Tax planning and moving to Canada

Tax planning and moving to Canada

The Importance of Tax Planning when moving to Canada

For anyone planning to immigrate to Canada, or former Canadian residents preparing to return after a period of non-residency, it is worth taking the time to do some pre-immigration tax planning. It may well be that the Canadian tax environment is a lot more aggressive than where you’re coming from. If you wait until after you arrive to start arranging your affairs, it will be too late. Each personal or family situation will be unique and will benefit from bespoke professional advice, but this note will outline a few things that a prospective new/returning Canadian should bear in mind before making their move.

Canada imposes tax on the basis of residency, so once you become a Canadian resident you will be subject to Canadian taxation on your worldwide income, including foreign investments, foreign trusts, foreign rental properties, proceeds of the sale of foreign properties, and any other income from any source, anywhere in the world.  Foreign tax credits may apply to reduce your Canadian tax burden to some extent on foreign sources of income to avoid “double” tax on such amounts.

The Canada Revenue Agency (CRA) actively investigates foreign income and has information exchange treaties with many other countries (including automatic exchange of information treaties that provide for easy, fast, automated sharing), so your assumption should be that the CRA will be able to find or verify any foreign income you may have. It is your responsibility under Canadian law to voluntarily report it – if the CRA has to seek it out, you will be subject to interest and penalties.

Certain income earned before you arrive in Canada, but which you receive after you arrive (i.e., become “resident” in Canada) are taxed in Canada, so make sure you receive as much income as possible prior to your arrival and do not leave amounts accrued and unpaid.

The deemed tax cost (i.e., the adjusted cost base) of your capital assets (worldwide) for Canadian tax purposes will be their fair market value as of the date you become a Canadian resident. This is a benefit because when you dispose of any such assets, you pay tax only on the capital appreciation over and above the adjusted cost base of the asset, so the higher it can be, the better. You should obtain third-party valuations of your material capital assets shortly before or after you become a resident and keep this information on file, as you will need it.

Consider arranging for the establishment of one or more trusts which can help reduce your Canadian tax burden during life and upon succession. Canadian tax laws apply various so-called attribution rules and deemed residency rules for non-Canadian trusts, which operate to severely restrict offshore planning opportunities. Other rules do the same for corporate entities that hold property for a Canadian resident (attributing passive income directly to the individual shareholder). There is greater opportunity to implement effective structures without falling afoul of these rules prior to becoming a Canadian resident.

The same is true of a restructuring of existing trusts, that will become Canadian resident trusts when you move to Canada. The rules are complex and professional advice is necessary before attempting to implement any structures or changes.  The consequences of poor planning can be disastrous from a tax perspective, and such consequences are often avoidable.

Note in particular that even some actions taken prior to residency will come under the scrutiny of the CRA. For instance, if a foreign trust has been settled, or contributed to within the 5-year period prior to Canadian residency, the trust could be deemed to be Canadian resident, including retroactively to the time of the contribution. It depends on who made the contributions and how.

For trusts which do become Canadian resident when you do, note that those trusts will be taxable from January 1 of that year (even if you only became resident later in the year). If you can arrange for those trusts to receive payments prior to January 1 of the year you will become a Canadian resident, you should do that (such as paying out dividends to the trust on shares it holds).

Where a Canadian resident is a beneficiary of an offshore trust, and if the trust has been established in a manner that successfully avoids application of the Canadian attribution or deemed trust residency rules, it is possible to receive payments from such trusts on a tax-free basis. To achieve this, payments need to be made out of trust capital, not income, but this is not difficult to arrange with trusts that are established in jurisdictions that do not impose income tax on trusts. Such payments still need to be reported to the CRA as income received from a foreign trust on form T1142, but Canadian income tax is not payable on such amounts.

Even after Canadian residency is obtained, there remains many very good tax and non-tax reasons to make use of trusts in estate and succession planning, and they remain a central tool to the Canadian wealth planning community. However, there are unique and potentially very beneficial opportunities available to non-residents; be sure to take full advantage of them. http://www.afridi-angell.com

tax planning

James Bowden

Afridi & Angell
International Estate Administration from a Canadian perspective

International Estate Administration from a Canadian perspective

International Estate Administration for Canadian executors or beneficiary

The administration of an estate can be a complex and intimidating process at the best of times. If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential. This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

There are a number of things that can make an estate administration “international”. These include:

  • foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile* of the deceased at the time of death or at the time of making his/her will
  • a foreign executor
  • or some combination of the foregoing. When an estate has one or more of these characteristics, there are certain questions that need to be addressed. The remainder of this article will be guided by these key questions and answers.

What laws apply to the estate?

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.

The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements.

The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.

Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).

The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

Where should you apply for probate?

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located. Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange). As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.

Those requirements will be one of the following:

  • a certified copy of the will; a fully attested copy of the will (possibly translated) [ The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.]
  • a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.

Note that assets that do not require probate in Canada may require it in other jurisdictions. If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor. In the context of an international estate administration this should be a material consideration for any executor.

Are there special tax issues with an international estate?

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements. Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country. If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate).

Note  this  is  different  from  the  clearance  certificate  that  the executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically. [ Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.]

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself. However, an information return may still need to be filed with the CRA [ Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).]. If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA [ Form T1135 (Foreign Income Verification Statement).].

Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward. It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.

If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death [ Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months], then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.

The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever. The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).

The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

What should you do to plan your international estate in advance?

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

  1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.
  1. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.
  1. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.
  1. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the lawyers or other professionals who were involved in their preparation or other estate planning.
  1. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

Source

tax planning

James Bowden

Afridi & Angell
Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

Tax-Driven Changes in Residency

For those with sufficient assets, tax-driven relocations and changes in residency have become commonplace. They began to occur in earnest in the 1990s and have increased in popularity ever since. In the past 1-2 years in particular, the popularity of residency changes for tax reasons has seen a marked rise. This has been driven by several factors, which include: the steady reduction in other viable international tax planning strategies as the OECD continues to press aggressive reform, more mobile lifestyles brought about by COVID-19, and the expectation of an increased tax burden especially for the wealthy (also brought about by COVID-19, at least in part).

In short, more people have begun to enjoy more mobility, and the comparative tax advantages of relocating have never been greater. As we have stated in prior inBriefs, for Canadians, changing their country of tax residency is almost certainly going to be the single most effective tax planning strategy they can adopt, with both immediate and long-term benefits.

The opportunity to attract such mobile, wealthy people is also very appealing to potential recipient countries, who stand to gain economically from an influx of wealthy immigrants. Competition for economically beneficial immigrants is high. Many countries have established residency programs and tax incentives specifically intended to attract economic immigrants. Some of the most popular destinations in recent years have included the UAE, Portugal, Greece and Italy, among many others including some Caribbean nations.

The models adopted by these countries typically require the applicant to make an investment in the country, often in real estate, in exchange for medium- or long-term residency (and sometimes a path to citizenship over time), and access to a favourable tax regime.  The amount of the investment varies greatly from country to country (from EUR 200,000 to EUR 3,000,000). [There are other paths to residency aside from investment in some countries, such as through employment or establishing a business.  In the UAE, for example, you may establish a company for significantly less cost than the cost of investing in real estate, and arrange for the company to sponsor your UAE residency.]

The favourable tax regime will be one of two models: the requirement for an annual lump-sum payment of tax irrespective of actual income each year (e.g., Italy, Switzerland), or, access to a low or no tax environment without the lump-sum in exchange for having made an initial investment (e.g., Portugal, Greece, UAE).

Deciding where to seek your new residency can be complex and should take into account many factors, not only taxation. There are publicly available resources which help you to evaluate potential destination countries according, breaking down some of the more relevant factors on a country-by-country basis, and even offering rankings of countries by popularity for their tax residency offerings. [ For example, see the popular Henley & Partners indices and reports which rank investment immigration programs, and perceived quality of different residencies and citizenships:  Https://Www.Henleyglobal.Com/Publications ]

The conditions of residency and favourable tax treatment usually do not require significant “days in country”, so extensive travel is permitted, but you would need to avoid spending so many days in another country that you are deemed tax resident there as well. The residency status granted normally gives you and your family the ability to live, study, and work in the destination country (and, for EU destinations, these rights would apply anywhere in the Schengen region).

From a tax planning perspective, it is crucial to carefully evaluate your assets and your expected sources of income before settling on a destination for tax residency, and to obtain professional advice as to how your specific assets and income will be taxed there. There are always exceptions to the favourable tax treatment offered by each jurisdiction. For instance, some may provide that only passive income from foreign sources will enjoy low/no tax, and only if there is a double taxation treaty in place with the foreign source country (in which case, income from assets located in offshore jurisdictions may not qualify, nor income you generate if you are working in your new country of residence). Also, assets located in the country you are moving away from may continue to impose tax on income and gains on those assets, despite your non-residency.

As such, the change of residency journey will almost always include a restructuring of your assets, and planning your sources of income, in order to achieve the desired tax-efficient result. As part of the planning, it can often be helpful to make use of trusts in low/no tax jurisdictions as a vehicle in which to hold appreciating or income-producing investments. Distributions from trusts can generally be structured in a manner which attracts little or no tax, depending on whether the distribution is out of trust income or trust capital.

International planning using trusts can be complex and requires cooperation among advisors in your new country of residence, your country of origin, the country in which the trust is established, and every country in which there is a beneficiary of the trust. Trust distributions to a beneficiary will be treated differently depending on where each beneficiary resides.  However, despite some complexity in the planning phase, trusts remain by far the most popular wealth planning vehicle for good reason, as the benefits of their use can be significant.  For example:

  • Tax efficient distributions: payments from a trust to its beneficiaries can be managed so as to attract less overall taxation, or no taxation, if the trust has been planned and structured properly. This can include tax-free distributions to Canadian resident beneficiaries, if properly planned.
  • Wealth accumulation: trusts in low/no tax jurisdictions often have very long lifespans, or are permitted to exist indefinitely. As such, they can accumulate investment gains with little or no tax over a long period, and can effectively preserve and grow capital. As such, capital can effectively be sheltered in the offshore trust indefinitely, with distributions made to beneficiaries as and when desired so that only those distributions are subject to tax when received (assuming the recipient is subject to tax).
  • Transition of wealth: for the above reasons, it is often very advantageous to structure an inheritance through an offshore trust, where the capital can be better preserved, grown and distributed much more efficiently than if the inheritance were given directly to beneficiaries.
  •  Creditor protection: trusts have long been a popular vehicle for asset protection. Since the trust legally owns the assets, the settlor’s creditors cannot seize them (subject to some exceptions where there are concerns around defrauding creditors).  And, since beneficiaries usually only have discretionary interests which are not vested, the creditors of the beneficiaries have nothing to seize either. Trusts are also a useful tool to keep wealth outside of the net of “family property” or similar definitions which determine what a spouse is entitled to upon separation, divorce or death.
  • Flexibility and control: trusts are flexible enough to allow you to transfer legal title to assets and grant beneficiaries economic benefits to or from the assets, without transferring control over the assets. This flexibility to retain control can be useful for many reasons, including in situations where beneficiaries may not be ready to responsibly manage the assets, or, in the context of a family business, where you may not yet know which child or children will be involved in the business upon succession. Often of most interest to settlors is the ability to continue to control the management of the trust’s investments, rather than handing over control to a trustee and institutional investment manager.
  • Estate planning benefits: trusts have a great many benefits in the context of an estate plan, including all of those noted above in this list, along with additional benefits such as the ability to place trust assets outside of the scope of a forced heirship regime, and the fact that trust assets will not be made subject to probate and estate administration procedures which are complex, time-consuming and sometimes expensive.

Once you have selected a destination and have considered how to structure your assets and income in order to achieve a tax-efficient result, you may also need to carefully plan your emigration from your current place of residency. For Canadian residents, there are tax consequences of ceasing to be a resident and there may be planning opportunities to reduce the impact upon your exit. Advance planning is especially important if you own shares in one or more private companies.

In light of the above, it is important that you select an experienced advisor who not only has local expertise along with an international network and capabilities, but who can also mobilize other professionals in your country and your new country of residence (and a suitable trust jurisdiction) in order to provide you with cohesive and complete advice. It is typical to require legal counsel and tax accountants in at least two countries, along with valuation experts and professional trustees, in order to provide complete advice on a tax-driven relocation.

If you would like to explore a change in residency and the potential tax advantages, please do not hesitate to contact us.

tax planning

James Bowden

Afridi & Angell
Swiss Family Foundations: Ensuring Stability, Protection, and Continuity

Swiss Family Foundations: Ensuring Stability, Protection, and Continuity

The Family Foundation is used hesitantly in Swiss succession and estate planning, although in recent years, the establishment of a foundation has been increasingly evaluated again. 

A robust estate planning ensures a reliable regulation and avoidance of conflicts amongst heirs. In each case, a tailor-made structure must be determined. While a testator may want to commit family assets over several generations to his family, another may seek avoidance of long inheritance proceedings or high inheritance taxes. Yet, other families seek anonymity and asset protection. A foundation may also be used in cases where an entrepreneur has no descendants suitable for succession or if he wants to ensure long-term continuity of his company.

The use of a Family Foundation

A Swiss testator is faced with narrow rules limiting his or her estate planning options. Relatively high compulsory portions (forced heirship rules) encumber a free transfer of assets to heirs of the testator’s choice. Therefore, the use of a family foundation has rarely been considered in a pure Swiss family situation. However, since families are often spread over different countries and continents and assets are located in various jurisdictions, contributions of assets to foundations maybe an optimal solution.

The main purposes of a Swiss Family Foundation

The Swiss Civil Code permits the establishment of family (maintenance) foundations “to meet the costs of education, equipment or support of family members or similar purposes“. The purposes have in common that assistance is to be provided to family members in certain situations, such as in adolescence, when setting-up their own household, or live on their own, and in case of need.

Educational costs include both the cost of basic and of continuing education at universities, apprenticeship schools and other educational institutions. The term equipment as of today includes payments that serve to establish, secure or improve a livelihood, in particular when starting a household, getting married or taking up self-employment. The concept of endowment is to be interpreted broadly and understood to be an allocation of assets of a certain size and value. As is the case for benefits under the title “education”, distributions do not require an actual need or emergency situation of a beneficiary. The support of family members finally requires a situation of need of the beneficiary.

Beneficiaries are individually determined family members

The Civil Code prohibits the permanent confinement of assets in favour of a particular family combined with unconditional distributions for an indefinite period. Thus, a Family Foundation may grant a special right to receive benefits to an individual or to individually determined family members instead of family members in general. A founder may reserve for himself or for certain individuals rights to use, enjoy or exploit the assets contributed to the foundation and/or its earnings. These individuals may include heirs who are willing to renounce their compulsory portion in favour of the foundation or other related persons such as cohabiting partners, relatives, or friends.

Special rights my include a usufruct on all or part of the foundation’s assets, residential rights or payments in favour of a specific person. Although family members cannot receive an unconditional benefit in their capacity as a beneficiary, it is possible to provide the spouse, the descendants or grandchildren with general distributions for their cost of living, if they are individually determined in a special right.

Business Foundations

A Business or Holding Foundation is a special form developed by practice and not explicitly regulated by law. A business foundation is characterized by its proximity to the economy. If an entrepreneur has no descendants suitable for succession, the settlement of a Business Foundation could be a temporary bridging measure until the succession is settled. The establishment of a Business Foundation can on the other hand ensure the long-term continuity of the company. https://blumgrob.ch/

tax planning

Natalie Peter

Blum Grob
French tax residency and the stubborn myth of the 183-day rule

French tax residency and the stubborn myth of the 183-day rule

The dangers of assessing French tax residency by solely considering whether an individual is spending more than 183 days in France. Contrary to a popular belief, the French tax authorities and French tax courts do not uniquely assess French tax residence by considering the number of days spent in France; they also take into account the economic and social ties with France, potentially leading to significant tax exposure.

Assessing French tax residency

Pursuant to article 4B of the French tax code, an individual is considered to be a French tax resident if he/she has in France his/her (i) home (“foyer”), (ii) main place of abode, (iii) place of principal working activity or business (such criterion being deemed to be fulfilled by all managing executives of a French company whose turnover exceeds 250 million euros) or (iv) center of economic interest.

Nevertheless, when an individual is deemed to be a resident of two States (because he/she meets the domestic criteria of two Countries), tax residence must be directly assessed by looking at the criteria set forth in the relevant double tax treaty. In this respect, most French double tax treaties include the OECD model type clause according to which the residence is determined through the following alternative tests: (i) one’s permanent home, (ii) one’s center of vital interest, (iii) one’s habitual abode and (iv) one’s nationality.

As most of these domestic and international criteria are subjective and up to interpretation, most people only focus on the habitual abode one and consider that if an individual does not spend more than 183 days in France, this individual would escape French tax residence and thus French taxes.

This is however not true in practice and the 183-day rule must be referred to with caution:

  • This rule is not universal: it can only apply if a double tax treaty applicable to the situation at hand contains such 183-day rule. In some cases, a treaty can exist but may not be applicable (e.g., LOB clause when the individual is not taxed on any income in one of the concerned State, remittance basis in the UK, 10-year exemption in Israel, etc.);
  • This rule may not capture all taxes at stake: it definitely applies to income tax but this may not be true for social security contribution, wealth tax, gift tax, etc.;
  • Attention should be paid to the period retained to assess the 183-day rule: calendar year, 12-month rolling period, etc.

Even when relevant, this rule is not the sole tie-breaker and generally not the first one considered by French tax authorities and Courts.

Indeed, as illustrated by several recent decisions, French courts often rule that an individual is a French tax resident despite the fact that one spent less than 183 days in France by focusing on one’s economic and social ties with France. On the contrary, spending more than 183 days in France does not systematically triggers the recognition of French tax residence.

Even more, in particularly complex scenarios where the balance of interests of any kind binding an individual to France and another State is delicate, both the French tax authorities and French tax courts tend to use two or more criteria at the same time to strengthen their position considering every piece of connection with France.

For instance, French tax courts have recently ruled that a retired couple whose only source of income was a French retirement pension should be deemed French tax residents under French domestic law regardless of evidence supporting that they had been living in Madagascar for several years.

Similarly, where there were evidence supporting the effective presence of a couple both in France (e.g., secondary residence, spending 153 days in France, several French bank accounts, significant gas and electricity consumption) and in Switzerland (e.g., main residence with home staff, residence state of the couple’s daughters, regular running costs), it was finally ruled that they were residents of France on the ground that all their investments were French-sourced since they directly and indirectly owned several French operational and real estate companies.

In view of the diversity of factual criteria used by the French tax authorities and French tax courts to determine one’s tax residence, it is therefore necessary to pay particular attention to all the elements that would make it possible to demonstrate the existence of a connection to France and not to only focus on the 183-day criterion. This is especially important considering the different consequences resulting from being a French tax resident.

Consequences arising from French tax residence

Subject to the provisions of French double tax treaties, French tax residence triggers several distinct consequences relating to (i) income tax, (ii) wealth tax, (iii) inheritance tax and, as the case may be, (iv) trusts related filings.

Indeed, French tax residents are taxable in France on their worldwide income, contrary to foreign tax residents who are solely taxed in France on their French-sourced income.

French tax residents may also be liable to the French real estate wealth tax on all their real estate assets, and not only the ones located in France as for foreign tax residents, to the extent that the overall net value of said assets exceeds €1,300,000 as at 1 January of the given year.

Additionally, when a donor or a deceased or a beneficiary or heir is a deemed a tax resident, inheritance duties are payable on all movable or immovable property located in France or outside France which are transferred by him or to him.

Finally, trustees have a filing obligation for trusts related to France by the French residence of their settlor or beneficiary, or if any asset held by trust is located in France.

To avoid this kind of extended French tax liability alongside with its numerous regular filing obligations, and given the complexity and factual nature of the analysis establishing one’s tax residence, it is advisable to seek professional advice. In particular, when someone has ties to France but has not yet considered to be a French tax resident, we strongly recommend performing such analysis to (i) confirm one’s opinion and, as the case may be, regularize one’s situation, but also to (ii) assess any tax exposure that may result from reassessment in case of a French tax audit. http://www.whitecase.com

tax planning

Alexandre Ippolito

White & Case
tax planning

Estelle Philippi

White & Case