July 2003

French wealth tax (Impôt de solidarité sur la Fortune - hereafter called «ISF») assessed on Russians holding real property in France through a UK Co.

By Me. Francis MASSON, Avocat à la Cour

Caution: this note dates back to July 2003 and will be shortly updated of recent changes. The author therefore declines any liability for any obsolete legal references.

This note will address the relevant headlines of ISF regulated by Articles 885 A through 885 Z of the French Tax Code, with a short outline of the Tax Treaties between France and the United Kingdom and between France and Russia.

1/ French tax provisions applicable to ISF - wealth tax

1-1 Taxable persons

Article 885 A of the French Tax Code provides as follows:

"Are subject to the annual ISF, when the value of their assets exceeds the limit (Of € 720 000) provided for under Article 885 U:

1° Physical persons having their tax domicile in France, for their assets located in France or abroad;

2° Physical persons not having their tax domicile in France, for their assets located in France.

Except in cases stated in Article 6-4. a and b, married couples are subject to a joint taxation...

The conditions of taxation are determined as of January 1st. of each year.

Professional assets defined by Articles 885 N to 885 R shall not be taken into account for the taxable basis of ISF."

Only physical persons may be subject to the ISF.

Married couples are subject to a joint taxation, except if their matrimonial regime provides for separation of their assets and they do not live together, or, if having started divorce proceedings, they have been authorized by the court to have separate domiciles.

Physical persons having their tax domicile outside of France are exclusively taxable for their assets located in France. Their financial assets (money market funds and other cash deposit in banks, bonds, shares of non real estate companies, etc...) are expressly exonerated.

Under Article 750 ter 2° 4th paragraph of the French Tax Code, real property or real property rights, directly or indirectly possessed in France, as well as shares of non listed legal entities having their registered office outside of France and whose asset mainly (for more than 50% of the value of assets located in France and not used for their own commercial activities) consists in real property or real property rights located in France, constitute assets located in France.

For shares of said deemed real estate foreign entities, the taxable value is represented by the proportion between the value of real property located in France and the value of total assets of the company located both in France and abroad.


Foreign legal entity, whose total assets amount to € 20 million as of January 1, 2003, broken down as follows:

-real property located in France (not used for the foreign company's own commercial activities):

€ 8 million

-real property located outside of France: € 3 million

-other assets located in France:

(a) real property used for the company's own commercial activities: € 3 million

(b) other assets: € 1 million

-other assets located outside of France: € 5 million

TOTAL ASSETS € 20 million

Said foreign legal entity is deemed to be in France a real property company, because real property located in France (€ 8 million) represents 8/12, or 66,66% of French assets (€ 8 million + € 3 million + € 1 million). The shares of said company held by physical persons domiciled outside of France will be subject to ISF in the proportion of 8/20, or 40% of their value.

1-2 Taxable assets

All assets, whether movable assets or real property as of January 1st., including receivables, are subject to ISF. In case of usufruct, the beneficiary of usufruct is exclusively taxable.

1-3 Exemptions

In addition to net professional assets (being defined by Article 885 N of the French Tax Code as assets necessary to the main exercise, by the owner or his spouse, of an industrial, commercial, agricultural or independent profession), exemptions include assets up to € 720 000, antiques (such as furniture, jewels, etc...older than 100 years), works of art, such as paintings, literary and industrial property rights, and financial assets held by physical persons not having their tax domicile in France, among others.

1-4 Value of taxable assets

The value of assets is the fair market value of the assets as of January 1st of each year and for shares of listed companies, their last quotation before January 1st or the average quotation of the thirty days preceding January 1st.

Debt, such as taxes (income tax, ISF, etc...), loans (for the balance of principal remaining due) may be deducted (which is not the case for the 3% annual tax).

1-5 Applicable rates of ISF

Only the net asset value above € 720 000 is taxable at the following rates for the following brackets:

-Up to € 720 000: 0%

-Between € 720 000 and € 1 160 000: 0,55%;

-Between € 1 160 000 and € 2 300 000: 0,75%;

-Between € 2 300 000 and € 3 600 000: 1%;

-Between € 3 600 000 and € 6 900 000: 1,30%;

-Between € 6 900 000 and € 15 000 000: 1,65%;

-Above € 15 000 000: 1,80%.

For example, would xx Co. Assets Ltd. reveal the identity of its shareholder(s) and be deemed a real estate company as defined in 1-1 above (we ignore whether the company held other movable assets or real property in France as at January 1st, 2003 and do not have its financial statements closed as at December 31, 2002) and on the basis of an estimated value of € 2 500 000 of its French real property, then the shareholder(s) would be subject on June 15, 2003 to an ISF tax of:

- up to € 720 000 = 0

- on € 440 000 x 0,55% = € 2 420

- on € 1 140 000 x 0,75% = € 8 550

- on € 200 000 x 1% = € 2 000

TOTAL ISF € 12 970

1-6 Late payment interest and penalties

As for the 3% annual tax, late payment interest amounts to 0,75% per month, plus a 5 % increase of the tax, whose payment has been differed.

2/ Tax Treaties between France and the United Kingdom

Neither the May 22, 1968 Tax Treaty between France and the United Kingdom, as amended, which for France exclusively applies to personal or corporate income taxes and withholding taxes, nor the June 21, 1963 Tax Treaty between France and the United Kingdom, which for France applies to the inheritance tax (for the United Kingdom to the estate duty) do apply to or contain provisions regarding the wealth tax.

3/ Tax Treaty between France and Russia

The November 26, 1996 Tax Treaty between France and Russia, which entered into force on February 9, 1999 contains several provisions relating to (a) the definition of real property (b) the wealth tax (entered into force on January 1, 2000), and (c) the related tax credit.

Under Article 6-2 of the Treaty, real property shall have the meaning given by the State, where said real property is located.

Article 22.2 of the Treaty provides that wealth represented by shares or similar rights in a company or legal entity, whose asset is mainly composed, directly or through the interposition of one or several other companies or legal entities, of real property located in a contracting State or of real property rights, is taxable in said contracting State.

Said provision allows France to assess to the wealth tax (ISF) a physical person residing in Russia for shares it holds in a legal entity, whose asset is composed, directly or indirectly, for more than half its asset value, of real property located in France or related property rights.

Under Article 23.2 of the Treaty, double taxation for Russia is avoided as follows: when a resident of Russia owns wealth taxable in France in accordance with the Treaty, an amount equal to the wealth tax paid in France shall be deducted from the wealth tax of said resident in Russia. Such deduction cannot however exceed the amount of the considered wealth tax, computed before deduction in accordance with Russian law.


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