Summary of the how the new rules will apply: 

During the first 5 years of ownership, the full gain is taxed.   

Between 6 – 17 years, the reduction is 2% per year. 

Between 18 – 24 years of holding, the reduction is 4% per year. 

During the last five years, the reduction in 8% per year. 

Ownership of the property through an SCI does not affect this rule, i.e., the SCI shreholders benefit from the capital gain reduction benefits that are listed above. However, if the SCI engages in furnished rentals and is thus treated for tax purposes as a commercial company, the property does not qualify at all for the exemption.    

N.B.:  U.S. citizens are nevertheless taxable in the U.S. on such sale.  The I.R.S. does not follow the French taxing rules.  Of course, if you owned the property for less than 30 years at the time of sale and consequently must pay some French capital gains tax, you may claim an offset of that French tax against any U.S. tax paid on the same gain.   The offset is referred to as the foreign tax credit. 

The new law came into effect on 20 September 2011.

The most sweeping and problematical changes are contained in the new trust law.  They affect non-residents as well as fiscal residents of France.  Practically speaking, the French law does not provide for the creation of trusts.  However, French courts as well as the “fisc” (the French tax authorities), have accepted their existence, but have sought to work out a way of dealing with them for property purposes but, more importantly, for tax purposes.   This portion of the new law, effective as of 2012, makes some dramatic changes to how trust holdings are taxed, including the timing of the tax as well as the rate of tax, and also creates reporting requirements by trustees to the French fisc.  Some standard tax planning techniques are now in jeopardy, and in some cases, those who are beneficiaries of large trusts may have to re-think whether to become French fiscal residents and certainly have to think twice about setting up a trust once they have already become French residents.

The changes in the wealth tax rules (ISF) will result in lower wealth tax for most and no wealth tax for some.  However, reporting requirements are tightened and penalties will be applied for failure to report.   A major change:  shareholder loans to a real estate holding company (SCI, LLC, S-Corp, etc.) are no longer taken into account in valuing the holding company shares for wealth tax purposes.

Gifts and inheritances see some dramatic changes, including an increase in the top rate between parents and children (as well as in the direct line of descent and ascent), from 40% to 45%.  Other changes result in certain gifts being taxed at 60% when in the past they would have been taxed at lower rates.    

Another tax change which, at this writing, has been enacted but not yet published, is the capital gains law that would increase the period for obtaining total exemption from the capital gains tax on the same of a secondary residence in France from 15 years to 30 years.

“The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization,” the agent wrote to a donor. “Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709).”

This is consistent with a 2005 decision by a French court, which denied the French fisc the right to tax the assets of an irrevocable discretionary trust set up by the father of a US national residing in France. The basis of the holding was that the beneficiary did not have sufficient control over the trust assets to make them taxable.

This has led to tax planning for incoming Americans, who are advised to create such trusts prior to taking up residence. Naturally, this requires skillful drafting and the determination of who should be the settlor of the trust and the trustee.

NOTE: THE REFERENCE IN THIS POST TO THE USE OF A DISCRETIONARY TRUST TO POSSIBLY AVOID FRENCH WEALTH TAX HAS BEEN MADE MOOT BY THE LAW OF JULY 6, 2011.  YOU MAY WISH TO SEE MY RECENTLY-CREATED MEMO CONCERNING THE NEW LAW, BY REQUESTING IT AT MAIL@OKOSHKEN.COM.  SEE MORE RECENT POSTS FOR UPDATES ON THIS IMPORTANT SUBJECT.

http://www.youtube.com/watch?v=54Y1vkekUIg

One element of the new [IRS Tax Amnesty] that is different from IRS’s 2009 the amnesty scheme is a provision for so-called “accidental Americans”. These are individuals who became American under unconventional circumstances, such as having been born in the US to non-American parents and who were subsequently raised in another country, unaware in many cases that they even are US citizens, and thus obliged to report to the IRS each year for their entire adult lives.

Under this scheme, such individuals – who some believe account for a large percentage of the estimated 1 million or more American expats who do not file Foreign Bank and Financial Account reports annually that authorities think ought to – may qualify for a 5% ‘in lieu of’ penalty rather than being hit with the full 25%.

Five percent may be much less than 25%, but as Krause notes, it is still likely to come as a major shock to many people, who were not even aware that they were Americans, that they owe the IRS a twentieth of their assets.

“There are thought to be thousands of these people in the UK and across the globe,” says Krause.

“Most are under the mistaken impression that not holding a US passport means that they are not US citizens. Unfortunately that is not the case.”

Adds Paul Hocking, chairman of Frank Hirth, a tax firm specialising in looking after Americans and others with US tax issues: “The 5% penalty for accidental Americans is so narrowly drawn it will only help a tiny handful of [them], as it expressely excludes those people who ‘knew’ they were a US person — [such as because they hold] a US passport — but didn’t understand they had a tax filing requirement. This is a large proportion of the non-filers we see, and the penalties for these individuals can be very high.”

“For someone who knew they were American [but] didn’t understand they had to report their income, to face a minimum of $10,000 per bank account per year penalty is too harsh, let alone someone who falls foul of the asset-based penalties, which can be as high as 25% of the value.”

PARIS — French President Nicolas Sarkozy said Feb. 10 that he opposes a tax on capital gains from the sale of a principal residence, a tax proposal that came from within his own political party.

Currently, such gains are completely exempt in France, although the French do pay property and residence taxes on a yearly basis.

The idea of taxing capital gains from the sale of a principal residence was first floated in a January report with recommendations for a planned tax reform, produced for the government by Jerome Chartier, a National Assembly

 deputy from Sarkozy’s center-right UMP (Union pour un Mouvement Populaire) party.
Long sacrosanct, removal of the capital gains exemption is certain to meet opposition.   The big question: Will budget needs triumph over convention?

Stay tuned.

Consequently, there is a rush, especially among older clients, to transfer assets to the next generation  prior to the end of 2010. 

We have been retained by several clients whose object is to gift France-based real estate.  In such case, there is the French gift tax to consider, as well as the US gift tax.  For children, there is an exemption of €156,974 per donor per child.  So, if both parents are involved in the gift, a total of €313,948 may be given tax-free to each child (reduced by gifts made during the 6-year period prior to the current gift).  The US exemption is $1,000,000 (less prior gifts reported in IRS Form 709).    A technique often used is to make a ”net gift”, where the recipient of the gift (donee), agrees to pay the gift tax.  The gift is thereby reduced by the amount of gift tax paid.  The net gift approach is equally valid in France.  Gift taxes paid in France, over and above the exemption, are also eligible for the foreign tax credit against US gift tax.  There are numersous twists and turns that must be considered, especially if the gift of the real estate is being made to one of two or more children (even if all parties are non-residents of France).  In one complex case, we worked with the notaire for more than 3 months to finalize such a gift. 

Needless to say, if the lower gift tax rates are to be availed of, the closing of the gift transaction in France must occur before December 31, 2010.