourgeoise) in financial management
Usually called “Luxembourg life insurance” (l’assurance-vie luxembourgeoise), life insurance contract (or a contract of the capitalization) put on the market by the insurance companies located in Luxembourg, has a great success in Europe and especially in France (the first country collector with 30% of purchase).

Substantially and functionally very similar to French life insurance, it has a lot of undeniable advantages for the depositors concerned about optimization of their property: a leveraged insurance by their regulations, international adaptability possible due to their tax neutrality and the modes of financial management which can be created as required.

Nevertheless, the subscription to the Luxembourg contract is followed by certain specificity which cannot be adapted to all the client profiles, thus the consultation of the financial adviser stays inevitable.

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Luxembourg life insurance in financial management

For the application of the article 1647 E of the General Taxation Code of France (CGI) which had as an aim took into account a contributive capacity of the company according to their activity, the venture capital companies as the societies of capital-investment were subjected to the calculation mode of the added value provided by the 3 of II of the article 1647 B of the same code.

This provisions which fixed the limitative list of the categories of the accountable elements which should be taken into consideration while calculation of added value including into production “products of bank exploitation and secondary products”. Or, those products did not include in conformity with the regulations of the comity of the bank regulations the added value for the equity investment and other shares held on the long term. Also, since the Equity securities held for investment portfolios are intended to stay permanently on the balance of the enterprise and thus don’t have a purpose to be given upon the short term, they should be considered as equal to the category of the shares held on the long term. As a result, the added value on the equity investment and other shares held on the long term are not among the elements that should be included to the added value of the venture capital company (1 re esp.) as well as societies of capital-investment (2 e esp.) and thus which should not be took into account to appreciate if the turnover of the company exceed the threshold to charge the minimal contribution of the professional tax provided by the article 1647 E of the CGI. CE, 8e et 3e ch., 27 mars 2017, no 394693, min.c/Sté Finorpa SCR (1 re esp.) concl. B. Bohnert

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The gains from the equity investment (Les plus-values sur titres de participation) 20171002(1)