Jersey, Guernsey and Isle of Man - Tax Agreements
France has recently signed Tax Information Exchange Agreements (TIEAs) with Jersey, Guernsey and the Isle of Man.
The agreements are aimed at preventing tax evasion by requiring the Channel Islands and Man to provide information to the French tax authorities.
Although investors seeking confidentiality may be concerned about this, the agreements are to be welcomed as they will significantly increase investment in French property through Channel Islands and Manx vehicles as these vehicles will, in many cases, be exempt from France’s 3% tax. This should open up the French property market to trust vehicles in Jersey, Guernsey and the Isle of Man and is a ground-breaking development.
The agreements only come into effect once ratified in the countries concerned. It is likely this will happen shortly.
Scope of the TIEAs
Each of the agreements has been drafted differently. All the agreements cover provision of information to the French tax authorities of French income tax, corporation tax, salary tax, wealth tax, inheritance and gift tax and registration duties on transactions. The inclusion of registration duties or stamp duty is unusual as information on this is not usually included in most double tax treaties. It is useful to the French tax authorities as a starting point for investigations into shares in property companies being sold without a stamp duty declaration being made.
The Jersey and Guernsey agreements go further than the Manx agreement and also cover French VAT and withholding taxes. It is surprising that the Manx agreements do not include these two additional elements.
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The Jersey agreement provides that pensions arising in Jersey and paid to a resident of France are only taxable in France. There is a provision that if the pension is not taxed in France under French domestic law Jersey has the right to tax.
France’s 3% tax
The 3% tax, or the Taxe sur la valeur v�nale des Immeubles poss�d�s en France par des personnes morales is governed by Article 990D of the French General Tax Code. It is one of the main articles used to attack offshore structures which are set up to own properties in France concealing the ultimate beneficial owner who may be in what France classifies as a tax haven country. Broadly these are non EU countries with which France does not have a treaty with an exchange of information clause. It also affects the very wealthy who for totally legitimate reasons seek to conceal the true ownership of high value properties.
The article provides that companies or other legal entities who, directly or through intermediaries, own one or more properties situated in France are liable to pay an annual tax of 3% of the open market value of these properties. There is no deduction for any mortgage on the property. In short you can conceal the true ownership of the property but the price is 3% per annum in tax.
This legislation has undergone a number of modifications recently and, following recent statements from the French Revenue has a direct application to trusts as well as companies. This is despite a general lack of understanding of the nature of trusts in France.
The French legislation contains a number of exemptions from this tax. Most of these relate solely to companies which are resident in France, another EU country, or in a country with which France has a convention of administrative assistance in order to counter tax evasion. The most general of these exemptions under Article 990E of the Tax Code is for the company to make a declaration each year disclosing the beneficial owner for properties owned on the preceding 1 January. The provision does not therefore have an affect on UK companies provided they give the relevant information to the French tax authorities. In practice, however, many UK buyers are unaware of this provision until they are contacted by the French tax authorities with a demand for the 3% tax.
Jersey, Guernsey and Isle of Man companies and trusts have not been able to benefit from this exemption as they are in neither an EU country nor have they had any tax agreement with France. This has meant that Jersey, Guernsey and Isle of Man companies are not attractive for investment into France. It also means that companies in these jurisdictions which own shares in a UK company which in turn owns a French property are caught by this tax as you have to go up the chain of shareholders and the tax is assessed on companies at each level in the chain.
All this looks set to change with the agreements which have recently been signed by France and these countries. The agreements provide for an exchange of information with the French tax authorities and so the exemption from the 3% tax in Article 990E can apply. This should be positive for French property especially investment property as a big pool of capital will now for the first time be able to invest in France.
Claiming exemption from the French 3% tax
In practice, if and when the agreement does come into force, the French Revenue will require companies and other legal entities in the chain of ownership of French property to complete French tax form 2746 which is fairly straightforward. Those willing to pay the tax are only required to declare the market value of the property. Those seeking an exemption from 3% tax will need to disclose the full names of all shareholders owning more than 1%, including the number of shares held by each and the rights under which they are held.
As mentioned above, there is a general lack of understanding of trusts in France and this becomes quite apparent when it comes to the Revenue guidance regarding the 2746 declaration. What the French Revenue is trying to determine when it comes to the 3% tax is who the true owner of the property is. It is in this detail where the trust structure creates ambiguities.
The names which need to be declared on the tax form will vary between either the beneficiaries or the settlor depending on the nature of the trust. This will depend on whether the trust is discretionary or has fixed trusts. There is further confusion created by French case law in relation to a different French tax, under which it has been decided that, for discretionary trusts, no beneficiary can be viewed as the true owner of the trust property so long as not all the beneficiaries live together.
It is possible, therefore, that a situation may arise where a declaration is required naming the true owner yet, under French case law, there is no true owner of the trust property. In practice, the trustees may make the declaration and lodge a copy of the trust deed with the French Revenue to cover themselves. This may mean that the desire for anonymity which is often sought when investing in the Channel Islands may be retained without facing a prohibitive tax charge in France.
Solicitor & Chartered Tax Adviser
Sykes Anderson LLP
Tel: 020 3178 3770