Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
A new Double Tax Treaty between the United Kingdom and France was signed in London on 19 June 2008. This will replace the 1968 version which is currently in force and means that the convention with France which was signed on 28 January 2004 will not now be presented to Parliament and will therefore not enter into force. The new treaty only comes into force once ratified by both parliaments. The current treaty has allowed for a considerable amount of tax planning for those moving from the UK to France or vice versa or owning property in the other country to their residence.
We look below at a few of the major changes introduced by the new treaty and the impact these will have on such existing opportunities. This article does not deal with the tax planning opportunities thrown up by the new treaty. More information about these opportunities will be forthcoming once the new treaty enters into force.
Scope of the treaty
The treaty like all tax treaties starts by defining what is covered. 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 which makes you wonder whether the treaty has failed in its stated purpose and is potentially void for uncertainty. This is something both parliaments need to look at carefully during the ratification process. 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 1(b). It seems odd this tax is not listed. You can think for instance of a French domiciled person resident in the UK who pays the L30,000 per annum UK “non domiciled income tax” claiming this UK income tax is in reality the same as French Wealth tax and so seeking to deduct this against his French Wealth Tax liability under the treaty.
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) of the current treaty has sadly gone from the new treaty. Article 24 of the new treaty replaces it with a distinctly unhelpful Article 24 (3) (a) which states that income which shall be taxed only in the UK under the treaty shall be taken into account for French tax. This is likely to mean that the current loophole will go.
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 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. As such these would be taxable only in the UK.
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. Although on the face of it this seems potentially beneficial, 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 applying 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.
The new version of the Treaty will enter into force once each country has carried out the necessary parliamentary procedures. This may not be until 2010 and it should be remembered that the 2004 version which was signed by both countries has never become law.