Mrs. D, a Canadian owner of luxury apartments in Mediterranean coast of France, intends to rent the apartments out to third parties. She wants to reduce taxes on rental income, capital gains taxes if she sells the apartments, and inheritance taxes if she dies.

Suggested solution:

Mrs. D cannot avoid French tax on rental income derived from the apartments, as they are situated in France. If she owns them as an individual, the tax burden could be as high as 49.58%. If a company owns the apartments directly, or they are indirectly controlled by her, French corporate tax will be due at a rate of 33.33 %, regardless of whether the apartments are owned by a domestic or a foreign company.

French capital gains tax can be avoided if the company owning the property is established in Luxembourg. This is due to a special provision in the France and Luxembourg tax treaty.

It is possible for French inheritance taxes to be avoided should Mrs. D die, but only under certain conditions. These are: if the apartments are owned by a trust, directly or indirectly. It needs to be stressed, however, that this requires very careful structuring and that the trust needs to be an irrevocable, discretionary trust. In addition, none of the beneficiaries can be a French resident.

Dividends paid by the Luxembourg company to a trust do not qualify for tax treaty relief, resulting in 25% withholding tax. This tax can only be avoided if the Luxembourg company is be owned by an offshore company, or a so-called Luxembourg 1929 company, which occasionally liquidates the regular Luxembourg company, as liquidation gains are not subject to Luxembourg withholding taxes. The offshore company (or the Luxembourg 1929 company) can then distribute the liquidation gains, which are received in the form of a dividend to the trust, wherever they are located (although this is subject to Canadian anti-avoidance regulations).

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