Private assets

Distribution paid as of January 1st, 2005 (Taxable in 2006) no longer carry an “Avoir fiscal” but benefit of a 40% (50% for dividends received in 2005 and taxed in 2006) rebate for the computation of the income tax. The 50% rebate applies to dividends paid by companies based in France, in an EU member state or in a country having a tax treaty in force with France.

The general yearly rebate of 1525 (1220 euros in 2005) and 3050 euros (2440 euros for dividends taxable in 2006) for couples filing a join tax return still applies to all dividends benefiting of the 40% rebate(50% for dividends received in 2005 and taxed in 2006) including dividends paid by foreign eligible entities.

In addition, dividend paid as of January 1st, 2005 benefit of a tax credit up to 115 euros (230 euros for couples filing a join tax return) deductible from the income tax related to year of reception of the dividends. The excess tax credit is reimbursed.

Dividend paid by French companies until December 31, 2004 (Taxable in 2005) carried a tax credit called “Avoir Fiscal”. These dividends plus the “Avoir Fiscal” were taxable. The “Avoir fiscal” was deductible from the personal income tax. Any excess was reimbursed.

Farming taxation

As of 2005 (Income 2004) the farming losses are deductible from the global taxable income when the non farming earnings do not exceed 60 000 euros (53 360 euros before).

The reform of the pension plans of the farmers has modified the way the pensions are paid. As a result in 2004 pensioned farmers and related beneficiaries received 14 months of pension instead of 12. Beneficiaries will be however taxed only on 12 months.

Trust refers to the following situation: A trustee is in charge of the management of an asset initially owned by the settlor. The trustee becomes the owner of the asset and manages it for the benefice of a third person, the beneficiary.

A trust might have impact on income tax (trusts revenues received by a French resident or French source revenues received by the trustee), on wealth tax (the trust assets should be included in the taxable basis), on registration duties at the life end of the trust. French tax payer's revenues accrued in a trust located in a tax heaven might be taxable in France should certain conditions be met (to know about this subject check Tax heaven/international).

Holding a professional building through a Civil company "SCI" permits the owner to separate the building from its business and to benefit of rental allowance largely protected from the fluctuation of the economic activity of the business. This segregation also facilitates the transfer of the business. The tax regime applicable to the "SCI" gives also numerous tax defensible strategies for wealth tax and capital gain tax.

French civil companies created before July 1st, 1978 which were not registered before November 1st, 2002, are deemed transformed in joint-ventures called “société en participation”. Their assets are automatically transferred from the civil company to the joint-venture. However the French tax authorities recently indicated that the capital gain eventually triggered by this transfer is not taxable if the joint-venture books the assets at the value they had in the books of the Civil company. (Answer Grosskost – AN June 2nd, 2003)

Case law:
Société Civile Immobilière "SCI" (Non trading real estate company) does not perform a business activity of retailers of real properties and therefore cannot be subject to corporate income tax when the SCI only trades its own real properties initially acquired without any speculative intention and leased until the sale. French Supreme administrative Court (Conseil d'Etat) judged that speculative intention must be evidenced on purchase date and not on date of sale.

WARNING: Reform of rules applicable to succession and gifts applicable as of January 1st, 2007

Article 7 of the finance bill for 2004 (Instruction November 6, 2003, 7 G -5-03 - available in French) cut by 50% the gift tax on gift and revealed "manual gift" transferring full ownership (by opposition to a naked ownership or an usufruct) granted between September 25, 2003 and June 30, 2005 whatever the age of the donor. Would such gift and/or manual gift have been taxed, the taxpayer must file a claim to obtain a refund.

In addition to the reduction of the gift tax, the breakdown of the value of an asset between the life tenant and the naked owner has been up dated to step-up the value of the usufruct which remained unchanged since 1901. The new table applies since 1/1/2004.

Further to a Supreme Court decision of March 31 2004, tax administration issued new guidelines related to the tax treatment of gifts made by hand revealed at the death of donor. Inheritance tax provisions apply to such gifts should these gifts were not subject to gift tax before the death of the donor.

For inheritance and donation granted as from January 1st, 2006, former disclosed gift made more than 6 years ago (instead of 10 years ago) will no longer have to be included in the computation of registration duties when a new gift is made. As a consequence former donations disclosed before January 1st, 2000 will no longer have to be included in the computation of registration duties.

As of January 1st, 2005 debt raised by the grantor for the benefit of the asset subject of the gift or for the acquisition of the asset subject of the gift are, if specific conditions are met, deductible from the basis of the gift tax.

The 50% gift tax rebate on “full ownership” gift whatever the age of the grantor is prorogated until December 31, 2005.

Gifts made by each parent, grand-parent or great-grand-parent between June 1st, 2004 and December 31, 2005 to each child, grandchild and great-grandchild older than 18 years the day of the gift, would be tax exempt up to a maximum of EUR 20,000 (30,000 euros from Febuary 9, 2005). This exemption applies to nephew and/or niece if no descendants. The gift must be reported to the local tax office within the next month of the gift. It is possible to benefit from this provision in addition with the other existing tax incentive applicable to inheritance and gifts.

In addition this very same gifts made in full property between January 1st, 2006 and December 31, 2010 are exempted of gift tax up to a maximum of EUR 30,000 when the grantee invests the money, before the end of the 2nd year following the date of the gift, to the creation or the buy-out of SME.

The current rebate of 50,000 euros per child is increased to 150,000 euros per child. It will be therefore possible to give tax free each 6 years 150 000 euros to each child. Individuals who made a gift less than 6 years ago may make a new gift to the same people up to the difference between the gift they made and 150 000 euros.

Gifts in cash in full property made by each parent, grand-parent or great-grand-parent younger than 65 years to each child, grandchild and great-grandchild older than 18 years the day of the gift, are tax exempt up to a maximum of EUR 30,000 (one time per grantee). This exemption applies to nephew and/or niece if no descendants. It is possible to benefit from this provision in addition with the other existing tax incentive applicable to inheritance and gifts. There is no time limit to this provision.

On December 21st, 2007 French Supreme Court decided that French tax authorities may recharacterize a life insurance contract as a gift and tax accordingly

WARNING: Reform of rules applicable to succession and gifts applicable as of January 1st, 2007

As of January 1st, 2005, gift tax on the transfer of asssets encumbered with debt is calculated on the net value of the gift (Market value of the assets less the relate debt transferred to the grantee) when the debt meets the tests listed below:
- Grantor took the debt for the acquisition or for the benefit of the assets transferred
- The debt is transferred to the grantee as part of the gift
- The lender is properly notified that his receivable is transferred to the grantee
- The lender is a third party

In a guideline 7G-7-06 dated July 27, 2006 French tax authorities indicates that for gift of a real property these debts do not reduce the tax basis of real estate publishing taxes.

WARNING: Reform of rules applicable to succession and gifts applicable as of January 1st, 2007

Since the new law on divorce, gift between spouses are irrevocable even in case divorce. This issue must therefore be carefully addressed before the gift or the underwriting of a life insurance.

WARNING: Reform of rules applicable to succession and gifts applicable as of January 1st, 2007

French tax authorities recently indicated that a child less than 6 years old who receives a gift or an inheritance from abroad and who therefore cannot be considered as resident in France for at least 6 years, will not be subject to gift tax or inheritance tax, even if his/her parents live in France for 6 years or more during the last 10 years.

In case of gift of stock-options after the holding period, the gain equal to the difference between the market value of the share on exercise and the strike price was not taxable because it was not a transfer for consideration.

As from June 20th, 2007, this gain is also taxable in case of gift.

Gift to non-profit organizations recognized to be of public interest

As of January 1st, 2003 (Law voted July 21, 2003), the tax deductibility of donations made by individuals to non-profit organizations recognized to be of public interest is increased to 60% of the donation paid (currently 50%), up to a maximum of 20% of their annual taxable income (currently 10%). The donation in excess of this 20% yearly threshold is carried forward over a 5-year period.

In addition gift made by inheritors to foundations and non-profit organizations recognized to be of public interest are deductible from the tax basis subject to inheritance duties. This deduction does not cumulated with the tax credit applicable for income tax purposes.

In a guideline dated May 16, 2007 French tax authorities disclose the conditions to benefit of an income tax reduction for free lending of premises to public welfare societies. The tax reduction is subject to a rental agreement. The yielding up of the rental fee remains taxable as a real estate income at the level of the landlord.

Gift of a company : value ruling

Amending finance law for 2008 made legal the “rescrit-valeur”. Up to know the “rescrit-valeur” was only authorized by tax guidelines.

The “rescrit-valeur” is a ruling allowing any business owner to who want to give his business to request the tax authorities to confirm the value of his company. When the value is approved, tax authorities may no longer challenge this value if the donation of the company in made in the next 3 months.

This provision benefits to business owners and corporation owners. Shares of listed companies, of portofolio companies and for real-estate management are excluded (article 759 CGI).

Three conditions must be fulfilled :
- Prior to the gift, good face donator must request in writing a confirmation of the proposed value of its business from the tax authorities.
- Donator must provide the tax authorities with the necessary information to value the business for the gift considered.
- Donator must proceed with the gift at the approved value within 3 months of the approval.
Tax authorities have 6 months to answer the request.

Come into force: Application filed as of January 1st, 2009.

Inheritance from foreign source

For the first-time France and Germany signed an inheritance and gift tax treaty on October 12, 2006. The treaty is based on the OECD Estate, Inheritance and Gift Model Convention of 1982. The treaty provides for allocation rules for properties and for the deduction of liabilities in the state of residence or the State of source.

Inheritance tax

WARNING: Reform of rules applicable to succession and gifts applicable as of January 1st, 2007

As of January 1st, 2007, law dated June 20, 2006 changed deeply French succession and gift rules. Main topics are (Please see also " Transmission of a business").

Acceleration and simplification of succession rules:
- Delay to accept or renounce to the succession if reduced from 30 years to 10 years, or subject to the control of the judge, reduced to 2 months.
- Rules governing the acceptance limited to the net equity value are made easier for the heirs.
- Option to not be liable for an inherited debt reasonably ignored on unconditional acceptance of the succession when payment may have serious effect on the own estate of the heir.
- In case of legacy of cash, the liability of the heir on his own private assets is limited to the value of the succession.

When no heir exists, father and mother have no longer a share reserved on the property of the decedent's estate.

In the absence of heir, the surviving spouse has the right to receive 1/4 of the succession. Any person dying without descent, may distribute all his property to his surviving spouse or to any person of his choice. The father and the mother have each the right to receive back 1/4 of the property they gave to the decedent.

Amicable distribution is the rule. It works even when one joint owner is absent or cannot indicate his will due to distance. It is also possible to make a partial amicable distribution.

It is now possible that a gift or a will provides that the beneficiary must keep the transferred property and transmit it at his death to a second beneficiary mentioned in the deed.

Option to make a liberality to a first beneficiary and to indicate what will remain of the liberality at the death of the first beneficiary will be distributed to a second beneficiary.

It will be now possible that the wedding agreement give to the surviving spouse the right to request from the heirs owning the building a lease of the premises in which the business is located.

A potential heir will have the right to make decisions necessary to the survival of the business without triggering a deemed acceptation of the succession.

The appointment of a trustee, the administrative decisions and some disposals (real estate excluded) will only require a 2/3 majority.

When an amicable decision is not possible, any commercial, industrial, self-employed or professions may continue as a joint ownership under the control of the Judge. In addition the distribution may be postponed for 2 years or more by a decision of the Court.

The surviving spouse or any heir, including his spouse or his descents, owning shares in the business and working or having worked in the business, may request the attribution of the joint business, subject to a cash payment to the other heirs when the value of the business exceed his own share in the estate.

Possibility to enter in a succession agreement by which a heir waives in advance all or part of his legacy to the benefit of one or several people being or not heirs. This option allows the heirs to choose in advance the heir which will acquire the business.

As of July 1st, 2002, the surviving spouse may benefit of an usufruct on the main residence of the couple and on the furniture filling this residence (see Protection of spouse). According to administrative guidelines dated June 6, 2003, the benefit of the deferral rules is applicable to the payment of the inheritance tax on the entailed building.

As of January 1st, 2005 the taxable amount of legacy received by the surviving spouse and/or the surviving children or the surviving parents, is reduced by 50,000 euros. The rebate is shared between the inheritors proportionally to their share in the legacy. The 50 000 euros rebate comes in addition to individual rebate.

From January 1st, 2005 to August 22, 2007 the rebate for gift and legacy between parents and children or in favor of disabled is increased from 46,000 euros to 50,000 euros. French tax authorities have confirmed that the inheritance where heirs other than the one listed above will also benefit of the rebate.

The current rebate of 50,000 euros per child / ancestor is increased to 150,000 euros. As a counterpart, the global rebate of 50,000 euros per legacy is abolished.

As of January 1st, 2005 the rebate for specific legacy between brothers and sisters is increased from 15 000 euros to 57,000 euros subject to conditions.

As of August 22, 2007, subject to the same conditions than those applying to benefit from the 57,000 euros rebate, legacy between brothers and sisters are now exempted.

Since May 15, 2005 the surviving spouse may postpone the payment of the inheritance tax on the assets received up to 6 months after his (her) own death or until the gift or the sale of the assets involved.

When the payment is postponed, an interest of 2/3 of the legal interest rate is due ( 2,05% x 2/3 = 1,3 % in 2005). Up to now, the only option was a payment by instalment over a maximum of 10 years.

The benefit of the differed payment is limited to legacies consisting of at least 50% of non liquid assets (Buildings, non listed shares, business, patents, copyrights etc….). In addition the surviving spouse must offer sufficient collaterals (Mortgage, Security or Guarantee).

As of August 22, 2007 surviving spouse or legal partner "PACS" is exempted of inheritance tax .

IMPORTANT: Since May 15, 2005 the surviving spouse may postpone the payment of the inheritance tax on the assets received up to 6 months after his (her) own death or until the gift or the sale of the assets involved.
When the payment is postponed, an interest of 2/3 of the legal interest rate is due (2,05% x 2/3 = 1,3 % in 2005). Up to now, the only option was a payment by instalment over a maximum of 10 years.

posteriori audit of gifts and inheritance

For successions and gifts between January 1st, 2009 and December 31, 2011, a new procedure similar to a « quitus fiscal” is implemented. Instead of facing the uncertainty of an audit of the value of a gift, a taxpayer may request a tax audit of a succession or a gift within the 3 months period of the registration of the deed. From a practical standpoint the request may be joined to the deed.

The transformation of a life insurance contract in euros in a multi support (or account-units) life insurance contract is no longer triggering the tax consequences of the end of the initial life insurance contract. The life insurance contract keeps its tax seniority.

On December 21st, 2007 French Supreme Court decided that French tax authorities may recharacterize a life insurance contract as a gift and tax accordingly. Recharacterization may apply when the circumstances driving the designation of the beneficiary shows the policyholder’ strong will to make a binding transfer.

In the case at hand, the Supreme Court considered that the option to repurchase the contract was illusory and the true decision of the policyholder was to transfer irrevocably the assets because the premium for the life insurance equals 82% of the wealth of the policyholder who designated, three days before his death, as sole beneficiary, the person recently appointed as his exclusive heir.

IMPORTANT: Since the new law on divorce, gift between spouses are irrevocable even in case divorce. Therefore when a spouse has expressly or tacitly accepted the benefit of life insurance underwritten to her or his benefit by his or her spouse, the underwriter will no longer be entitled to recover his or her money nor will he or she entitled to change the beneficiary of the life insurance contract without her or his agreement. This issue must therefore be carefully addressed before the gift or the underwriting of a life insurance.

Matrimonial regime

Law of June 23, 2006 which deeply modifies rules of succession and gift will come into force on January 1st, 2007. This law abrogates in several cases the mandatory homologation of the change of matrimonial regime. by a civil Court. This will deeply facilitate the change of matrimonial regime. As a result it will be possible, when children are of age, to change a matrimonial regime by notarized act.

PACS (Cohabitation agreement)

As of the taxation of 2004 earnings (Income tax paid in 2005) most of the rules applicable to the married couples or divorced couples apply to people bound by a PACS (Cohabitation agreement). The tax consequences of the marriage of 2 partners of a PACS are neutralized.

As of January 1st, 2005 the gifts between partners of a PACS (Cohabitation agreement) may benefit from a 57000 euros rebate (Conditions apply) and of the reduced gift tax rate as of the signature of the PACS (No longer any 2 years delay).

Election for the look through tax regime for limited liability family companies « SARL »

As of fiscal year finishing on January 1st , 2004, partners bound by a PACS may benefit fromthe look through tax regime for existing or newly incorporated limited liability family companies « SARL ».

Progressive exemption of capital gain tax on shares

Capital gains on shares of companies subject to corporate income tax are reduced by 1/3 for each year of holding as of the 6th year of holding. Capital gains will 100% exempted after 8 years of holding.

For individuals other than executives of SME, the holding period starts as from January 1st 2006 for shares acquired before 2006. Therefore the 100% exemption will only apply to disposal made in 2014.

Executives of SME who are retiring and selling their shares acquired or subscribed before January 1st, 2006, will immediately benefit of the exemption when the required conditions are met.

Article 150-0 D ter CGI provides for a rebate of one third of the capital gain benefiting to managers of SME who sell their company when retiring, for each year they keep their shares over five years.

The benefit of this provision is subject to several conditions: stop any activity in the company which shares are sold and apply for retirement either within the year following the sale, or within the year preceding the sale.

Amending law for finance law 2008 expand this period from 12 months to 24 months (sales made as of January 1st, 2009).

Protection of the house of the entrepreneur

A person operating its own business may protect his house against seizure by professional creditors by notarizing a statement on un-seizure. (Applicable after the publication of this law in the official gazette).

Regularization unit

French tax residents holding undeclared financial accounts in countries with advantageous tax policies, can regularize their situation at the regularization unit set up in Bercy up to December 31st 2009,. After this date, Eric Woerth, French Minister of Budget made it clear that the tax audit would apply with maximum severity, without any lenience.

On the basis of its experience with the regularization unit, ALTEXIS can competently advise its clients on the opportunity of engaging this procedure, as well as assist them in the preparation of an anonymous regularization file and negotiate with the tax authorities on the terms of this regularization.

By regularizing, tax payers put themselves in conformity with the French tax rules and avoid eventual prosecutions. Also, they obtain free disposal of sums that were until then largely unavailable.

The regularization procedure is entirely anonymous. It is only when a final overall agreement has been reached that the tax payer's name is transmitted to the tax authorities.

The regularization of the tax situation is executed on the basis of payment of the income tax, and, if necessary, on the payment of the wealth and inheritance tax. It is also sometimes possible to obtain the capping of default interest. The 40% penalty can also be negotiated with the tax authorities.

Before starting the procedure, ALTEXIS evaluates with its clients the different options of regularization available to them, and prepares an evaluation of the total cost for each option (imposition, default interest and penalties to be negotiated).

The anonymity of the client is preserved throughout the procedure. When the regularization solution has been decided upon, in complete agreement with its client, ALTEXIS takes care of presenting it in a completely anonymous way to the tax authorities and conducts the procedure to its full end. Names will only be communicated to the authorities after a formal settlement has been reached and the terms had being negotiated.

As of April 3, 2003, the tax depreciation called « Besson » is replaced by a more flexible tax depreciation called “Robien”. This new depreciation rule allows the deduction from the rental income of a depreciation allowance up to 65% of the purchase price over 15 years. The benefit of the tax depreciation in no longer limited to renter earning less than a maximum income. In addition the maximum rent allowed should be closed to the market price and include the investment in residences for senior citizen and students as long as no hotel services are provided. When the investment is made through a SCPI (Look through entity), the depreciation allowance is immediately deductible at the partner level, the year of subscription to the capital.

The following investments are eligible:
- New accommodations acquired since January 1st, 2003.
- Accommodations acquired before January 1st, 2003 and finished since January 1st, 2003.
- Dilapidated accommodations acquired since April 3, 2003 which will be renovated by the acquirer.

The tax cut for investment in vacation resorts is now available for builings located in the new district “Villes nouvelles” of Marne-la-Vallée (77), Sénart (77) et L’Isle-d’Abeau (38). The tax incentive is either equal to 25% of the acquisition cost of the building acquired new or unfinished or to 20% of the renovation costs. Eligible costs are capped at 50 000 euros for single and
100 000 euros for a married couple.

Saving plan invested in shares called "PEA"

A "PEA" is a saving plan invested in EU member shares. Subject to several restrictions and minimum holding period, the French holder of such plan in not taxable on capital gain and dividends related to shares hold in the PEA.

Dividends paid as of January 1st, 2005 no longer carry a tax credit called "Avoir fiscal". The holders of a PEA will no longer benefit of the reimbursement of the "avoir fiscal". In replacement they will receive a tax credit up to 115 euros (230 euros for a jointly assessed couple). The amount of the tax credit will not be transfer to the PEA but will be deductible from the income tax related to the year of perception of the dividend. The excess tax credit will be reimbursed.

IMPORTANT:

When shares of non listed companies are transferred to PEE or PEA (Saving plans exempt of capital gain tax), it is important to do it at market value to avoid that the French revenue considers that the use of a PEA or a PEE is an abuse of law (80% penalty).

French Supreme administrative Court held that a French tax resident must close his PEA when living France however this closing should trigger no taxation, social contributions included, when living for another EU or EEE member country (CE n° 275416 - June 2nd, 2006).

Guideline 5 I-8-06 date August 4, 2006 provides several precisions regarding the tax regime of PEA (Saving plan invested in shares) specially with respect of private equity deals.

Confirmation that shares of companies and mutual funds located in EU, Norway and Iceland are eligible to PEA.

Since January 1st, 2005 capital losses made on closing of more than 5 years old PEA, may offset same category capital gains made the same year or 10 years onward.

Evidences necessary to proof that the sale or withdrawing made since August 5, 2005 on a PEA were allocated to the purchase of the creation of a business (No taxation and no mandatory closing of the PEA).

Cash from Earn-out on shares sold from a PEA are tax exempted when deposited on the PEA. This cash deposit does not reduce the 132 000 euros PEA threshold (Year 2006). Would the PEA be closed, the earn-out payment would be taxable at a rate of 27% (16% + 11% - Year 2006).

When a PEA holder must pay an indemnity due to a warranty for liability on shares sold from his PEA, the payment must be made from the PEA. As needed cash is transferred to the PEA while complying with the 132 000 euros threshold (Year 2006).

When the buyer of the shares retain part of the price (Pledge on warranty for liability), the PEA holder may deposit in cash the related amount on his PEA within 2 month of the sale. This deposit does not count in the 132 000 euros threshold. A lack of deposit would trigger the closing of the PEA.

Conditions to fulfil to deposit Stock Appreciation Right (Bons de Souscription d'Actions) on a PEA:
- Related stock must be eligible to PEA (e.g. bonds are not).
- Related stock must be purchase with cash account of the PEA within the threshold of 132 000 euros (Year 2006). This is the value of the stock which is used to calculate the 132 000 euros threshold, not the value of the SAR.
- Stock of the company issuing the SAR are already deposit on the PEA (May be challenged successfully).

SUIR (Venture company)

This new type of legal entity benefits from a 10 years tax holidays (Corporate income tax and alternative minimum tax "IFA"). It must be hold by a single individual who will be exempt from income tax with this respect (French tax resident) or exempt from withholding tax (Non French tax resident). Its only business purpose must be the subscription in cash to shares in non-listed company registered in the EU.

SUIR is exempt of corporate income tax during 10 years. SUIR must hold at least 5% of the dividend rights and not more than 20% of the dividend rights and voting right of the companies they invest in.

Tax allowance on gift or inheritance of companies or businesses

Many safe and tax efficient leisure investments are available in France both for residents and non residents. Tax incentives exist for investment in more than 100 years old furniture, paintings, sculptures, photos, ships, planes, cars, jewelries. Historical buildings and forest may also present tax opportunities. Such investment strategy combines passions, diversification of assets portfolio, capital gain opportunities and tax efficiency (Income tax - Individuals, wealth tax, inheritance tax...).

Tax reduction for equity investment in SME

When conditions are met, individuals who subscribe to the capital of a small or medium size business “SME” benefit from a tax credit equal to 25% of the cash contributions up to a 20000 € for single taxpayer (40000 € limit for a couple). If the cash contributions exceed the allowed deduction, the excess can be carried over 3 years.

One condition to benefit from the Tax reduction for equity investment in SME is that more than 50% of the shares of the SME are owned by individuals. For the equity infusions made as of January 1st, 2005 the computation of the 50% threshold will be softened by excluding from the computation the shares owned by some capital risk ventures (SUIR, sociétés de capital-risque, sociétés financières d’innovation, etc…).

This tax reduction initialy applied until December 31, 2006. Finance law for 2007 extended this provision until 2010.

Rules applicable on the period 2007 through 2010:
- Tax credit is extended to 2010,
- Excess credit may be carried forward 4 years
- Eligible SME must have an operational activity. The regime does not apply to corporation having a wealth family management.
- More flexible rules apply to companies engaged in equitable business (Condition apply with respect of shareholders and activity)

The tax deductibility of the loss of the share capital is abrogated. However it is still possible to benefit from the tax deduction of losses on shares cancelled (art. 150-O D CGI).

This tax credit may cumulate with the wealth tax exemption for subscription to the capital of a SME.

Tax reduction for loan-interest on acquisition of non listed SME

As of August 5, 2003, individuals who borrowed at interest in order to acquire shares in a non listed SME subject to corporate income tax may benefit of a yearly tax deduction equal to 25% of the interest charge up to 2500 euros (5000 euros for taxpayers filing a joint tax return). The tax reduction is granted only to individuals who hold the majority of the voting right after the acquisition, commit themselves to keep the shares until the end of the fifth year following the acquisition and participate actively in the management of the acquired SME. Other tests apply mainly related to the acquired SME.

Taxation

The temporary usufruct, combined as needed with a life insurance, is a very efficient tool for the financing, the management and the transfer of a business offices and spaces.

The temporary usufruct must be also reviewed from a wealth tax stand point.

Tontine provision

A tontine provision is an agreement attributing retroactively to the surviving parties, for no consideration, the property on the right of the deceased. The last surviving party receives retroactively the full property of the assets covered by the tontine provision. According to a recent case law, assuming that the tontine provision is not part of an agreement concerning the join acquisition of an asset, the asset transferred by death of a party is subject to registration duties applicable to the transfer for consideration (maximum rate 4,89 %) instead of the inheritance tax which may reach 60%.

French Supreme Civil Court recently ruled that tontine agreement between spouses for the acquisition of several apartments mainly paid by the husband, the spouse having not enough earnings, is not a gift and therefore is not subject to inheritance rules.

Trusts - Fiduciaire

The French tax code now includes a specific definition of the trust !

According to article 792-0 bis, I-1 of the French tax code : " A trust is defined as the legal relationship existing in a country other than France between a settlor, either through an inter vivos deed or a testamentary deed aiming at transferring his assets' or rights' property to a trustee who holds his property for the benefit of one or several beneficiaries or for a specific goal."

The amended finance law published on July 30th, 2011 providing for the private assets tax reform, precises the tax regime of donations and successions realized via a trust, as well as the rules applicable to the taxation of the private assets held within a trust. As of the publication of the law, donations or inheritances realized via a trust will be submitted to donation or inheritance tax, according to the applicable brackets, depending on the kindship existing between the grantor and the beneficiary.

When a donation or succession cannot be characterized according to French law, specific transfer taxes will apply in case of the settlor's death, whether the assets be transferred at the death of the settlor or later on. In such case, should the beneficiary's share in the trust be determined at the time of death of the settlor, this share will be taxed according to the applicable brackets depending on the kindship existing between the beneficiary and the deceased settlor.

Should the share of the beneficiaries not be determinable, the share of assets as well as the capitalized rights meant to be transferred to the deceased's descendants will be taxed at the maximum rate applicable to the descendants in direct line, and the other remaining assets and rights in the trust would be taxed at 60%.

These taxes would be due when the settlor/deceased has his tax residence in France. When the settlor/deceased is a non French tax resident, taxes will be due when the trust's assets are located in France or, subject to conditions, on the worldwide trust's assets, should the beneficiary be a French tax resident at the time of the transfer.

It is to be noted, that the 60% rate would be applicable to any donation and transfer by death realized via a trust managed in a non cooperative jurisdiction as defined by the French tax authorities. Starting January 1st, 2012, the total assets or capitalized rights within the trust will be subject to a annual specific wealth tax at a 0,50% rate when the settlor and the beneficiaries are French tax residents. For non French tax residents, the wealth tax will apply only to the sole assets located in France.

The taxation would be due by the trustee, or, by default, by the settlor or the beneficiaries. This taxation would however not be due on the assets and rights within the trust if they are already declared by the settlor or a beneficiary's for their own wealth tax. Spendthrift trusts and pension fund trusts will not be subject to this annual specific wealth tax.

Actual or future French tax residents entering in a trust must carefully review the French tax consequences of the participation to a trust as settlor, beneficiary or trustee.

FLASH: First level Court ruled that a French resident beneficiary of a US trust in not liable of wealth tax on the value of the assets belonging to this trust. French tax authorities did not appeal

Law of February 19, 2007 made a shyly introduction of Fiducie in French law, a structure similar to the Trusts.

To be considered as performing professionally the activity of renting furnished homes it is now necessary to meet the following tests:
- to be listed at the commercial register as professional lessor
- yearly sales generated by the lessor activity exceeding 23 000€
- the lessor activity generates at least 50% of fiscal household taxable earnings. Earnings used for this test is the addition of taxable salaries of article 79 CGI, business income including lessor activity, business income of art. 62 CGI, agriculture income and income from professions.

Losses generated by the lessor activity is deductible from the global income. Depreciation of the building(s) is not tax deductible for the computation of the losses.

The new tax exemption of the capital gain is less favourable. The maximum amount cannot exceed 90 000€ (Ceiling for services) while the ceiling for goods was applicable before.

The tax regime applicable to the owner of historical monuments (Tax deduction of expenses) is less favourable.
The benefit of the favourable tax regime no longer applies to monuments acquired as of January 1st, 2009 through civil companies, except for family civil companies or authorized civil companies when the partners commit to keep their shares during 15 years from their acquisition.

The owners for less than 15 years of premises benefiting of the favourable tax regime applicable to historical monuments must commit, as of the taxation of 2009 earnings, to keep the monument during at least 15 years (Computed as of the date of acquisition). This new restriction applies to acquisitions made before or after January 1st, 2009.

The tax deduction of landowner losses called “Loi Malraux” is transformed in a tax reduction.

The ceiling of 10 700€ applicable to the tax deduction of landowner losses from the global taxable income does not apply to the landlord losses generated by expenses related to the full repair of a building located in a protected area.

The tax deduction amount to 30% of the expenses for a building located in ZPPAUP and 40% in a “secteur sauvegardé” up to a yearly ceiling of 100 00€ i.e. a maximum tax rebate of 30,000€ or 40,000€.

This new tax relief is subject to the global ceiling applicable to tax exemptions (See § 12 above).

Come into force: Apply to authorization for construction or notification of works filed as of January 1st, 2009.

Tax rebate for overseas investments by companies is substantially modified. A ceiling applies now to the tax benefit.
For each fiscal year the total income tax rebate for overseas investments cannot exceed 40,000€ or 15% of the taxable earnings of a tax household.

This tax rebate is included in the global ceiling applicable to income tax exemptions (See above § 12).

Come into force: Applies to tax rebates and carry forward of tax rebates resulting from investments made as of January 1st, 2009. Transition rules applies to not jeopardize investments decisions made before January 1st, 2009.

A ceiling applies now to the whole tax benefit generated by income tax exemptions.

Income tax exemptions cannot exceed 25 000€ plus 10% of the taxable income of the tax household, whatever its structure (Single, married couple or PACS couple).

A taxpayer having a taxable income of 60 000€ will have a cap of 31 000€ (25 000 + 10 % of 60 000) what ever the structure of his/her tax household.

The applicable taxable income is the one used for the calculation of the income tax with the progressive brackets. Income taxable at a flat rate like real estate or securities capital gains is excluded.

Come into force: Taxation of 2009 earnings, for expenses/investments or aids made/granted as of January 1st, 2009.