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As soon as a donation or inheritance involves an international dimension, the sensitive question of the applicable law arises, both from a civil and a tax perspective.
Each country has its own tax system, which is intended to apply either to assets located within its territory and/or to its residents. The main difficulty is therefore avoiding double taxation. In France, Article 750 ter of the General Tax Code sets out the applicable rules. However, these rules apply only in the absence of a bilateral international tax treaty.
In the absence of a bilateral treaty, what tax rules apply in France?
Article 750 ter of the French General Tax Code sets out the tax rules applicable in the absence of an international treaty, depending on the domicile of the deceased or the donor (the person making the donation), the domicile of the donee (the person receiving the gift) or the heirs, and the location of the assets.
If the deceased or the donor is domiciled in France
All assets transferred are taxable in France, whether they are located in France or abroad and whether the heirs, donees, or legatees are domiciled in France for tax purposes or not (Article 750 ter, 1° of the General Tax Code). In such cases, the amount of transfer duties paid abroad is deductible from the tax due in France.
If the deceased or the donor is not domiciled in France
- If the heir or donee is also not domiciled in France, only assets located in France are subject to transfer tax in France (Article 750 ter, 2° of the General Tax Code). In this case, it is not possible to offset the tax paid abroad against the tax due in France.
- If the heir, donee, or legatee has been domiciled in France for at least six of the ten years preceding the transfer, all assets transferred, whether located in France or abroad, are subject to transfer tax in France (Article 750 ter, 3° of the General Tax Code). In such cases, the amount of transfer duties paid abroad is deductible from the tax due in France.
And what about double taxation?
In the country of domicile of the French non-resident, similar rules may apply. This mechanism can therefore lead to double taxation issues. In such cases, the same transfer may be taxed in two countries, for example, in the country of residence of the French expatriate and in the country of residence of his or her children.
Moreover, the classification of the assets transferred may vary from one country to another. For instance, certain assets are regarded as real estate in France, whereas in other countries they are treated as movable property. Here again, there may be risks of double taxation.
Article 784 of the French General Tax Code nevertheless provides a mechanism to avoid double taxation in certain cases. Specifically, when the donor or deceased is domiciled in France (Article 750 ter, 1° of the General Tax Code) or when the donee or heir is domiciled in France (Article 750 ter, 3° of the General Tax Code), the amount of transfer duties paid abroad on assets located outside France is credited against the amount of tax due in France.
The tax credit is applied by means of Cerfa form No. 2740, issued by the Non-Residents Tax Office.
Where to get information?
• DINR Direction des Impôts des Non-Résidents (Directorate of Non-Residents’ Taxation) - 10 rue du Centre, 93465 NOISY-LE-GRAND Cedex www.impots.gouv.fr/portail/international/particulier
• For the list of international treaties signed by France: www.legifrance.gouv.fr/
• To consult the administrative guidelines on BOFIP
What is the purpose of international treaties?
To limit double taxation, France has signed bilateral international tax treaties. These treaties, which take precedence over the national law of the signatory States, define the rights of the States with respect to the taxes they may collect. They may therefore derogate from national law. Their drafting and operation are not uniform, and they may be amended over time.
Therefore, in each case whether for a donation or an inheritance, it is essential to check whether a treaty has been signed between France and the expatriate’s country of residence. In addition, any amendments made since the signing of the treaty must be considered.
What are the limits of international treaties?
The first limitation lies in the fact that the number of bilateral tax treaties signed by France is limited (121 bilateral tax treaties covering all types of taxes in 2019, according to the Cour des comptes). In addition, the treaties signed apply only to one or several types of taxes, but do not cover the entire tax system. Thus, a bilateral treaty may address inheritance tax or income tax but not deal with the rules applicable to donation.
Furthermore, in certain cases, even if a treaty has been signed, it may not apply due to its scope. For example, the Franco-Monégasque treaty of 1 April 1950, applicable to inheritance tax, covers only nationals of France or Monaco. Thus, if a Swiss national owning real estate in France dies in Monaco, where he or she is domiciled, the Franco-Monégasque treaty will not apply.
Finally, the application of a State’s tax law has no effect on the application of civil law (for example, the rules designating heirs or governing the distribution of the estate).
In conclusion, to prepare the transfer of an estate and avoid unpleasant surprises, it is advisable to consult a professional such as a notary. The notary will be able to provide valuable advice to everyone, both from civil law and tax perspective, whether in matters of donation or inheritance.