Service France

The UK has taken the necessary steps for the new UK-France double tax treaty to come into effect in the UK in April 2010. Signed in London on 19 June 2008, this will replace the 1968 version which is currently in force. The convention with France which was signed on 28 January 2004 has been discarded. The text of the new treaty is yet to be ratified by the French Parliament but it is intended that the Treaty will take effect in France at the start of the next French tax year (1st January 2010). Due to the discrepancy between the start dates of the respective tax years, there will be a period of three months during which the old treaty will apply in the UK and the new treaty will apply in France. It appears that, during this period, French residents will be subject to the new treaty whilst UK residents will be subject to the old treaty.

The draft law to enact the treaty is before the Conseil des Ministres and has been approved by the Conseil d’Etat. After approval from the Conseil des Ministres, the law will need to be passed by both chambers of the French Parliament. We are informed that it is on track to come into force on 1st January 2010.

The new treaty has no effect on the separate treaty (1963) dealing with inheritance tax. There are no plans we are aware of to change this treaty.

Scope of the treaty

The treaty starts by defining which taxes it applies to. The preamble states that the aim of the treaty is to avoid double taxation which suggests that the taxes each country levies should be clearly defined and similar. This is what normally happens. However bizarrely in the new treaty this is not the case. Firstly the UK taxes which are covered are defined exhaustively as income, corporation and capital gains tax. All these taxes are Central Government taxes.

On the French side “all taxes” are covered including local authority taxes and French social contributions. There is no exhaustive list. Article 29 (3) gives a specific tightly defined exemption for French Wealth Tax – see below - even though Wealth Tax as an existing French tax is not listed in the scope of the French taxes in Article 2(1)(b).

This may have been done for UK political reasons as the UK Government does not accept that national insurance is a tax. Similarly the UK Government would view, with anathema any suggestion that there is a de facto “wealth tax” in the UK. The drafting of the treaty prevents any taxpayer seeking to argue that any UK tax levied on them amounts to a “wealth tax” which can be offset against French wealth tax. In particular there may be an argument that the fixed £30,000 annual payment for a UK resident but non-domiciled individual to be taxed only on income remitted to the UK amounts to a “wealth tax”.

French resident owning UK property

A useful tax planning ploy for French residents was to own UK property which was exempt from both UK and French capital gains tax. No UK tax was payable because the person was not UK resident and no French tax was payable because Article 13 in the French version said the gains were taxable where the property was situated i.e. the UK. In addition Article 24(b) (i) helpfully provided that these gains could not be taxed in France if they were taxable in the UK “by virtue of the convention”. This meant that even though they were not taxable under UK domestic law they were taxable theoretically under the tax treaty and so France could not tax the gain.

The wording relating to capital gains tax remains largely the same as in the 1968 treaty. Under Article 14 of the new treaty, individuals who, for example are resident in France and sell immoveable property located in the UK ‘may be taxed’ in the UK. The 2008 French version of the Treaty continues to state that such gains are taxable in the UK. At first sight this looks helpful. However the wording in Article 24(b) (i) (that where the UK had the principal taxing right, France would not tax) of the current treaty has been removed from the new treaty. Article 24 of the new treaty is distinctly different and states in Article 24 (3) (a), that where the UK has the primary taxing rights, any tax paid in the UK will be credited against French tax. This is likely to mean that the current loophole will go. Information from the French Revenue is that this capital gain will be taxable with a credit given for any tax paid in the UK. Unless the UK changes its internal tax legislation, there will be no UK tax and therefore no credit. However, it is not clear to what extent French taxation will rely upon communication between the UK and French Revenues.

Many former UK residents with UK buy to lets who were previously outside the scope of French capital gains tax on disposals of such properties will be adversely affected by the treaty changes. It may be sensible to consider selling your buy-to-lets now. It seems likely that transfer of information from the UK Revenue to the French Revenue will take place here as the new buyer of any such property will submit a stamp duty land tax return to the UK Revenue to get his title registered.

UK Companies

Currently, provided certain conditions are met, UK companies selling French property are exempt from French capital gains tax. This seems unlikely to continue to be the case under the new treaty however. The new Article 7(7) provides that the capital gains tax section will also apply to UK companies selling immoveable property in France. These companies will, under the new treaty, be subject to French capital gains tax when selling such property whereas up to now the gains would form part of the business profits of the company, which are taxable only in the UK.

Selling a UK Company

The old treaty, subject to certain conditions being met, allowed for UK individuals who owned more than 25% of the shares in a UK company to sell their shares after moving to France without being subject to capital gains tax in either country. The provision of the treaty which permitted this loophole has completely disappeared from the new treaty. In these circumstances any such disposal would be taxable in France.

Partnerships

One of the main changes in the 2008 version is provision of the treaty to partnerships under Article 4 entitled “Residence”. This provides not only for partnerships but for “any group of persons or entity similar to a partnership”. Whether or not members of such groups will be entitled to treaty protection will vary depending on the tax treatment of profits in each state. The Treaty sets out six different scenarios for the treatment of profits and states under each whether protection will be provided. By including entities similar to a partnership, this may mean that Limited Liability Partnerships (“LLPs”) will now fall within treaty protection. This clarifies the position for individuals wishing to trade in France through a LLP, although it may in fact close a previously exploited loophole for LLPs.

Wealth Tax

A further addition to the new treaty comes under Article 29 entitled Miscellaneous Rules. This allows for a ‘wealth tax holiday’ whereby UK nationals who become French residents will not be subject to wealth tax on their assets located outside of France for the first five years of their residency. If this person loses the status of French resident for at least three years they will obtain the five year exemption again if they return to be French resident after this period. It must be remembered that at all times the individual will remain liable for wealth tax on their French located assets.

Other matters

You can still apply to the “competent authorities” in each State to reach agreement on a point not covered by the Treaty. However, if agreement is not reached within 2 years the application will be able to be referred to arbitration under Article 26 of the 2008 Treaty. Also in terms of the provision of information as provided for by the new Article 27, countries are prohibited from refusing to provide information for the reason that it is held by a bank. This may widen the net for authorities seeking to obtain information in order to cut down on tax evasion.

Summary

A number of loopholes and opportunities existed under the old treaty and Sykes Anderson is exploring other opportunities which will arise under the new treaty.

The old treaty, having been in force since 1968, has had the benefit of 40 years of interpretation by both the UK and French Authorities. It may take some time to be certain of how each authority will apply the new provisions and whether any of the changes are an indication of any future policy changes in the national tax laws.

March 2009

David Anderson
Nicole Gallop Mildon
Graeme Perry