ABOUT THE AUTHORS: Jean-Luc Bochatay and Alain
Moreau are Partners, and Guillaume Aubineau is an Associate at FBT
Attorneys-at-law
As expected for some time, Switzerland and France have recently
amended the Inheritance Tax Convention 1953 (1953
Convention). If adopted, the new convention (whose entry into force
is expected by 1 January 2014) will allow France to restore its
right to tax inheritance, notably on immovable property held
indirectly in France, or the assessment of the place of domicile of
the heir – in France – where the domicile of the deceased was
outside of France.
Scope of application of the new
convention
As with the 1953 Convention, the new convention would not cover
gift tax. Its scope would be limited to inheritance tax, i.e.
French inheritance tax (including, presumably, the tax introduced
by the new law on trusts dated 29 July 2011), and Swiss inheritance
tax that is now only levied by the cantons and
communes.
The new convention would apply to persons domiciled in one of
the contracting States upon their death, i.e. a person who,
pursuant to this State’s law, is liable to inheritance taxes by
virtue of their domicile (excluding persons liable to inheritance
tax in said State only for the assets located therein). Where there
is a conflict of residence, the text would apply the standard OECD
Model criteria.
The notion of immovable property
According to the 1953 Convention, the notion of ‘immovable
property’ is strictly defined and does not include shares of real
estate companies (notably the French Société Civile
Immobilière – SCI), which should therefore only be liable to
tax in the State in which the deceased was last resident.
The new convention provides for a wider definition of this
notion, including shares of real estate companies (incorporated in
France or abroad). In this respect, the new convention expressly
sets out that shares, units or other rights over a company or a
corporation whose assets are composed of more than 50 per cent of
their value of real estate (directly or indirectly through one or
several other companies or corporations) located in a contracting
state qualify as ‘immovable property’.
This provision, which derives from article 750 ter 2° para 4 of
the French Tax Code (FTC), would allow France to tax shares of real
estate companies (i.e. those whose assets are mainly composed of
immovable property located in France).
In this respect, an immovable property located in France and
held indirectly, for instance, through a SCI by a de cujus
resident in Switzerland, shall be taxable in France. Under the 1953
Convention currently in force, this property is tax-exempt in
France and often exempt in Switzerland (notably in transfers
between spouses and to children).
However, the new convention goes further, providing that
immovable property is deemed part of the inheritance of a person
domiciled in a contracting State when it belongs to companies or
corporations of which the deceased, on their own or with their
family, holds more than half of the capital, directly or indirectly
through one or several other companies or corporations.
This provision, which derives from article 750 ter 2° para 2 of
the FTC, would allow France to tax immovable property located in
France owned by companies that do not qualify as real estate
companies, but that are controlled directly or indirectly by the
de cujus with their family.
In this context, very few immovable properties held in France by
non-residents will remain outside the scope of the French
inheritance law.
Right to tax
The 1953 Convention establishes an exclusive right of taxation
for each State, according to which immovable property held
personally (‘en nom’), ‘furniture’, including linen,
household goods and objects of art and collections, are subject to
tax only in the country where they are located at the time of the
death of the de cujus, and the other movable assets are
subject to tax only in the State where the de cujus had
their last domicile.
As regards France, the new convention would considerably extend
its right to tax. Under the new convention, French inheritance tax
scope will cover the following:
- The overall inheritance assets if the de cujus was domiciled in
France at the time of death. This provision derives from article
750 ter 1° of the FTC and would allow France to apply its domestic
territoriality rules. In this situation, under the 1953 Convention,
assets taxable in Switzerland (i.e. in the main, immovable property
located in Switzerland) were only subject to Swiss inheritance
tax.
- All movable, tangible or immovable assets of the estate,
located in France if the de cujus was domiciled in Switzerland at
the time of death. This provision derives from article 750 ter 2°
of the FTC and would allow France to apply its domestic
territoriality rules. In this situation, under the 1953 Convention,
assets located in France, other than immovable property, were
subject only to Swiss inheritance tax.
- The overall inheritance assets (granted to the heir) if the
heir (of a de cujus resident in Switzerland) is resident in France
at the time of the death of the de cujus and has been resident in
France for at least six years during the previous ten years. This
provision derives from article 750 ter 3° of the FTC and would
allow France to apply its domestic territoriality rule.
Thus, heirs of a de cujus domiciled in Switzerland who
are French residents would be liable to inheritance taxes in France
– including on the deceased’s assets located in Switzerland
(movable and immovable assets). In this situation, under the 1953
Convention, the overall assets of the de cujus are not
taxable in France (with the exception – in the main – of immovable
property located in France).
This provision of the new convention does not follow the
principle set out by the OECD in its 1982 Model, under which the
right to tax the overall inheritance assets is primarily granted to
the State of domicile of the de cujus.
The convention signed with Germany, which obviously served as a
framework for the negotiation of the new convention, also permits
expressly to take into account the State of domicile of the heirs
for the assessment of French inheritance tax.
The French tax authorities have also recently considered that
the convention signed with Italy on 20 December 1990 does not
preclude the application of article 750 ter 3° of the FTC (taxation
in France of French resident heirs on their overall
assets).
As regards Switzerland, the new convention does not extend its
right to tax compared to the 1953 Convention. Conversely, under the
new convention, Switzerland would notably lose its right to tax
French immovable property held by a Swiss resident de
cujus via companies.
Methods for avoiding double taxation
In the 1953 Convention, double taxation is avoided in France and
in Switzerland via an exemption with progression method, triggering
the establishment of planning strategies favouring the State with
the most attractive inheritance tax regime (i.e. in general
Switzerland).
Pursuant to the new convention, the exemption with progression
method would remain applicable as regards Switzerland. However,
concerning France, double taxation would now be avoided via the tax
credit method, i.e. by the possibility of deducting from French
inheritance tax the tax already paid in Switzerland. French
domestic tax law also provides (in article 784 A of the FTC) for a
similar mechanism for the avoidance of double taxation through the
granting of a tax credit in France equivalent to the tax paid
abroad. The imputation of foreign inheritance tax on French
inheritance tax is limited to the foreign tax paid on assets
(movable or immovable) located outside of France.
In this context, this new convention only seems to validate the
application of French domestic law (indirect holding of real estate
and inheritance tax territoriality rules). The interest of
implementing such an unbalanced text in favour of France compared
to a situation where the 1953 Convention would be simply terminated
seems very limited (notably with respect to the possibility of
offsetting Swiss tax on French inheritance tax on a larger basis
than with article 784 A of the FTC and to settle conflict of
residence between the two countries).
In the light of the above commentary on the provisions of the
new convention, it will be necessary to review and update the
inheritance planning strategies put in place under the 1953
Convention. Careful and professional cross-border advice will be
required, notably with respect to article 10 of the new convention,
providing for a rather wide-ranging anti-abuse
provision.