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Trust Case Studies |
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Nancy Johnson, a Canadian
individual, has acquired some luxury apartments in France along the
coast of the Mediterranean. It is her intention that the apartments
will be rented out to third parties. In case of sale of the apartments
or when Nancy dies, capital gains taxes and inheritance taxes should
be avoided or reduced as much as possible.
In addition, Nancy wonders how high taxes on rental income and/or
taxes on capital gains in case of the sale of the apartments can be
avoided or reduced as much as possible.
Suggested
solution:
It is not possible to avoid French taxation on any rental income derived
from the apartments, as the apartments are situated in France. If
Nancy owns the apartments as an individual, the tax burden may be
as high as 49.58%. However, if the apartments are owned by a company
directly or indirectly controlled by her, French corporate tax will
be due at an effective rate of 34 1/3 %, regardless of whether the
apartments are owned by a domestic or a foreign company.
If the company owning the property is established in Luxembourg, French
capital gains tax can be avoided due to a special provision in the
tax treaty between France and Luxembourg.
French inheritance taxes upon Nancy's death can, under certain conditions,
be avoided if the apartments are directly or indirectly owned by a
trust. This needs very careful structuring and in any case, the trust
should be an irrevocable, discretionary trust. Moreover, none of the
beneficiaries may be residents of France.
Any dividends paid by the Luxembourg company to a trust will not qualify
for tax treaty relief, thus resulting in 25% withholding tax. In order
to avoid the withholding tax, the Luxembourg company should be owned
by a offshore company (or a so-called Luxembourg 1929 company) which
occasionally liquidates the regular Luxembourg company. Liquidation
gains are not subject to Luxembourg withholding taxes. The offshore
company (or the Luxembourg 1929 company) can distribute the liquidation
gains received in the form of a dividend to the trust, wherever located
(subject to Canadian anti-avoidance regulations).
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