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Legal news

The Airbnb Bill

Posted on : February 21, 2024

On January 29, 2024, the National assembly (“Assemblée Nationale”) passed the proposed “Airbnb” law on first reading with amendments.
This “Airbnb” law aims to put furnished tourist accommodation back on the long-term rental market, by modifying the taxation of tourist rentals with a drastic reduced tax allowance, down from 71% or 50% depending on the situation to just 30%.
New obligations have also been imposed on owners wishing to change the use of their property to furnished tourist accommodation, requiring them to provide a sufficiently good energy performance diagnosis, to prevent over-energy-consuming properties from ending up on vacation rental sites. Mayors will also have the power to reduce the maximum rental period for principal residences to 90 days a year, compared with 120 days today .

Modification of the taxation of tourist rentals

The proposed law modifies the highly advantageous “micro BIC” tax regime for tourist rentals:

  • The tax allowance for classified furnished tourist accommodation (quality label, ranging from 1 to 5 stars) is lowered to 30%, subject to an annual rental income ceiling of 30,000 euros (compared with 71% and a ceiling of 188,700 euros
    today) ;
  • In rural areas and winter sports resorts, an additional allowance of 41% is available, provided that sales do not exceed 50,000 euros ;
  • The tax allowance for unclassified furnished tourist accommodation will also rise to 30%, with an annual rental income ceiling of 15,000 euros (compared with 50% and a ceiling of 77,700 euros today).

In addition, the double deduction of depreciation for non-professional furnished tourist accommodation (LMNP) (“Location meublée non-professionel”) as part of the actual tax regime has been abolished.

New obligations for furnished tourist accommodation

The text requires owners who want to change the use of their property to a furnished tourist accommodation:

  • For a definitive change, the presentation of an energy performance diagnosis (“Diagnostic de performance énergétique”) (DPE) classified between levels A and D ;
  • For a temporary change, the mandatory energy renovation schedule for housing set by the 2021 Climate and Resilience law (“Loi Climat et resilience de 2021”). As in the case of conventional housing, G-rated furnished tourist accommodation will be banned from rental on January 1, 2025, F-rated on January 1, 2028 and E-rated on January 1, 2034.

Principal residences and overseas territories are not affected

These new rules will prevent long-term rentals from switching to short-term rentals to get around the ban of the renting of over-energy-consuming properties. It is planned that the stock of premises that have already obtained final authorization will be brought into compliance within five years.
A new obligation will also apply to condominiums: owners and tenants will have to inform the syndic of any change of use, who will have to put it on the agenda for the next general meeting.

Extended powers for mayors

The proposed law gives mayors broader powers to better regulate premises used for tourism :

  • The town hall registration procedure is extended to all prior declarations for the rental of furnished tourist accommodation (“Déclaration préalable de mise en location d’un meublé de tourisme”), regardless of the municipality, and whether or not it is a principal residence. Although furnished tourist accommodation already have to be declared to the town hall, they are not always registered, which means that supporting documents can be requested. The widespread use of a registration number, after declaration to a national teleservice, is considered essential to improve mayors’ knowledge of the rental tourist (“parc locatif touristique”), and a necessary condition for better regulation. The system will be applicable by early 2026 at the latest ;
  • Mayors will be able to impose two new administrative fines of up to 5,000 euros for failure to register a furnished tourist accommodation, and up to 15,000 euros for use of a false registration number ;
    All municipality will be able to lower the maximum number of days a principal residence can be rented out for tourism purposes, from 120 days to 90 days per
    year ;
  • Municipality with change-of-use regulations will be able to extend the change-of-use regime to all premises not used for residential purposes. The aim is to regulate the practices of investors who are increasingly turning to the conversion of offices into furnished tourist accommodation, since the introduction in 2021 of an authorization for the conversion of commercial premises into tourist accommodation.

The text also extends to all communes the option of applying change-of-use regulations, without authorization from the prefect. It also opens up the possibility for municipality to define quotas for change-of-use authorizations, and to delimit, in their local urban plan (PLU) (“Plan Local d’Urbanisme”), sectors where, for any new construction, only principal residences will be authorized.

This option will be open to some 9,300 municipality : those with more than 20% secondary residence, and those where the annual tax on vacant propriety (“Taxe annuelle sur les logements vacants”) is applicable and where an increase in residence tax on second homes (Taxe d’habitation sur les residences secondaires”) is permitted. The Senate must now examine the proposed law.

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The taxation of expatriated employees

Posted on : February 14, 2024

Note on the special tax regime for expatriate employees and the conditions under which they are eligible for this special regime with other taxpayers who select domicile in France.

Taxation of expatriate employees – Impatriates employee

Article 155 B of the French General Tax Code (GTC) provides the possibility for expatriate employees in France to benefit from a special tax regime. The GTC provides number of conditions for the application of the “impatriation” scheme.

Scope of the General Tax Code – The conditions

  • The status of the taxpayers

In application of article 80 ter of the GTC, there are a statute requirement to benefit of the impatriate regime :

– For public limited company Chief Executive Officer, the directors or members of the Supervisory Board, the members of the Management Board and the provisional managing director.
– For minority managers of limited liability companies.
– For all other companies or establishments subject to corporation tax, managers subject to the employee tax regime.

  • Executive expatriation

The GTC requires, for those taxpayers to be called from abroad to take up employment with a company established in France for a limited period (in a maximum of 8 years). The expatriation may not exceed 8 years, in which the expatriate is considered as a resident in France for tax purposes. To be eligible, the expatriate must not have been domiciled in France for tax purposes in the 5 years prior to expatriation.

Consequences of impatriate employee status

  •  Impatriate workers taxation

Impatriate workers benefit from a special tax regime to the extent that they are subject to tax on the remuneration received directly in connection with their new position carried out in France.
Nevertheless, expatriates can still opt out for a taxation equal to 30 % of their remuneration received in France. Expatriates are granted by a continuity of this scheme, even though they are replaced for a new function in the same company, but also if they are replaced in a new company detained by the same group, if the new company is located on French territory.

Expatriates can also benefit, in case of a work trip in a foreign country, which implied a remuneration, only if this trip was directly and exclusively bound to the French employer interest. Expatriates will also be able to benefit from a 50 % reduction in the amount of income from transferable securities, income from patents or copyright, and gains from the sale of securities or company rights, paid from outside France or by a person residing in a territory bounded with France by a tax treaty including an administrative assistance clause to fight tax fraud.

According to the highest administrative court decision, the Conseil d’Etat, of the 21st of October 2020 (no. 444799), the exoneration of transferable capital provided by article 155 B of GTC point II, is not linked to an actual remuneration for the activity in France.

There is no taxation for any expatriation bonuses. On the 27th Septembre 2023, the French National Assembly rendered a Report establishing that the situation of impatriate employees’ property wealth taxation in France was limited to assets located in France.

  • Advantages of the expatriate scheme in France

The expatriate employee in France, if he is seconded for a significant period abroad, will not be able to hope for an exemption from the remuneration he will have received abroad, under the yoke of article 81 A of the GCT, it will only be subject to the exemption provided for by article 155 B of the GCT.

A decision of the Conseil d’Etat, dated on March 26, 2003 (no. 226400), establishes the maximum duration of the expatriation at 24 months, beyond this period, the exemption of income obtained abroad provided for by article 155 B of the GCT is no longer guaranteed for the taxpayer.

The expatriated taxpayer is granted by an extended limited period than taxpayers submitted to article 81 A of the GCT. Which are subject to assessment by the administrative courts, which determine a reasonable duration on a case-by-case basis (EX: Conseil d’Etat decision of March 14, 2011, no. 318129).

Taxation of taxpayers electing domicile in France

The main principle in Taxation law is territoriality. In France, this principle is provided by article 4 of the GTC:

“Persons whose tax domicile is in France are liable to income tax on all their income. Those whose tax domicile is outside France are liable for this tax solely on the basis of their French-source income.”

Conditions for tax liability in France

Prior to be subject to taxation in France, foreign taxpayers must have close or at least significant ties with France.

According to article 4 B of the GTC, if foreign taxpayers want to be subject of French tax law, they must have their main home or place of residence in France, be employed or self- employed in France, or have their center of economic interests in France.

A Conseil d’Etat’s ruling of the 15th of June 2007 (no. 284449) stated that foreign cannot opt for French taxation if there are no ties with France.

Consequences for taxpayers

If we refer to article 4 B paragraph 1 of the GTC, it can be determined that taxpayers who opted for tax domicile in France is taxable on his universal income, even foreign income is subject to an allowance from French tax.

In this case, taxpayers will be taxed in accordance with the agreements entered by France and the country of the source of the income.
Taxpayers will be subject to the international agreements concluded with France and the countries of the source of the income.

In the absence of agreements, taxpayers will be subject to double taxation in the country of source, which will lead to a tax credit against French tax authorities, depending on the amount of this tax, if taxpayers are subject to a higher tax than what is provided in French law.
Otherwise, taxpayers will have to pay the difference between the tax at source and the French tax in France.

Med venlig hilsen / Kind regards
Cabinet Nicolas BRAHIN
Advokatfirma i NICE, Lawyers in NICE
Camilla Nissen MICHELIS
Assistante – Traductrice
1, Rue Louis Gassin – 06300 NICE (FRANCE)
Tel : +33 493 830 876 / Fax : +33 493 181 437
Camilla.nissen.michelis@brahin-avocats.com
www.brahin-avocats.com

 

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International tax treaty between FRANCE and the UNITED KINGDOM: The tax credit context.

Posted on : January 19, 2024

A convention between FRANCE and the UNITED KINGDOM for the avoidance of double taxation and the prevention of fiscal evasion and avoidance with respect to taxes on income and capital gains, together with a protocol, was signed in London on June 19, 2008.

The agreement of June 19, 2008, replaced the agreement of May 22, 1968, as amended by four successive addenda.

In terms of general provisions, the agreement has similar features to other international agreements with FRANCE.

  • Persons covered :

The agreement applies to residents of FRANCE, THE UNITED KINGDOM or both.

  • Taxes covered :

Paragraph 1 of Article 2 of the agreement lists the taxes covered by the agreement:

“The taxes to which this Convention shall apply are: (a) in the case of the United Kingdom: (i) income tax; (ii) corporation tax; (iii) capital gains tax; (hereinafter referred to as “United Kingdom tax”) ; b) in the case of France, all taxes levied on behalf of the State or its local authorities, irrespective of the system of collection, on total income or on items of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amount of salaries paid by companies, and taxes on capital gains, and in particular : (i) income tax; (ii) corporate income tax; (iii) social security contributions on corporate income tax; (iv) payroll tax; (v) general social security contributions; (vi) social security debt repayment contributions”.

For FRANCE, these include income tax, corporate income tax, the social contribution on corporate income tax, payroll tax, general social contributions and contributions for the repayment of the social debt.

  • Real estate wealth tax :

Since January 1, 2018, the ISF has been replaced by the real estate wealth tax (“l’impôt sur la fortune immobilière”), whose base is restricted to real estate and real estate rights held by the taxpayer, directly or through a company or organization.
In its administrative comments on this new tax, the French tax authorities stated in a remark that “the principles guiding the interpretation of the provisions of tax treaties used for the wealth tax are used for the wealth tax. However, a treaty applicable to the solidarity tax on wealth is not necessarily applicable to the wealth tax, as a case-by-case examination of the treaty provisions is necessary”.

  • Tax credit for French tax residents :

The tax credit for French tax residents is equal to the amount of French tax corresponding to income taxable in the UNITED KINGDOM. The income qualifying for the tax credit is income included in the UK tax base, without the person concerned being exempt on the grounds of his or her status or activity but does not require such income to have been subject to effective taxation. As regards French social security contributions, the granting of a tax credit equal to their amount is not subject to the condition that the income subject to these contributions has been included in the base of an equivalent or similar tax in the UNITEDKINGDOM.

In a ruling handed down on February 12, 2020 (no. 435907), the French State Council (“Conseil d’Etat”) clarified the contours of the tax credit intended to eliminate the double taxation provided for in the treaty between France and the United Kingdom.

The tax credit for residents of FRANCE is equal to the amount of French tax corresponding to income taxable in the UNITED KINGDOM. Income qualifying for the tax credit is income included in the UK tax base, without the person concerned being exempt on account of his or her status or activity. In the absence of a condition of effective taxation in the UNITED KINGDOM, social security contributions must be counted among the taxes giving entitlement to the credit.

  • Tax credit for UK tax residents :

When a person becomes tax resident in the UNITED KINGDOM and continues (or starts) to receive income and/or gains abroad, there is generally an obligation to submit a UK tax return.

The fact that an individual resident in the UNITED KINGDOM is only taxable on foreign-source income if the latter is repatriated to the UNITED KINGDOM, the person must file the tax declaration in both countries.
At the same time, such a person is not deprived of the status of resident within the meaning of the current treaty insofar as such income is theoretically taxable in the UNITED KINGDOM subsequent to the year in which it is received.

Similarly, tax residency is not conditional on unlimited tax liability in the country of residence, as the French State Council (“Conseil d’Etat”) considers that the decisive criterion for qualifying as a tax resident is the taxpayer’s tax liability on the basis of the ties he or she has developed with the country of residence, and not the extent of the tax liability to which the taxpayer is subject there.

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International succession: Determining the applicable law in the context of an international succession

Posted on : January 15, 2024

International succession is a thorny issue. Many questions are raised concerning the settlement of international succession and the necessary procedures. What is the applicable law? The law of the country of which the deceased was a national? The law of the country where the deceased’s assets are located? The law of the country where the heirs reside?

International inheritance seems an almost impossible procedure. The settlement of international successions raises a few practical difficulties.

This is particularly true when it comes to determining the law applicable to international succession. The same applies to the taxation of assets arising from international successions. As such, mastery of these rules is of major interest when it comes to managing taxpayers’ assets.

Private international law was profoundly reshaped by the entry into force, on August 17, 2015, of European Regulation (EU) No. 650/2012 of July 4, 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and the creation of a European Certificate of Succession, known as the Succession Regulation.

In terms of conflict of laws, the European regulation has revolutionized practice in at least two respects:

  • On the one hand, it provides for the application of a single law to the entire succession, whereas domestic rules were based on the principle of splitting the connection between movable and immovable property;
  • Secondly, it opens up the possibility of choosing the law of succession in favor of the law of the nationality of the deceased, whereas French law prohibited any autonomy of will in this respect. These changes give a new dimension to the practitioner’s duty to advise.

The conflict-of-laws rules resulting from the European regulation are universal in nature, and have replaced domestic conflict-of-laws rules where the regulation is applicable. However, the latter continue to govern successions opened before August 17, 2015.

On the other hand, the taxpayer must check whether the estate is considered to be international, in other words, whether from his point of view it presents at least one foreign element such as, in particular :

  • foreign nationality of the deceased ;
  • habitual residence abroad ;
  • the presence of assets abroad ;

The European regulation has retained the principle of a unitary connection of the succession, the law applicable to the succession being that of the State of the place of habitual residence of the deceased, unless a choice is made in favor of the law of the nationality.

The practitioner should refer to article 21 of the aforementioned regulation, which lays down the following general rule:
“1 Unless otherwise provided in this Regulation, the law applicable to a succession as a whole shall be the law of the State in which the deceased had his habitual residence at the time of his death

2. Where, by way of exception, it is clear from all the circumstances of the case that, at the time of his death, the deceased was manifestly more closely connected with a State other than that whose law would be applicable by virtue of paragraph 1, the law applicable to the succession shall be that of that other State”.

In a decision dated September 21, 2022, published in the official journal of FRANCE (“bulletin”) (no. 19-15.438), the French Supreme court (“Cour de cassation”), on its First Civil Chamber reunited, validated this position, stating that:

“The law must be interpreted as meaning that a court of a Member State must declare of its own motion that it has jurisdiction under the subsidiary jurisdiction rule provided for in that provision. […] Consequently, a court of appeal which declares that the French court lacks jurisdiction to rule on the succession and appoint a succession agent, on the grounds that the deceased’s habitual residence was located in the United Kingdom, without raising of its own motion its subsidiary jurisdiction, is in breach of this text, even though it was clear from its findings that the deceased had French nationality and owned property located in France”.

Declaration of international succession in FRANCE

The declaration of international succession must be made using the appropriate forms. It must be filed within a specific timeframe.

The declaration of international succession must be filed :

  • within 6 months of the date of death if the death occurs in France ;
  • within 12 months in all other cases. There are, however, certain exceptions. This applies in particular to the deaths of residents of Mayotte and Réunion. For residents of these countries, the time limit may be extended to two years, depending on the place of death.

However, it is not necessary to file a declaration of inheritance if the gross estate assets are less than :

  • €50,000 for transmission to direct line heirs, the surviving spouse and the partner bound to the deceased by a civil solidarity pact (PACS), provided that these persons have not previously benefited from an unregistered or undeclared manual gift from the deceased;
  • €3,000 for other heirs.

The declaration of inheritance of a person who dies in a foreign country must be filed by the heirs within 12 months of the date of death with the Tax Receipt for Non-Residents. Inheritance tax must be paid at the same time. When the deceased and/or his heirs reside abroad, it is necessary to ascertain the existence and provisions of a bilateral international convention signed between France and the foreign country.

Below is a table showing the rates of inheritance tax on the net taxable portion after deduction of allowances:

  • Between spouses or partners :
2023 Rate  Deduction 
< 8.072 EUR  5%  0 EUR 
Between 8.072 EUR et 15.932 EUR  10 % 404 EUR 
Between 15.932 EUR et 31.865 EUR  15 % 1.200 EUR 
Between 31.865 EUR et 552.324 EUR  20 % 2.793 EUR 
Between 552.324 EUR et 902.838 EUR  30 % 58.026 EUR 
Between 902.838 EUR et 1.805.677 EUR  40 % 148.310 EUR 
> 1.805.677 EUR  45 % 238.594 EUR 
  • In direct line :
2023 Rate Deduction 
< 8.072 EUR  5%  0 EUR 
Between 8.072 EUR et 12.109 EUR  10 % 404 EUR 
Between 12.109 EUR et 15.932 EUR  15 % 1.009 EUR 
Between 15.932 EUR et 552.324 EUR  20 % 1.806 EUR 
Between 552.324 EUR et 902.838 EUR  30 % 57.038 EUR 
Between 902.838 EUR et 1.805.677 EUR  40 % 147.322 EUR 
> 1.805.677 EUR  45 % 237.606 EUR 
  • Between sisters and brothers, living or represented
2023 Rate  Deduction
< 24. 430 EUR 35 %  0 EUR 
> 24.430 EUR 45 %  2.443 EUR 

Nieces and nephews representing their deceased or relinquishing sibling benefit from the rate applicable between brothers and sisters for estates opened on or after January 1, 2007.

Where should an estate declaration be made in FRANCE?

In the case of an international estate, a declaration of inheritance must be made in FRANCE. The declaration of inheritance of a person domiciled outside France must be made to the tax authorities. The declaration and payment must be made to the non-resident department of the General Directorate of Public Finances (“Direction Générale des Finances Publiques”).

Taxation of an international estate

Determining the tax rules applicable to an international estate can raise a number of practical difficulties. In principle, the applicable tax regime is that of the country where the deceased is domiciled. It is therefore normally this state that will have the right to tax the assets owned by the deceased on the day of his death. However, certain specific features of international taxation apply. Real estate is taxed in the country where it is located. Thus, in principle, in the context of an international succession, FRANCE will retain the right to tax real estate located on its territory.

FRANCE will also have the right to tax heirs or legatees if they have been domiciled in France for tax purposes for at least 6 of the last 10 years prior to the transfer. However, there may be several situations where the deceased’s assets are taxed in two countries, leading to a situation of double taxation. In such cases, FRANCE allows the tax paid abroad to be offset against the tax payable.

Specific rules for property in an international estate

Two situations need to be distinguished. The applicable rules differ according to whether the deceased was domiciled for tax purposes in FRANCE or outside FRANCE.

The deceased was domiciled in France for tax purposes :

All inherited movable and immovable property, whether located in FRANCE or abroad, is taxable in FRANCE. This principle therefore applies regardless of where the deceased was domiciled at the time of inheritance.

The deceased was domiciled for tax purposes outside FRANCE :

If the heir is not domiciled for tax purposes in FRANCE at the time of the succession or has not been domiciled in FRANCE for at least six years during the ten years preceding the succession, he must pay inheritance tax on movable and immovable property inherited in FRANCE. This applies whether he/she owns them directly or indirectly. This applies, for example, to French public funds, interest shares, trust assets or rights, French debts, and securities.

If the heir is domiciled in FRANCE for tax purposes at the time of the transfer and has been so for at least six of the ten years preceding the transfer, he will be liable for inheritance tax on the movable and immovable property he inherits, both inside and outside FRANCE. This applies, for example, to public funds, interest shares, fiduciary property or rights, debts and, in general, to all French or foreign securities.

 

 

 

 

 

 

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International Tax Treaties

Posted on : January 9, 2024

An illustration of the different tax effects based on the same legal basis of the elimination of the double taxation : different tax effects according to the taxable person residence

Tax treaties are international treaties designed to prevent taxpayers – companies or individuals – from being taxed twice on the same income by two different countries, and also to combat tax evasion and avoidance.

A country’s tax system may include rules imposing higher taxation on foreigners. Many tax treaties between FRANCE and other countries include a non-discrimination clause based on nationality. Thanks to this clause, foreign taxpayers will be treated in the same way as nationals of their country of residence, who are in a comparable tax situation.

An exemplary illustration will be given of the principle of eliminating double taxation and its different effects between different countries. The legal basis of elimination of the double taxation is the same but the tax effects are different according to the country of the residence of the taxable person.

Two methods exist for eliminating double taxation. These are the exemption method, which can be total or progressive, and the imputation method, which can also be total or ordinary.

FRANCE has the most extensive network in the world, with 121 bilateral tax treaties. The majority of international tax treaties signed by FRANCE are based on the Organization for Economic Cooperation and Development (“Organisation de coopération et de développement économiques”) (OECD) model, which provides different definitions of the concepts of stable establishment or residence and sets out tax rules for the taxation of income and wealth.

Tax treaties are negotiated by the Tax Legislation Directorate (“Direction de la législation fiscale »)(DLF), in conjunction with the Ministry of Europe and Foreign Affairs, which plays a secondary role. The International Legal and Economic Expertise Mission (“Mission d’Expertise Juridique et Économique Internationale”) (MEJEI), located within the Public Finance Department (“Direction Générale des Finances Publiques”) (DGFiP), is responsible for ensuring that tax treaties are properly applied. However, each tax treaty between FRANCE and another country imposes different requirements.

Below, it will be analyzed the tax treaties between FRANCE and three other countries: UNITED STATES, HONG-KONG and RUSSIA.

1. Tax treaty between FRANCE and the UNITED STATES concerning taxes on income and wealth.

An agreement for the avoidance of double taxation and the prevention of fiscal evasion and fraud with respect to taxes on income and capital was signed on August 31, 1994, in PARIS between the Government of the French Republic and the Government of the UNITED STATES of America. It is accompanied by a protocol and an exchange of letters forming an integral part of the agreement.
This agreement replaced the agreement signed on July 28, 1967, amended by the protocols of October 12, 1970, November 24, 1978, January 17, 1984, and June 16, 1988, including the exchanges of notes or letters annexed.

The article 33 of the agreement provides that the provisions of the agreement shall apply:

“a) with respect to withholding taxes on dividends, interest and royalties, and U.S. excise taxes on insurance premiums paid to foreign insurers, to amounts paid on or after February 1, 1996.
b) with respect to income taxes, to tax periods beginning on or after January 1, 1996.
c) as regards taxes not mentioned above, to taxable events occurring on or after January 1, 1996.
d) Notwithstanding the foregoing:
– the provisions of e of paragraph 4 of article 10 (dividends) and those of article 12 (royalties) shall apply to dividends and royalties paid on or after January 1, 1991.
– for mutual agreement procedures under Article 26 of the Convention, to cases submitted to the competent authorities on or after December 30, 1995”.

Persons covered by the agreement

Unless the convention provides otherwise, the persons concerned are residents of FRANCE and the UNITED STATES, namely any person subject to tax by reason of their domicile, their residence, their registered office. management, its head office or any other criterion of a similar nature. Green card holders are also affected.

Determination of tax residence

  • Natural persons :

In the event of a residence conflict, it is resolved by successively applying the criteria retained by the convention, namely: The permanent home, the center of vital interests, the usual place of stay, the nationality, the agreement of the competent authorities of the two countries.

  • Legal entities :

The conflict of residence is decided by the competent authorities who take into account the place of effective management of this person, their registered office and any other relevant element. In the absence of such agreement, such person shall not be considered a resident of either Contracting State for the purposes of granting the benefits of the Convention.

Taxation of individuals

  • Activity income :

Remuneration from salaried employment is, conventionally, taxable in the State in which the professional activity is carried out (except in the case of temporary assignments). Pensions are taxable in the state of source.

  • Passive income :

Real estate income is taxable in the state where the building is located. Dividends are taxable in the state of residence of the beneficiary but may be subject to withholding in the state of source which cannot exceed 15% of the gross amount of these dividends. Interest is taxable in the beneficiary’s state of residence. Real estate capital gains are taxable in the state where the building is located. Capital gains from the sale of shares or units are taxable in the state of residence of the beneficiary. Particularity concerning American nationals who are tax residents of FRANCE, as an exception, the dividends, interest and capital gains on the sale of securities from American sources that they receive are taxable in the UNITED STATES.

Wealth tax

The article 23 of the convention deals with wealth tax, but also applies to real estate wealth tax (“impôt sur la fortune immobilière” (IFI), as confirmed by the French tax administration.
This provision provides for the taxation of wealth constituted by real estate in the State in which the property is located.
It also provides that natural persons of American nationality who do not have French nationality and who become residents of FRANCE are exempt from wealth tax for the 5 years following those of their installation in FRANCE, for assets only. held outside FRANCE.

Business taxation

The convention uses the criterion of permanent establishment allowing profits from a commercial or industrial activity to be taxed at the place of exercise of these activities and not at the place of residence of the company. Thus, in the case of a company established in FRANCE which carries out all or part of its activity in the United States where it has a permanent establishment, the results resulting from this activity and attributable to the permanent establishment will be taxable to the UNITED-STATES.
A permanent establishment is defined as an installation with a certain permanence. This may include a management headquarters, a Branch or an office.

Elimination of double taxation

As a reminder, the tax convention distributes the right to tax income between FRANCE and the UNITED STATES. However, as a tax resident of a country, this person must declare all of their income there. Likewise, American nationals, even if they are residents of another country, must declare all of their income in the United States. The France-United States convention uses the tax credit (“crédit d’impôt”) as a method of eliminating possible double taxation.

System to combat tax evasion and fraud

Finally, the agreement has an administrative assistance clause with a view to combating tax fraud and evasion, as well as a mutual assistance clause in matters of recovery allowing for an automatic suspension of payment and not having to provide guarantees for those liable for the exit tax when they leave FRANCE.

Tax allocation under the tax treaty

Where it gets a little more complicated is that the treaty gives the right to tax differently depending on the nature of the income. Sometimes, only the taxpayer’s state of residence will be able to tax, sometimes the state of income, sometimes the right will be attributed to both, and this is where the tax credit mechanism comes into play.

To simplify matters, here are a few rules to bear in mind (note that there are often exceptions):

  • Salaries, wages, annuities received from salaried employment: taxable in the state where the activity is generated ;
  • Self-employed activities: taxable in the state of residence ;
  • In the case of wealth tax, if you are an American tax resident, you are not taxable in the United States and you will only be taxable in France if your French wealth is equal to or greater than 1.3 million euros (excluding financial investments) ;
  • Dividends: a priori taxable in both states, but with a ceiling in the source state.

Furnished rental regime

Income from a furnished rental activity falls under the category of industrial and commercial profits (“bénéfices industriels et commerciaux”) (BIC). The tax regime applicable to this income when it is taxable must be determined under common law conditions (micro-BIC, self-employed, simplified regime or normal real regime). Professional furnished rental companies must keep commercial accounts and comply with all reporting and accounting obligations imposed on businesses.

To sum up, persons not domiciled in FRANCE must in principle pay a tax which cannot be less than 20% of taxable income. However, if a taxpayer manages to justify that the average rate of French tax on all of this income from French and foreign sources is lower than the minimum rate of 20% then he will be taxed at this average rate on his income alone.

2. Tax convention between FRANCE and HONG-KONG

FRANCE and the HONG-KONG Special Administrative Region of the People’s Republic of China signed an agreement in Paris on October 21, 2010, for the avoidance of double taxation regarding to taxes on income and the prevention of fiscal evasion and avoidance.

Persons covered by the agreement

This agreement applies to people who are residents of FRANCE and HONG-KONG under the internal law of each country.
However, the protocol specifies that a tax resident of one of the countries cannot benefit from the provisions of the convention, since he carries out his professional activities in a free zone.
On the other hand, a resident benefiting from a specific tax regime allowing him to be taxed only on income originating in this country benefits from the convention.

Determination of tax residence

  • Natural persons :

Natural persons benefit from this agreement. However, in the event of a residence conflict, it can be resolved by successively applying the criteria retained by the convention, namely, the permanent home, the center of vital interests, the usual place of stay, the nationality for FRANCE or the right of residence for HONG-KONG and the agreement of the competent authorities of the two countries.

  • Legal entities :

They are considered tax residents of the country in which their effective place of management is located.

Taxation of individuals

  • Activity income :

Remuneration from salaried employment is, conventionally, taxable in the State in which the professional activity is carried out.

  • Passive income : 

Real estate income is taxable in the state where the building is located. Dividends are taxable in the state of residence of the beneficiary. However, they may be subject to withholding in the State of source, which cannot exceed 10% of the gross amount of these dividends. Interest is also taxable in the state of residence of the beneficiary. However, the State of source may also make a deduction, which may not exceed 10% of the gross amount of interest.
Real estate capital gains are taxable in the state where the building is located. Capital gains from the transfer of shares or shares are taxable only in the state of residence of the beneficiary except in the case of substantial participation, where the capital gain is then taxable in the state of residence of the company.

Wealth tax

The agreement signed with HONG- KONG includes a provision relating to the wealth tax, a tax in force at the time of its drafting and must also apply to the real estate wealth tax (“impôt sur la fortune immobilière”) (IFI). This provision distributes the right to tax wealth between the two countries. It provides in particular for the taxation of wealth constituted by real estate in the State of location of the property.

Business taxation

The convention uses the criterion of permanent establishment allowing profits from a commercial or industrial activity to be taxed at the place of exercise of these activities, and not at the place of residence of the company. Thus, in the case of a company established in FRANCE which carries out all or part of its activity in HONG-KONG where it has a permanent establishment, the results from this activity and attributable to the permanent establishment will be taxable in HONG- KONG. A permanent establishment is defined as an installation with a certain permanence. This may include a management headquarters, a branch, or an office.

Elimination of double taxation

In FRANCE, the method for eliminating double taxation is tax credits (“crédit d’impôt”)
The tax credit is an amount deducted from your income tax. If the tax credit exceeds the amount of your income tax, the surplus is reimbursed by the Public Finance Department (“Direction Générale des Finances Publiques”).

System to combat tax evasion and fraud

The convention includes a provision relating to the exchange of information. This provision authorizes the communication of information, including banking information. However, only detailed requests can be made by the tax authorities, in order to avoid spontaneous or automatic “fishing for information”.

3. Tax treaty between FRANCE and RUSSIA

An agreement for the avoidance of double taxation with respect to taxes on income and capital was signed on November 26, 1996, in PARIS between the government of the French Republic and the government of the Russian Federation. It is accompanied by a protocol forming an integral part of the agreement.

Specifically, the article 28 of the agreement provides that the stipulations it contains apply:

“a) with regard to taxes collected by withholding tax;

(b) in relation to other income taxes, to income relating to any tax period

c) with regard to other taxes, to taxes for which the taxable event will occur from January 1, 2000”.

The delegations of France and Russia met on January 22, 2001, with a view to resolving the difficulties in applying the tax convention of November 26, 1996.

This delegation dealt with the definition of construction sites as permanent establishments, the application of a withholding tax on dividends under the tax system, and the deductibility of certain expenses. The negotiations took place in an atmosphere of friendship and mutual understanding.

Persons covered by the agreement

The Convention applies to persons who are residents of one or both States.

Taxes covered

As far as FRANCE is concerned, these are income tax, corporate tax, payroll tax and wealth solidarity tax (“l’impôt de solidarité sur la fortune”) (ISF). As far as RUSSIA is concerned, these are the tax on profits of enterprises and organizations (including tax on salaries exceeding the established norm), tax on personal income, tax on business property and personal property tax. Russia has not introduced a wealth tax.

Real estate wealth tax

The real estate wealth tax (“impôt sur la fortune immobilière”) (IFI) is restricted to buildings and real estate rights held by the taxpayer, directly or through a company or an organization.

In the administrative comments relating to this new tax, on June 8, 2018, the French tax administration specified in a remark that the principles guiding the interpretation of the provisions of the tax conventions used in matters of ISF are taken up in terms of IFIs. The fact remains that a convention applicable to the ISF is not, however, applicable to the IFI, a case-by-case examination of the conventional stipulations being necessary.

Deductibility of expenses

Differences of interpretation persist between the French and Russian parties on the application of the rules for deducting various types of expenses when calculating the industrial and commercial profit made by a permanent establishment located in RUSSIA of a company incorporated under French law, or by a subsidiary located in RUSSIA of a French company.

The French side considers that, in application of the provisions of the Franco-Russian agreement of November 26, 1996, operating expenses incurred by a permanent establishment or subsidiary meeting the conditions are fully deductible in determining its income, provided that this deduction does not exceed the amount that would have been agreed in the absence of special relations between the debtor and the effective beneficiary of this income.

The Russian party points out, however, that the ceiling for deducting expenses relating to representation, advertising and training has been substantially raised since April 1, 2000.
In this respect, it points out that since the ceiling was raised, it has not been informed of any new cases of litigation brought by companies.

In any case, the Russian party is willing to examine, on a case-by-case basis, within the framework of the amicable procedure provided for in article 25 of the agreement, any difficulties arising from the application of these limitations.

The Russian party, for its part, considers that while domestic legislation permits the deduction of special expenses from taxable profits within certain limits. At the same time, it has been confirmed that regardless of the provisions of domestic legislation, interest is deducted from taxable profits, irrespective of the status of the lender and the terms and conditions of the credit giving rise to the interest payment. The only limitation on interest deductibility is the maximum interest rate. However, there is a huge update in this particular convention as RUSSIA suspends key provisions of double taxation agreement with FRANCE and other “unfriendly” states.

On August 8, 2023, the Russian President issued a decree, which unilaterally suspends – on the part of the Russian counterpart – most of the substantive provisions of the double taxation avoidance agreements concluded between RUSSIA and the so-called unfriendly states which have imposed sanctions on RUSSIA.

The appeal concerns 38 double taxation avoidance agreements, including the one concluded with FRANCE on November 26, 1996. The suspension is effective from August 8, 2023, until the unfriendly states remedy their violations of RUSSIA’S legitimate economic and other interests, the rights of its nationals and legal entities, or until the termination of these international treaties with respect to Russia. The suspension was legally adopted under the Russian Federal Law on International Treaties, which authorizes the President, in situations requiring urgent measures, to suspend the effect of an international treaty that has been ratified by federal law.

Although the decree mentions the need to take urgent measures due to the unfriendly actions of a number of states (sanctions), as required by Russian federal law, this may be insufficient to serve as grounds for unilateral suspension from the point of view of international law. This latter point may be one of the factors to be taken into account by so-called unfriendly states when devising their retaliatory measures.

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How will business gifts be taxed in 2023?

Posted on : December 12, 2023

As the festive season approaches, companies may wish to give gifts to their most important customers. These gifts are subject to specific tax rules.

The end of the year can be an opportunity to give a gift to your major customers to thank them for the trust they place in you and to consolidate the professional relationship you have with them. But be careful to stay within the bounds of tax regulations to avoid any risk of tax reassessment.

Recovery of VAT

VAT on gifts is deductible if they are of very low value, i.e. when the unit value of the gift does not exceed 73 EUR (including VAT) per year and per recipient in 2023. The tax authorities include in this value the distribution costs borne by the company.

Deductibility from profits

Gifts to customers are deductible from taxable profits, provided that they are given in the direct interests of your company and that their value is not excessive.

Important: you must be able to prove the usefulness of business gifts for your business (building customer loyalty, for example) and, in particular, be able to identify the recipients by name. It is therefore advisable to keep all the necessary supporting documents (invoices, names of customers, etc.).

Obligation to declare

If the total amount of business gifts exceeds 3.000 EUR over the financial year, you must, in principle, declare them, on pain of a fine. In practice, sole traders fill in a special box in appendix no. 2031 bis to their income tax return. Companies, on the other hand, must attach a detailed statement of overheads (no. 2067) to their income tax return.

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