Philippe Kenel

French-Swiss Tax Fiscal Relation: State of Play

Philippe Kenel, PhD in jurisprudence, attorney-at-law in Lausanne, Geneva and Brussels, Python & Peter

Beside the issue of administrative assistance and normalization of past relations, Franco-Swiss relations in tax matters have been dominated over the course of the last few years by two major issues: inheritance taxes and the application of the Treaty concluded on 9 September 1966 between Switzerland and France with a view to eliminating double taxation in matters of income and wealth taxes and to prevent fraud and tax evasion (hereinafter: the Treaty) with regard to persons paying expense-based taxes in Switzerland. The first issue has been settled, while the second is in the hands of diplomats from the two countries as well as the French courts.

In order to understand the issue of inheritance tax, it is important to bear in mind that States are free to choose the criteria they wish to apply as a basis for levying taxes. The main criteria applied are the domicile of the deceased, the domicile of the inheritor (heir), or the location of the movable or immovable property (real estate assets). The majority of States, including Switzerland, tend to impose inheritance taxes at the deceased's place of residence as well as at the location of the real estate assets.

France is characterised by the fact that in application of Article 750ter of the General Tax Code (hereinafter: GTC), it combines these criteria in levying tax in the following three scenarios:

1. If a person residing in France dies, the French State levies a tax on the entirety of the deceased's assets of both movable and immoveable property, irrespective of whether such property is located in France or abroad;
2. Where a person residing abroad dies, but his heir resides in France and has been for six of the previous ten years (cumulative conditions), our neighbour levies a tax on the entirety of the movable and immovable property located in France and abroad that is inherited by the heir.
3. Where a person residing abroad dies and none of his heirs are residing in France nor have they been for six years out of the previous ten, the French State levies a tax on the entirety of any assets inherited, on both movable and immovable property that is located in France.

In the first of the two scenarios discussed above, Article 784A of the GTC stipulates that any amount paid in taxes abroad, where applicable, can be offset against taxes payable in France. However, this option is limited to taxes paid on movable and immovable property located outside of France.

No taxes are levied in the case of inheritances between spouses. In the case of inheritances for direct descendants, the tax rate is 45% as soon as the amount of the net taxable share exceeds EUR 1,805,677.

For many years, Switzerland was largely unconcerned by Article 750ter of the GTC to the extent that the treaty concluded on 31 December 1953 between the Swiss Confederation and the French Republic with a view to avoid double taxation in the matter of inheritance taxes provided that in the event of death of a person domiciled in Switzerland, only Switzerland was entitled to levy tax on the inheritance with the exception of real estate assets held in the deceased's own name and located in France. However, following a saga during the course of which the Federal Council failed to shine but where the parliament saved Switzerland's honour, France denounced the aforementioned 1953 treaty, with effect per 31 December 2014, without replacing it with a new treaty text.

It follows from the foregoing that as of 1 January 2015, France has applied Art. 750ter GTC to French-Swiss inheritances. As a result, we recommend to persons residing in Switzerland who wish for their heirs to escape the burden of French taxes, to sell their movable assets (including stocks and bonds) as well as any real estate assets they have on French soil, and to instruct their heirs to leave France. It suffices that their heirs move to a country that does not levy inheritance taxes on the basis of the heir's place of residence. This is namely the case in Switzerland, Belgium, Great Britain, and Portugal, but is not true for Spain.

The rules set out in Article 750ter GTC apply equally to endowments. This was always the case for French-Swiss endowments to the extent that there has never been a treaty between Switzerland and France governing double taxation in the area of gifts bestowed between living persons.

Persons paying expense-based tax, also referred to as lump-sum taxpayers, pay taxes not calculated as a function of their income or their fortunes, but rather on the basis of their expenditures. The law requires that the amount of said expenditures may not be less than five times the rental value of the accommodation they live in. Starting on 1 January 2016 for new arrivals, and per 1 January 2021 for those who arrived in Switzerland before 31 December 2015, this threshold will rise to seven times the rental value.

The difficulties which arise in application of the Treaty to lump-sum tax payers could be resolved as follows: Article 4, para. 6 (b) of the Treaty states that a person will not be deemed to be a resident of a contracting State within the meaning of the treaty if he or she is a "natural person who is only taxable in this State on a lump-sum basis determined as a function of the rental value of the residence or residences that he or she possesses in the territory of this State". In 1967 the Swiss and French tax authorities gave birth, by way of a mutual understanding procedure, to the concept of "topped-up lump sum". In other words, if the expense-based taxpayer accepts that the amount on which he shall be taxed is in excess of approximately 30%, the tax authorities shall deem him to be resident for tax purposes in Switzerland within the meaning of the Treaty. On 26 December 2012, the French Directorate General of Public Finances unilaterally decided that this understanding would no longer apply after 1 January 2013.

The position of the French authorities is misguided on several counts. First and foremost, even if this issue is subject to some controversy, we consider that France was not within its rights to unilaterally terminate a mutual understanding that has stood for more than 40 years. Secondly, if we were to concede that the French tax authorities were able to unilaterally terminate this understanding, the consequence thereof would be to apply the letter of Article 4, para. 6 (b) as cited above. However, this provision simply does not target persons paying expense-based taxes in Switzerland. On the one hand, it is clear from the text of the Treaty that its scope of application does not extend to persons who are taxable on the basis of a lump sum determined as a function of the rental value of their residences. However, lump-sum taxpayers are not taxed on the basis of the rental value of their residences but rather the amount of their expenditures. The rental value does not enter into consideration except in order to set a minimum threshold for their expenditures. On the other hand, an analysis of the history surrounding the negotiations that culminated in Article 4, para. 6 (b) reveals that the persons envisaged by this provision certainly were not persons paying expense-based taxes in Switzerland. There was, moreover, never any reference to them in the accompanying message of the Federal Council. The cited article targets persons residing in Switzerland who own a second home in France, and who pay lump-sum taxes in this country on the basis of the rental value of their property.

In light of the above, one can legitimately ask why, in 1967, the Swiss tax authorities accepted a system of „topped-up lump sum" in the context of a mutual understanding procedure. Whatever the answer to this question may be, it follows from the foregoing that if Switzerland were to accept the unilateral revocation of this understanding, then there would be every reason to apply Article 4, para. 6 (b) of the Treaty that under no circumstances applies to persons paying expense-based taxes in Switzerland. This would result in a situation where the lump-sum taxpayer would benefit from the Treaty even if he did not pay any „topped-up lump sum"!

This should highlight the importance of applying the Treaty to lump-sum taxpayers. In effect, not only the fact that they benefit from the Treaty allows them to recoup in full or in part a certain number of withholding taxes, but more than anything else, this clarifies the issue of their place of residence in application of the criteria set out in the Treaty, which is to say essentially the place on which their personal interests are centred, and not on the basis of Article 4B of the GTC, which provides namely that a person is deemed to be resident for tax purposes in France if his economic interests are centred there or if he exercises an economic activity there that he cannot prove is only done in an ancillary capacity.

Given that the French position is completely misguided, it is important that Switzerland comport itself very assertively vis-à-vis its neighbour. The only position that we are ready to accept is that Switzerland continue to apply the system of „topped-up lump sum", even if, as we have seen above, this practice runs contrary to the wording of the Treaty. There is a real risk that the Federal Council will fail to show the requisite courage, thereby leaving the matter to be decided by the French courts. And since we are well aware of the independence they exercise vis-à-vis their government ….