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
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). 1

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. 2

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
  1. 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.[]
  2. 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 []
Beware Tax pitfalls when moving from one country to another

Beware Tax pitfalls when moving from one country to another

Be sure to beware tax pitfalls when moving residence

Swiss Courts ruled that a US citizen living in the UK could not get Swiss dividend tax back. With a judgment rendered on 27 November 2020 (case no. 2C_835/2017), the Swiss Federal Supreme Court (“FSC”) confirmed a decision by the Federal Administrative Court (“FAC”) of 24 August 2017 (decision no. A-1462/2016) concerning a an individual tax residence matter that arose in the context of certain dividend withholding tax (WHT) refund requests, which had been raised by the appellant (Mr. A, a US citizen) pursuant to the USA-Switzerland income tax treaty of 1996 (the “US Treaty”) with regards to Swiss dividends he had derived in the calendar years 2008-2010.

Both Swiss court instances confirmed the decision of the Federal Tax Administration (FTA) to reject the refund request and to claw back a WHT refund that it had already granted to Mr. A on a summary basis, as they concluded in fact that Mr. A failed to meet the tax residence criteria as defined under art. 4 (1)(a) of the US Treaty. The FTA had at some point suggested that Mr. A. should rather seek a partial WHT refund pursuant to the double taxation treaty between Switzerland and the UK (the “UK Treaty”).

However, Mr. A maintained that he held a “resident non-domiciled” tax status in the UK, which would effectively preclude him from benefits under the UK Treaty, as he did not remit the dividends in question to the UK and consequently did not owe any UK taxes thereon.

Facts of the Case

During the relevant periods Mr. A apparently lived in the UK, where he was treated as a UK “resident bot not domiciled” taxpayer. Mr. A held shares in several Swiss companies, from which he received substantial dividends, namely an aggregate amount of CHF 22.75 million in 2008 and 2009 and an amount of CHF 5,872,459 in 2010, all amounts before deduction of 35% WHT. Mr. A filed partial WHT refund requests with the FTA by using the Forms 82I, which is foreseen for Swiss WHT reclaims made by individuals pursuant to art. 10 of the US Treaty.

The reclaimed amounts corresponded to 20% of the gross dividends received. The FTA first satisfied the WHT reclaims for 2008 and 2009 for an aggregate amount of CHF 4.55 million on a summary basis, even though it had already noted that Mr. A had indicated a residential address in the UK. After receipt of Mr. A’s WHT refund request for 2010, the FTA explored further and suggested that Mr. A make a reclaim under the UK Treaty instead.

Upon Mr. A’s explanation that he could not utilize the UK treaty as he was taxed in the UK merely on a remittance basis, and after Mr. A had filed for a further partial WHT refund for the year 2012, this time indicating a residential address in the USA, the FTA finally rejected the open WHT requests and ordered Mr. A to return the already received WHT refund of CHF 4.55 million with 5% interest per annum. The FTA had concluded that Mr. A did not qualify as a US tax resident in the meaning of art. 4 (1) (a) US Treaty.

Under said provision, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, nationality, 1 is considered a resident of that State. However, the second sentence of subparagraph (a) provides for a special rule pertaining to non-Swiss resident US citizens and non-US national green card holders in the United States: Such persons are considered resident in the United States only “… if such person has a substantial presence, permanent home or habitual abode in the United States”.

Mr. A. had maintained that he had at least a permanent home available to him in the United States, if not also a substantial presence, facts which the FTA had denied, however.

Relevant considerations of the FAC

The key considerations of the FAC focused on whether Mr. A – as a US citizen not resident in Switzerland – met any of the three criteria mentioned in the second sentence of subparagraph a of art 4 (1) US Treaty: having either (i) a substantial presence, (ii) a permanent home, or (iii) habitual abode in the United States. The FAC considered that the notion “substantial presence” derived from US law and referred to the Technical Explanation of the US Treaty by the US Treasury Department and § 7701(b)(3) of the U.S. Internal Revenue Code.

On the other hand, the notions of permanent home and habitual abode are not used by US domestic law; hence in the FAC’s opinion, they should be construed in an autonomous manner. Those two notions re-appear in the tie breaker provision of art. 4 (3) (a) and (c) US Treaty, which is modeled along the OECD Model Tax Treaty.

Remarkably, the FAC considered that the second sentence of art. 4 (1) (a) US Treaty means in fact that a US citizen or green card holder (thereby automatically a US resident for US income tax purposes) who is not also a Swiss tax resident must prove particular ties to the United States in order to qualify as a US resident for purposes of the US Treaty.

The FAC went even as far as questioning whether the criteria of substantial presence, permanent home or habitual abode are really to be construed as strictly alternative criteria, as the literal wording of the provision (expressed by the word “or”) would suggest.

The FAC considered that in light of the tie breaker rule of art. 4 (3) US Treaty that uses similar criteria as well, it is important to stress that art. 4 (1) (a), 2nd sentence in any case requires a strong personal nexus with the United States of such category of US taxpayers in order to qualify as US resident under the US Treaty.

The FAC in that sense rejected a merely literal interpretation of that treaty provision solely based on the word “or”. In the FAC’s opinion, such a literal interpretation would deprive the criterion of “substantial presence” of any meaning; the FAC feels that it was not the intention of the Contracting States to grant access to the tax treaty benefits just to any persons with only minimal ties to a Contracting State.

It appears that the FAC gives the notion of permanent home in art. 4 (1) (a), 2nd sentence the meaning of a mere tie-breaker, which becomes relevant only where the taxpayer is treated as a resident under the domestic laws of two states, namely the United States and a third country (in the case at hand, the UK).

In the case at hand, as Mr. A did not meet the substantial presence test of US income tax law, nor did he have habitual abode in the United States, the FAC concluded in fact that Mr. A. had stronger ties to the UK than to the United States and discarded Mr. A’s argument that he had a permanent home in the United States available to him.

The fact that Mr. A had indicated his UK address on two of his WHT reclaim forms seems to have played a certain role. Furthermore. Mr. A also had a permanent home in the UK where he was active as a trader. Even though Mr. A. had insisted that he also possessed one or more homes in the United States available for his private use, the FAC expressed doubts as to whether Mr. A. used those home permanently. On those grounds the FAC refused to acknowledge that Mr. A met the US residency criteria of the US Treaty.

Moreover, the FAC pointed to a letter by Mr. A’s counsel to the FTA, in which such counsel had indicated that art. 27 (1) of the UK Treaty was applicable to his client. Under that rule, a UK resident who would principally be entitled to a (partial) relief from Swiss WHT pursuant the provisions of the UK-Switzerland treaty. And who is not taxed in the UK, under UK domestic rules, on the full amount of such Swiss revenues, but only on such portion thereof that is received in, or remitted to the UK shall only be entitled to the Swiss tax relief for the fraction received in, or remitted to, the UK.

The FAC stressed that reference to that provision of the UK Treaty implied that Mr. A was in fact a UK tax resident in the meaning of art. 1 and art. 4 of the UK Treaty. The FAC referred to the FSC decision 2C_436/2011 of 13 December 2011, according to which a UK resident taxpayer who is merely taxed on a remittance basis in the UK is principally considered as a UK tax resident under art.1 and art. 4 of the UK Treaty.

The FAC considered that Mr. A. would likely have been able to obtain a partial Swiss WHT refund pursuant to the UK Treaty, had he chosen to remit the relevant dividends to the UK; he should not be allowed to effectively circumvent that remittance requirement for benefits under the UK Treaty by invoking the US Treaty instead. https://www.reinarz-taxlegal.com/

Peter Reinarz

Peter Reinarz

Reinarz
  1. ….[]
Forfait tax in Switzerland – What you need to know

Forfait tax in Switzerland – What you need to know

Swiss forfait tax – What you need to know

1.What is the forfait about?

Switzerland has for decades had the so-called forfait taxation regime, essentially allowing foreign nationals relocating to Switzerland to pay tax on their worldwide expenditure.

The forfait regime is often mentioned alongside the UK and Irish non dom-regimes and, more recently, the Italian regime available to new residents. By comparison, the forfait regime, coupled with other advantages of the Swiss tax system, is more beneficial on many counts (e.g. legal certainty and/or inheritance tax). In particular as far as professional activity is concerned, however, the regimes on the islands may be perceived as carrying the day.

2. Can I apply?

The forfait regime is available to foreign nationals taking up tax residence in Switzerland for the first time or after an absence of at least 10 years.

Although the regime was originally aimed at wealthy foreigners coming to spend the autumn of their life in Switzerland there has never been a minimum age (nor maximum, for that matter).

3. Can I work?

To be eligible for the forfait regime you may not exercise any paid work in Switzerland, neither as employee nor in a self-employed capacity.

Gainful activity abroad is permissible, however.

4. I would be entitled, then. But my spouse is Swiss. Can I still get the forfait?

No, you can’t. Both spouses must fulfil all criteria.

5. I’m a dual national. Am I eligible?

No, dual citizens with Swiss nationality do not qualify either (and never did).

6. How do I calculate my tax?

Forfait taxation is essentially based on (i) the taxpayer’s worldwide living expenses that serve as tax base, (ii) the rent multiple (7 x annual rent for accommodation) or (iii) the so-called control calculation to which ordinary tax rates are then applied.

Living expenses include in particular worldwide costs for accommodation, general living, cars, aircrafts and yachts, housekeeping and personnel in respect of all individuals (family members etc.) financially supported by the taxpayer.

Put simply, the tax base corresponds to what it takes to keep the family going, whereby cantons have substantial leeway in determining the practical aspects. The minimum base for Federal tax purposes is CHF 400’000.

And there is another factor to take into account, the so-called control calculation. Tax payable under forfait must be at least equal to (income and wealth) tax payable at ordinary rates on (i) Swiss real estate and related income, (ii) movable assets located in Switzerland and related income, (iii) Swiss securities and related income, (iv) Swiss intellectual property and related income, (v) Swiss source pensions and (vi) income for which treaty benefits are claimed (for treaty benefits see question 8).

Swiss securities comprise Swiss shares and dividends or interest from Swiss sources. Whereas a portfolio of non-Swiss shares held and managed by a Swiss bank should not give rise to any issues, interest, if any, on a Swiss cash account may.

Treaty protected income will typically include non-Swiss dividends or royalties subject to a withholding tax in the source country. Such income must be included in the control calculation if a reduction of source tax is claimed under an applicable treaty (question 8).

In summary, the tax base is usually the higher of (a) CHF 400,000, (b) worldwide living expenses, (c) the rent multiple or (d) the sum of the control calculation.

7. As a forfait tax payer, do I get the benefit of double tax agreements (DTA)?

Any income for which treaty protection is claimed will need to be included in the so-called control calculation.

Some DTA will not accept a forfait tax payer as tax resident. Others contain express provisions in respect of forfait tax payers, namely those with Germany, Belgium, Norway, Italy, Austria, Canada the US and France. Typically, these DTA will require any treaty protected income to be included in the tax base. That said, in particular with France there is some uncertainty in practice as to the treatment of French source income.

8. Social security? – no one ever told me

Forfait tax payers under the age of 65 are subject to social security contributions. Depending in particular on an individual’s wealth the contribution may amount up to CHF 24’000 plus approx. 5% administrative costs per person.

9. Procedure – how do I obtain my forfait and what do I have to disclose?

Obtaining the forfait is usually less of an issue than immigration, especially for non-EU nationals.

Once the chosen place of residence has been identified one would typically approach the local cantonal tax authorities. They are competent to grant a forfait ruling. Immigration authorities will have to be consulted with, too, as they issue the residence permit.

Information to be provided includes an individual’s worldwide living expenses and an approximation of his or her wealth. The level of detail requested by the authorities varies greatly between cantons. https://www.frb-law.ch/

tax planning

Michael Fischer

Fischer Ramp Buchmann
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