FARAD Finance Forum 2019 – #FFF19

Wealth and tax planning was an important subject for the Spanish market during the course of 2018. Fuelled in part by the government’s proposed tax measures as part of its provisional budget for 2019; measures that could have had a significant impact on high net worth individuals. These measures included, for example, rises in marginal rates of tax on personal income and savings, an increase in the marginal rate of wealth tax and aggressive tax measures (including in connection with the transposition of the Anti Tax Avoidance Directive, or ATAD). What’s more, the government’s proposed measures seemed to target instruments used as vehicles for financial and property investment for high net worth individuals and sophisticated investors, such as SICAVs (open-ended investment companies) and SOCIMIs (listed real estate investment companies).

Even if the current government failed to obtain approval for its 2019 budget and associated tax measures, it is worth speculating on the tax measures that could be adopted if the political parties that support the current government were to obtain a sufficient majority in the Parliament and/or Senate when the next elections are held in April 2019.

Against this background, life assurance maintains its appeal as instrument of choice, not only for Spanish high net worth individuals, but also for expatriate customers, who have moved to Spain and wish to manage their assets with a view to planning for their family and the transfer of these assets from one generation to the next, while complying with the applicable laws and regulations, including with respect to tax.

On the subject of expatriate customers, it is worth noting that during the past few years, Spain has appealed to Latin American high net worth individuals, who seek a secure environment for themselves and their families in a country with a culture similar to that of their country of origin. To this end, life assurance can also play a role in terms of wealth planning, insofar as it is an instrument that is not only fully recognised in Spain, but also in many Latin American countries (Mexico, Colombia, etc.).

To learn more about this subject, come and listen to our expert Gonzalo García Pérez, at the Farad Finance Forum, on 19 March 2019, at 3pm.

Conditions and procedure

Your business as an insurance intermediary is growing and you are considering selling OneLife’s insurance products outside your home market? To meet the needs of your increasingly mobile customers, you intend expanding into foreign markets? What are the opportunities open to you?

The situation as you understand it:

The business of insurance distribution (formerly insurance mediation) is highly regulated. Any insurance broker or agent must be authorised by the regulatory and supervisory authority before carrying on its activities. Once an insurance broker is authorised, it possesses a European passport (since the third life assurance directive of 10 November 1992), enabling it to conduct business in another European Union member state without being established in that state by way of the freedom to provide services. This means that the broker does not have to have a permanent establishment to provide services to customers outside the member state in which it is established.

It is this freedom to provide services that enables OneLife to offer its Luxembourg life assurance products in the European Union.

However, like insurance intermediaries, OneLife must first respect certain conditions before being able to pursue business in another Member Sate of the European Economic Area (EEA).

What you might not have known:

The two freedoms that allow insurance products to be distributed abroad are the freedom of establishment and the freedom to provide services, each of which has its advantages and drawbacks. Here is a brief presentation of these two freedoms.

1. Freedom to provide services

If you are registered with the FSMA (Financial Services and Markets Authority) in Belgium, the Luxembourg insurance commissioner (Commissariat aux Assurances – CAA) or the French register of insurance intermediaries (Organisme pour le Registre des Intermédiaires en assurance – ORIAS), then you possess the European passport. In order to sell insurance products in a market (Member State) other than the market in which you are established, you can choose to pursue your business in this other market by way of the freedom to provide services.

For example, for a French intermediary, articles L 515-1 et seq. of the French Insurance Code governs the procedure to follow in order to apply for an authorisation extension with respect to a foreign market:

Any (re)insurance intermediary or any insurance intermediary distributing insurance as an ancillary activity registered in France that intends pursuing business for the first time in another Member State under the freedom to provide services must first send the following information to the body that maintains the register mentioned in I of article L. 512-1 (ORIAS):
1° Its name, address and registration number;

2° The Member State(s) in which it intends pursuing its business;

3° The category of intermediaries in respect of which it intends to pursue its business and, where applicable, the name of any (re)insurance company it represents;

4° The branches of insurance concerned, if any.

II – Within one month of receiving this information, the body that maintains the register mentioned in 1 of article L. 512-1 communicates the information mentioned in I to the host Member State’s supervisor. The aforementioned body then informs the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity that the host Member State’s supervisor has received this information and that it can begin to carry on its activity in that State. Where applicable, at the same time, the body informs the intermediary that the information concerning the rules protecting the general good applying to the activity intended to be conducted in the host Member State are published by this State, and that the intermediary must respect these rules in order to pursue its business there.

The Luxembourg law on the insurance sector in its articles 293 and 293-1, and article 269 of the Belgian law of 4 April 2014 on insurance prescribes the same conditions:

Extract from Article 269 of the law of 4 April 2014:

Any (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity registered in Belgium that intends pursing its business in Belgium for the first time in another Member State by virtue of the freedom to provide services must first inform the FSMA in the form and conditions the FSMA has prescribed.

Within one month of receiving the information referred to in paragraph 1, the FSMA communicates the information to the host Member State’s supervisor.
After the host Member State has confirmed receipt of the information, the FSMA informs in writing the intermediary concerned that it has received the information and that the intermediary may begin conducting its activities.

When pursuing its business in the host Member State, the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity referred to in paragraph 1 must comply with the laws and regulations of this host Member State applying to (re)insurance intermediaries or insurance intermediaries distributing insurance as an ancillary activity in the interests of the general good. The FSMA informs the intermediary concerned where it can find the relevant host Member State’s rules of general good.
The register specifies in which Member States the intermediary may operate by virtue of the freedom to provide services.

2. Freedom of establishment

The freedom of establishment is the right for any authorised person to set up undertakings in another EU Member State. That is to say, an authorised intermediary may establish a permanent presence by setting up a branch or office (permanent establishment) in another Member State subject to respecting the particular procedure as prescribed by article L 515-3 of the French Insurance Code, article 291 of the Luxembourg law on the insurance sector and article 270 of the Belgian law on insurance.

However, this does not concern the creation of a subsidiary (a company) in another Member State, which must obtain specific authorisation from the host State’s supervisor in order to pursue its business of insurance distribution.

The prescribed procedure is similar in the 3 countries.

Extract from article L 515-3 of the French Insurance Code:

Any (re)insurance intermediary or any insurance intermediary distributing insurance as an ancillary activity registered in France that intends establishing a branch or permanent presence in another Member State under the freedom of establishment must first inform the body that maintains the register mentioned in I of article L. 512-1 and send the following information to that body:
1° Its name, address and registration number;

2° The Member State in which it intends establishing a branch or permanent presence in another legal form;

3° The category of intermediaries in respect of which it intends to pursue its business and, where applicable, the name of any (re)insurance company it represents;

4° The branches of insurance concerned, if any;

5° The address, in the host Member State, for any correspondence concerning the communication of documents;

6° The name of any person responsible for managing the branch or permanent presence.

II – Unless the body that maintains the register mentioned in I of article L. 512-1 has reasons to doubt the appropriateness of the organisation structure or financial position of the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity compared with the intended distribution activities, it sends, within one month of receiving it, the information mentioned in I to the host Member State’s supervisor, which confirms receipt thereof. The aforementioned body then informs the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity that the host Member State’s supervisor has received this information.

Within one month of receiving this information, the body that maintains the register mentioned in 1 of article L. 512-1 receives, from the host Member State’s supervisor, communication of the rules of general good applying in this State. The aforementioned body then informs the intermediary that it can commence to carry on its activity in the host Member State, provided it complies with these rules. If the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity has not received this information by the aforementioned deadline, it may establish the branch and begin conducting its activities.

III – Should the body that maintains the register mentioned in article L. 512-1 refuse to send the information mentioned in I to the host Member State’s supervisor, it communicates to the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity, within one month of receiving all the information mentioned in I, the reasons for its refusal.

3. For each freedom, the procedure to follow before conducting any activity in another Member State

The intermediary must:

Then, the supervisory authority:

To sum up:

For the two freedoms, the procedures are clearly similar. However, whereas distributing insurance on a freedom of services basis is less complicated and less expensive than a permanent establishment in another Member State, which requires having a fixed business facility and resident staff, it can be an opportunity to offer services that are closer and more tailored to customers.

Whichever freedom is chosen by way of which the distribution of insurance is to be conducted, the activity cannot begin straight away and the intermediaries are advised to:

inform OneLife as soon as possible in order to ask them relevant questions;
anticipate their activity abroad in order to shorten the time spent on the regulatory administrative procedures and to respond to customers’ requests in good time.

You are an insurance intermediary and wish to grow your business abroad? OneLife’s experts are here to help you achieve this goal!

Author:

Jean-Nicolas GRANDHAYE – Corporate Counsel at OneLife

International Inheritance Planning

As previously explained, in the first part of this article, although the European Regulation of 4 July 2012[1] allows harmonisation of successions between France and Belgium at civil level, it does not deal in any way with the tax aspects and does not resolve the problems of double taxation that can result from these cross-border situations.

The criteria for exercise of fiscal jurisdiction in the two countries, and particularly the extensive powers of France in relation to inheritance tax where heirs/beneficiaries are resident in France therefore require careful attention in any inheritance planning. We will first briefly examine the legal instruments allowing possible solutions in this context.

1. The signature by France and Belgium of a Convention preventing double taxation of successions

On 25 January 1959, France and Belgium signed a convention for the avoidance of double taxation in matters of succession (hereafter, the Convention). When a person at the time of his/her death, is domiciled in one of the two States and his/her heirs are domiciled in the other State, it allows to determine which of the two States concerned will be granted the right to apply inheritance tax.

This Convention provides, as a general principle, that property belonging to the deceased is liable to taxation only in the state where the deceased was domiciled at the time of his/her death[2]. This principle is applicable in particular to life insurance policies which fall within the scope of Article 757 B of the French General Tax Code.

It is important to note that the concept of domicile in the Convention should be understood as the place where the deceased had his/her “permanent home”[3], in other words the centre of his/her vital interests.

This is an important mechanism in respect of the amount of tax which may be due in the two States, particularly in the case of a life insurance policy taken out by a person resident in Belgium for tax purposes with a beneficiary who is resident in France. As families are now highly mobile, extensive knowledge of these principles is essential.

2. Impacts and points to watch linked to the specifics of the tax system of each country

While the Convention allows the allocation of the right to tax inheritance, vigilance is required, as the taxes it covers are specifically listed[4]. In the case of premiums paid before the insured person is 70 years old, the fixed taxes of 20% and 31.25%[5] are not taxes on inheritance but sui generis tax not covered by the Convention. This sui generis tax could therefore be added to the death duties payable in Belgium under domestic law. However, for premiums paid after the insured person is 70 years old, payments under the life insurance policy fall within the scope of the inheritance taxes covered by the Convention (up to the limit of the premiums paid)[6].

It may also be worth noting that transfers inter vivos are expressly excluded from the scope of the Convention. Therefore, only the domestic law of each State applies to gifts inter vivos. Moreover, the gift of a policy (as often used by Belgian residents) by a Belgian resident to a French resident should be subject to gift taxation in France and could also lead to a novation of the policy from a French tax perspective.

Nevertheless, in the light of careful examination, and by means of tailored structuring, a Luxembourg life insurance policy may in certain situations enable limitation of the tax impact of inheritance in a Franco-Belgian context.

We offer the following case study as an illustration of this idea, and to highlight a number of pitfalls to be avoided in Franco-Belgian planning using life insurance.

Case study: tax treatment of a life insurance policy taken out in a Franco-Belgian context.

Mr and Mrs Leduc were Belgians living in Lille, while their children, Louise and Victor, lived in Bordeaux and Brussels respectively. Mr and Mrs Leduc wished to spend their retirement in Knokke in Belgium. Taking account of their family’s international situation and with a view to preparing for the transfer of their property to their children, they jointly subscribed to a Luxembourg life insurance policy in the year of their 72nd birthday, with a value of €2.5 million. Mr and Mrs Leduc’s marriage was subject to a community of property regime, the premiums were paid from their joint property and in addition their lives were insured under the policy. Louise and Victor were named as the beneficiaries of the policy.

Ten years later, Mr Leduc died. At that time, he was resident in Belgium. As the general terms and conditions of the OneLife life insurance policy included an accretion clause providing for increase by default, Mrs Leduc recovered the rights to the life insurance policy. She always received excellent advice, and as a result of the structuring of the life insurance policy (taking account in particular of reforms of succession and matrimonial tax regimes in Belgium) Mrs Leduc was not liable to inheritance tax on the part of the policy which she recovered following the increase in its value to her benefit. As Mr and Mrs Leduc were resident in Belgium for tax purposes, we are in a purely Belgian situation here.

Sadly, a few years later, Mrs Leduc died. Her children, residing in Belgium and France respectively, each received half of the value of the policy, €3.1 million.

So, what taxation is applicable to the amounts received by the children?

We will consider the cases of Victor, a Belgian resident, and Louise, a French resident, separately.

Victor’s case

Victor, a Belgian resident for tax purposes, was therefore entitled to receive half of a life insurance payment under a“stipulation pour autrui” (provision in the contract conferring a benefit to a third party). He was very fortunate in that OneLife had paid careful attention to his parents’ case and their wish for tax optimisation. He was in a position to make excellent use of his share in the capital from the life insurance policy (50% of 3.1 million EUR), which came to him free of any inheritance tax. To achieve this, his mother had inserted a transfer of rights known as “post-mortem” into the policy, so enabling Victor to be classified on the death of his mother, as the “policyholder”. As the policy was wound up on the death of his mother, the tax for which Victor was liable on the capital he received was taxation of a gift, rather than inheritance tax. This part of the planning was a resounding success, as Mrs Leduc retained control of the asset until her death, while her son had to pay tax not of 27% (tax on inheritance by direct family members) but 3% (tax on gifts to direct family members).

Louise’s case

As in Victor’s case, as Louise’s parents were residents in Belgium for tax purposes at the time of their deaths, she would be liable to pay inheritance tax in Belgium. Without the benefit of any tax treaty, as a beneficiary resident in France[7] for over six of the last ten years, Louise would also have been liable to pay French inheritance tax[8] with a marginal rate of 45%[9] on the premium paid (i.e. €2.5 million), thus creating a situation of double taxation.

However, thanks to the Convention agreed between France and Belgium, only Belgium had the right to tax the inheritance resulting from the policy.

Louise was nevertheless liable to pay social security contributions at a rate of 17.2% on sums which were not subject to such contributions while her parents were alive.

From the Belgian perspective, Louise was also named as a beneficiary of the post mortem transfer of rights for 50% of the value of the policy. She therefore also received, on her mother’s death, a capital sum under “stipulation pour soi-même” (personal stipulation)(as she qualified both as policyholder and beneficiary of the policy at the time of her mother’s death). Therefore only taxation on gifts, amounting to 3% in Belgium for direct family members, was due.

As the transfer of rights post mortem is not officially recognised in France, it is appropriate to analyse the legal and tax consequences of such operation.

Points of attention: If the policy had been taken out before the person whose life was insured was 70 years old, the tax payable by Louise in France[10] would not be covered by the Convention which would therefore not have been applicable.

As this is just one of many examples of structuring, it is reasonable to conclude that Luxembourg life insurance, with its combined civil and tax advantages, can allow optimal inheritance transfer arrangements in a cross-border context.

Please note that the above developments are merely an overview of some of the implications of cross-border inheritance planning and that the practical impact of these measures should be assessed on a case-by-case basis.

OneLife’s experts are at your disposal for any questions you may have.

If you are interested in these case studies, download our e-book #Success in #Succession Part I and Part II

Authors:

Fanny PERPERE – Wealth Planner

Nicolas MILOS – Senior Wealth Planner

[1] REGULATION (EU) No. 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012

[2] Art. 8 of the Convention.

[3] Art. 3 of the Convention.

[4] Art. 1 of the Convention.

[5] Art. 990 I of the General Tax Code (Code Général des Impôts – “CGI”).

[6] Art. 757 B of the CGI.

[7] Art. 4 B of the CGI.

[8] Art. 750 ter and 757 B of the CGI

[9] Above 1,805,677 EUR

[10] Art. 990 I of the CGI – sui generis tax not assimilated to French inheritance taxes.

Reconciling France and Belgium

In light of families’ unquestioned propensity for greater mobility, the settlement of successions has become more complex with so many cases now incorporating an international element. The place of residence of the deceased and heirs and the location of the assets may give rise to double taxation at the time of succession. It is therefore important to stress that international estate planning must cover both the civil and fiscal dimension.

Despite its international expertise and products adapted to such mobility, Luxembourg does not constitute an exception, and estate planning through life assurance products must also be conducted with caution if double taxation is to be avoided on settlement of the contract. Located between Belgium and France, insurance companies in Luxembourg deal with numerous cases involving both of these jurisdictions.

In order to fully grasp the difficulties that may arise out of Franco-Belgian estate planning, we must first outline the general guiding principles followed by a brief description of the rules of succession applicable in each country, to ultimately conclude to any possible reconciliation between these principles in order to create an effective estate management framework.

I. Harmonisation at the civil level without fiscal impact

The EU Regulation of 4 July 2012 harmonises the rules covering competence, applicable law, acknowledgement and implementation of decisions and acceptance and execution of authentic instruments covering succession.[1] It applies to successions opened from 17 August 2015 and covers all aspects of civil law, yet specifically excluding tax, customs and administrative matters.[2]

It is therefore entirely possible that, within an international context, the applicable civil law may differ from the pertinent tax law. Property vested under the law of one country may therefore be taxable in another. As the tax treatment of life assurance contracts differs from one country to another, it is pertinent at this stage to focus on the specific regimes applicable in France and Belgium.

II. French tax regime applicable to life assurance contracts

a. General principles

In principle, amounts paid on the death of the life assured to a given beneficiary do not form part of the estate and are therefore excluded from the calculation of the reserved and disposable portion of the succession.[3] Yet there are a number of exceptions, notably should the premium be considered as “manifestement exagérée” which is established on a case-by-case basis, including in light of the policyholder’s age, family situation, wealth and suitability of the contract.

Furthermore, in the event of no beneficiary being designated, of refusal on the part of the beneficiary, or where the beneficiary dies before the life assured, the amounts paid out by the insurer on settlement of the contract are reincorporated within the estate of the life assured and will be subject to death duties in the same way as the rest of the deceased’s estate.[4]

French legislation distinguishes between different types of life assurance contracts in order to apply specific tax treatment on the death of the life assured. Such treatment will notably depend on the date the contract was entered into and the age of the life assured at the time premiums were paid. Accordingly, after specific allowances, the amounts will be subject to death duties (by way of exception)[5] or to specific flat tax as follows [6] :

The amounts paid by the insurer on the death of the life assured to their spouse, partner (“Pacs”), or siblings (subject to certain specific conditions) are exempt from death and other specific duties, regardless of the age of the life assured at the time the premiums were paid. For any other beneficiary of a contract taken out after 20 December 1991 for which the premiums are paid after the 70th birthday of the life assured, death duties will be applied depending on the family link between the life assured and the beneficiary (with a maximum rate of 45% for the direct line from EUR 1,805,677).[7]

Furthermore, and still within the context of a contract taken out after 20 December 1991 for which the premiums are paid after the 70th birthday of the life assured and given the application of death duties in accordance with ordinary law, the various allowances available under ordinary law[8] may be added to the overall allowance of EUR 30,500. Finally, it should be noted that capital for which social contributions were not paid during life will be subject to them at a rate of 17.2% on death.

b. When do French death duties apply?

Various criteria trigger the application of French death duties:[9]

The fact that the deceased was French tax resident at the time of death;
The fact that the heirs/beneficiaries were French tax residents at the time of death and had been so for a period covering at least six of the past ten years;
The fact that the transferred asset (movable or immovable) is located in France.

Accordingly, and subject to the application of any double tax treaties, where the deceased was French tax resident at the time of death, death duties apply to their worldwide assets.[10] Furthermore, where the deceased was not French tax resident at the time of death, in the event of heirs/beneficiaries being French tax residents, death duties apply to worldwide assets[11] or, where neither the deceased nor the heirs/beneficiaries are French tax resident, only to assets located in France[12].

III. Belgian tax treatment of life assurance contracts

a. General principles

The tax implications of opening a succession on death unquestionably include the obligation for the heirs to pay the death duties calculated on the basis of the inheritance declaration previously submitted by the heirs, within 5 months of the deceased’s passing.

Determining the amount of such death duties is a competence lying with the region (Brussels-Capital, Wallonia, Flanders) in which the inheritance declaration was submitted, namely the region in which the deceased had their most recent tax residency. Further, the family link between the deceased and the beneficiaries of the succession will determine the applicable rate of death duties. Set at regional level, death duties in Belgium vary between 3% and 80%.

More specifically regarding life assurance contracts, the structure of the contract may constitute an effective remedy to the high death duties normally applicable by the opening of the succession. Regionalisation within Belgium does not make matters straightforward in this area.[13] Most noteworthy (and sometimes startling) are the positions adopted by the competent authorities in the Flemish region regarding the calculation, verification and payment (or even reimbursement) of death duties and their registration.[14]

The pertinent articles of the Inheritance Tax Code (regions of Wallonia and Brussels-Capital) and of the Flemish Tax Code (region of Flanders) signify that a “stipulation pour autrui” (provision in the contract conferring a benefit to a third party) is subject to death duties.[15] This particularly pertinent provision is an essential criterion for any estate planning activity. In practice, the applicable legal texts signify that a “stipulation pour autrui” is always present in a life assurance contract where the life assured and the beneficiary are not the same person.

An initial way of avoiding death duties by using a life assurance contract structure would be, for example, to convert a “stipulation pour autrui” into a “stipulation pour soi-même” (personal stipulation, not taxable as does not fall within the scope of application of the law), by means of assignment of rights in the contract (commonly known as “donation” of the contract). This potentially results in the application of gift taxes (3% or 3.3% for the direct line, depending on the region), thereby excluding any application of death duties.

b. When do Belgian death duties apply?

The application of death duties in Belgium can be categorised as follows:

If the deceased was a tax resident of Belgium at the time of death, death duties are due on worldwide assets, less any debts secured against aforementioned assets.
If the deceased was a tax resident of a foreign country at the time of death, death duties are due on the value of immovable property located in Belgium. Debts secured against such property are deductible under certain conditions. Progressive rates apply that vary by region (Brussels, Flanders, Wallonia). We will talk more specifically about transfer duties.

The essential criterion for establishing the application of Belgian death duties therefore remains the tax residency of the deceased (not only Belgium but more widely, namely the region in which the concerned Belgian tax resident resides).[16]

We therefore note that the criteria for assigning powers of taxation regarding death duties vary from one country to another. France and Belgium are no exception to this observation. It remains to be seen whether any effective fiscal reconciliation can be established between the two regimes… Such an analysis will be covered in a subsequent contribution.

If you are interested in these case studies, download our e-book #Success in #Succession Part I and Part II

Authors:

Fanny PERPERE – Wealth Planner

Nicolas MILOS – Senior Wealth Planner

[1] REGULATION (EU) No. 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012

[2] REGULATION (EU) No. 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012, Article 1.1

[3] Art. L 132-12 of the Insurance Code (C.ass.)

[4] Art. L 132-11 C.ass.

[5] Art. 757 B of the General Tax Code (CGI)

[6] Art. 990 I CGI

[7] Amount applicable for 2019

[8] Art. 779 CGI and Art. 788 CGI

[9] Art. 750 ter CGI

[10] Art. 750 ter 1° CGI

[11] Art. 750 ter 3° CGI

[12] Art. 750 ter 2° CGI

[13] Law of 16 January 1989 on the financing of the communities and regions.

[14] Reference is made on this matter to a previous contribution entitled “Reforming the Belgian Civil Code: VLABEL is adapting quickly… maybe even too quickly”, N. MILOS.

[15] Article 8 of the Inheritance Tax Code; Article 2.7.0.1.6 of the Flemish Tax Code.

[16] Region of Brussels-Capital, Wallonia or Flanders. It should be noted that if the deceased was a tax resident in more than a single Belgian region during the 5 years preceding death, the applicable rates will be those of the region in which they were a tax resident for the longest period.

Overview and issues

On 20^th March 2018, the French and Luxembourg governments signed a new tax treaty (the “Treaty”). This new agreement is in line with developments in the BEPS (Base Erosion and Profit Shifting) project initiated by the OECD (“Organisation for Economic Cooperation and Development”). The renegotiation and complete overhaul of the treaty concluded in 1958 (and modified by four successive amendments) marks a desire to integrate the new international tax standards and bring them into line with the new model developed by the OECD in 2017.

Luxembourg and France have begun their internal ratification procedures. This process may therefore be finalised within a matter of weeks, and the treaty should, in all likelihood, be applicable as of 1^st January 2019.

Overview of the key measures

The main objective of this double taxation Treaty is obviously the resolution of potential double taxation in cross-border situations, but not only this. The spirit of the treaty is also clearly to combat potential situations of non-taxation, such as via double exemptions. In this respect, the preamble could be used to interpret the provisions of the different articles.

In addition, and unusually, it is accompanied by a significant new protocol emphasising anti-abuse measures.

Mechanisms to eliminate double taxation

Under the Treaty, double taxation is eliminated via tax credits, replacing the current tax exemption method.

The exemption method eliminates taxation in potential double taxation situations. For example, in the case of income earned in one State and paid to a resident of another State, the treaty will determine which of the two States is entitled to tax that income. In this situation, Luxembourg generally provides for the total exemption of that income from taxation if it is not deemed entitled to tax it under the double taxation treaty.

The tax credit method does not provide for exemptions, that is to say, for income earned in one State and paid to a resident of another State, the treaty will decide which of the two States is entitled to tax that income. The state entitled to tax the income will actually tax it. However, the other State will not lose the right to tax it. The income in question will be included in the taxable base of the person in the second State and that person receives a tax credit corresponding to the tax already paid in the first State.

This method is less advantageous than the exemption method and may lead to residual double taxation.

While the tax credit method is generally recognised under French law, this method is less common in Luxembourg, which is more likely to apply the exemption method.

The new method provided for under the Treaty may have implications at different levels, such as for French cross-border workers, residents receiving dividends that are not eligible for the parent-subsidiary scheme under domestic law (e.g. dividends distributed by a UCI (Undertaking for Collective Investment) to a Soparfi (holding company)), or for French residents earning director’s fees in Luxembourg.

2. Definition of residence and access to the Treaty

Until now, the concept of residence for legal persons has been based mainly on the concepts of “actual centre of management” and “registered office”.

In order to benefit from the provisions of the Treaty, you must be effectively taxable. Tax exemption or a very low tax rate may justify refusal of the status of resident within the meaning of the Treaty. From this point of view, not surprisingly, this merely reflects the modern interpretations of the concept of residence as well as the recent jurisprudence of the French Council of State.

However, paragraph 2 of the Treaty’s protocol gives UCIs (“Undertakings for Collective Investment”) established in one of the Contracting States that are similar to UCIs in the other State (on the basis of the latter’s domestic laws) access to the benefits of the provisions on dividends and interest for the rights held by residents of one of the two States or of any jurisdiction that has signed an administrative assistance agreement to combat fraud and tax evasion

3. Anti-abuse measures

This new treaty is worded in such a way that it communicates a clear desire to limit any misuse of its provisions. Thus, along with the notion of abuse of rights provided for in each of the States’ domestic laws, this new agreement recognises treaty abuse and allows the contracting States to deny access to the treaty for structures created principally for the purpose of benefiting from the treaty.

Through the insertion of this Principal Purpose Test (“PPT”) rule, the need for economic justification of the creation of cross-border structures is strengthened.

4. Definition of a permanent establishment

Here again, the Treaty extends the concept of permanent establishment, providing that a dependent agent acting on behalf of an enterprise situated in the other State, even without the power of signature, may constitute a permanent establishment if it is recognised that this agent played the main role leading to the conclusion of the contract. This role should be limited to preparatory and auxiliary activities. This new provision is of great importance for banks and insurance companies acting under the freedom to provide services.

5. Wealth tax

Under the new OECD model, immovable property forming part of a resident’s fortune will be taxable in the State where the asset is located.

On the combined reading of Articles 6 and 21, the Treaty could allow for the exoneration of a Luxembourg resident holding property in France through a company from the IFI (“Impôt sur la Fortune Immobilière” or real estate wealth tax).

6. Treatment of capital gains on disposals

Capital gains from the disposal of equity-related securities remain unchanged from the 2014 amendment, and are taxable in the State where the asset is located. What is new in the Treaty is that property dominance will now be analysed over the 365 days preceding the disposal.

Another important point: capital gains arising from a sale by a natural person directly or indirectly holding more than 25% of the capital of a company resident in one of the Contracting States may be taxed in that State if the seller has been a resident of that State at any time during the five years preceding the sale. It will be interesting to see how this provision of the Treaty articulates with the modifications to the French exit tax to be adopted under the budget bill for 2019.

7. Expansion of the concept of “dividend”

On the basis of the Treaty, the notion of dividend extends to everything that falls under the dividend tax regime in the distributing company’s State of residence. Consequently, income deemed to be distributed and other liquidation proceeds will fall entirely within the scope of the concept of dividends provided for in the Treaty.

The 15% withholding tax provided for in Article 10 remains similar to that provided for under the old treaty. The Treaty also grants an exemption from withholding tax on dividends paid by resident companies holding at least 5% of the capital of the company owing the payment over a period of 365 days.

What’s new relates to dividends distributed by certain property investment vehicles such as REITs (“Real Estate Investment Trusts”) or UCITS (“Undertakings for Collective Investment in Transferable Securities”), which will be subject to higher withholding taxes. Thus, a 15% withholding tax will be payable on dividends paid by such vehicles when the beneficial owner directly or indirectly holds a stake of less than 10% of the capital and 30% when the holding exceeds this threshold.

8. Interest

Interest income will no longer be subject to withholding tax; the previous treaty provided for a withholding tax limited to 10%. It should be noted, however, that the Treaty expressly excludes excess interest (that does not comply with the arm’s length principle) from this scheme.

The interest of the new treaty with regard to cross-border life insurance

Based on the above developments, it is interesting to note that the new treaty is generally more restrictive and less beneficial to residents of both States.

The Treaty could have a major impact on some asset structuring. Certainly, while the State where the property is located is entitled to tax it, the State of residence will still retain its taxation right and double taxation will be eliminated thanks to a tax credit in France.

However, this new agreement does not deal with cross-border life insurance plans and is even beneficial for French policyholders who have invested wisely in life insurance policies such as those offered by OneLife.

They will be able to take advantage of the group effect (due to the very large number of policyholders investing via OneLife) on taxation at source of insurance policy income, via:

the integration of a plan similar to the parent-subsidiary plan at the level of the Treaty that allows for the total exemption of dividends paid on life insurance policies from withholding tax;
the maintenance of the reduced withholding tax rate for ordinary dividends that cannot benefit from the aforementioned parent-subsidiary plan;
the elimination of withholding tax on interest paid on life insurance policies.

These provisions further increase the attractiveness of Luxembourg life insurance compared to other asset structuring mechanisms, particularly, but not only, with regard to immovable property.

And finally, life insurance has an additional advantage in terms of anti-abuse provisions because it is also an element of wealth transfer with an attractive tax regime.

Please note that the above developments are merely an overview of some of the provisions of the new Franco-Luxembourg treaty and that the practical impact of these measures will have to be evaluated on a case-by-case basis. OneLife’s experts are available if you have any questions.

Authors:

Fanny PERPERE – Wealth Planner

Jean-Nicolas GRANDHAYE – Corporate Counsel

Ready to invest in non-traditional assets for you and your family’s future?

Through our series, the Van Dewael, Leroux and García families have all discovered the benefits of investing in non-traditional assets when planning for their future.

Access to assets such as Private Equity, Real Estate, Securitisation Vehicles and Holding Companies opens up a world of opportunity when it comes to investments. A personalised investment plan from OneLife can combine the traditional and the non-traditional in one life assurance contract with the added benefits of succession planning, cross-border portability when relocating and high levels of investor protection. It’s Essential Wealth at its best.

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Real estate or insurance: you no longer have to choose!

Should I invest in real estate or life insurance products? The clock is ticking… but the dilemma no longer exists: you can do both!

Indeed, the question no longer matters, because the answer is simple: investing in real estate through your life insurance policy is the perfect solution!

Of course, just as you cannot physically carry your gold bars or your barrels of oil to your insurance company, neither can you contribute your house as a life insurance premium!

Well then, what can you do?

Let’s take a look at the investment opportunities and the legal and tax framework for investing in real estate through life insurance.

Investment opportunities

Currently, faced with declining yields in fixed-income funds, investors like you are increasingly turning toward higher-performing investments with limited risk.

Why should you invest in real estate through your life insurance policy?

Whether you want to aim for higher returns, hold a safe and limited-risk asset, boost your savings, benefit from attractive taxation compared to direct ownership or hold an asset outside of your estate, there are many good reasons to invest in real estate through your life insurance policy!

For a limited investment, you can hold an asset that is both secure—because it is based on a diversified real estate portfolio of office buildings, nurseries, medical clinics, retirement facilities, etc. (which also frees you from management burdens like unpaid rents, a lack of tenants, property showings, etc.)—and mutualised, and which yields an average of 5% per year!

What real estate assets can you invest in?

You are probably familiar with the terms SCPI, OPCI, SIIC in France and SIR in Belgium. You may also invest in real estate through listed or unlisted real estate funds, or you may set up your private real estate portfolio within a company and hold its securities within your insurance policy.

As you can see, the possibilities are many and varied. We will focus here on describing the legal and tax framework for holding French SCPIs and OPCIs and Belgian SIRs within your life insurance policy.

Legal and tax framework for investing in real estate through life insurance

Of all the real estate investment opportunities offered through life insurance, the most popular are investments in SCPIs, OPCIs and SIRs. Let’s take a look at them:

a. Sociétés Civiles de Placement Immobilier (SCPI)

Legal framework

Sociétés Civiles de Placement Immobilier (Private Real Estate Investment Fund) are companies whose sole purpose is the acquisition and management of a real estate portfolio for commercial or residential use.

Management is outsourced to an approved management company that is responsible for renting and maintaining the real estate assets.

The sums paid in by subscribers are destined for the purchase and management of the real estate assets.

In return for their contributions (the minimum unit price is €150), the company pays rents to subscribers in proportion to the subscribers’ contributions, less the costs related to the real estate portfolio (maintenance costs, rental management, various works, etc.).

Similar to a direct real estate investment, it allows investors to earn real estate income without the worries of rental management while enabling them to invest even with modest sums.

SCPIs can be closed-end or open-ended funds. Closed-end SCPIs issue new shares until their capital is fully subscribed, after which they are said to be closed, in contrast to open-ended SCPIs which continuously issue and cancel shares.

Taxation

The SCPI is tax transparent, i.e., each investor is individually taxed on the company’s taxable income in proportion to the shares he or she holds.

Income from French sources (rents and capital gains) generated by the SCPI held through a OneLife insurance policy is taxable at the corporate income tax rate in France of 33.33% (rate to be reduced to 28% in 2020, 26.5% in 2021 and 25% from 2022 onwards).

Capital gains on the sale of SCPI shares are also taxable in France at a 33.33% rate (aligned with the corporate income tax rate).

b. Organismes de Placements Collectifs Immobiliers (OPCI)

Legal framework

Organismes de Placements Collectifs Immobiliers (Undertakings for Collective Investment in Real Estate) are real estate funds which were originally created to replace SCPIs, but now coexist with them.

The purpose of OPCIs is to invest in, build, maintain and rent out real estate assets.They may also renovate the assets and resell them. In addition, the corporate purpose may include the management of financial securities and deposits.

Since the Macron Act of 2017, the French Monetary and Financial Code (CMF art L2014-34) has also allowed OPCIs to incidentally acquire furnishings, equipment and any other movable property allocated to the buildings held and necessary for their operation, use or exploitation.

There are several types of OPCIs depending on the investor’s profile, whether professional or retail, and level of risk: specialised OPCIs, OPCI umbrella funds, etc.

OPCIs aimed at professional investors (which benefits policyholders) are as follows:

– OPCIs established as a Société de Placement à Prépondérance Immobilière à Capital Variable (SPPICAV – Open-ended real estate investment companies)

– and those set up as a Fonds de Placement Immobilier (FPI – real-estate collective investment undertakings).

Both forms of OPCI have the same legal nature but their legal and tax frameworks differ.

SPPICAVs are constituted as a Société Anonyme (public limited company) or Société par Actions Simplifiée (simplified joint stock company) with variable capital. This means that the purchase of shares gives the subscriber ownership rights over the company, in proportion to the amount of his or her contribution, as well as voting rights at general shareholders’ meetings.

FPIs are not incorporated but are joint-ownerships.Investors hold units and not shares. They have no ownership interest in the FPI and have no right of control or decision-making.

Taxation

The subscription of FPI shares is exempt from registration fees and property advertising tax.

The sale, redemption or distribution of OPCI units or shares, or distribution of FPI assets are exempt from registration fees and property registration tax with two exceptions provided for in Article 730 quinquies of the CGI: holding more than 10% of the OPCI for the individual acquirer or 20% for the legal entity acquirer entails registration fees of 5%.

SPPICAVs are vehicles exempt from corporate income tax, but subject, in particular, to the obligation to distribute their profits to their shareholders.

Income distributed by a SPPICAV is considered to be financial income (dividends) and its taxation depends on the shareholder’s status (legal entity or individual) and his or her place of residence.

Under French domestic law, dividends distributed to non-resident shareholders are generally subject to French withholding tax of 30%.

If held through a OneLife policy, the tax treaty between France and Luxembourg allows this rate to be reduced to 5% for dividend-receiving companies that hold at least 25% of the distributing company’s share capital and to 15% for lesser holdings.

However, under the new tax treaty between France and Luxembourg, which should come into force on 1 January 2019, these rates are likely to change. Dividends paid by an OPCI will be subject to a reduced withholding tax of 15% when the beneficiary company directly or indirectly holds less than 10% of the share capital of the distributing company and 30% if the holding is greater than 10%.

Capital gains on the sale of SPPICAV shares are taxable in France at a withholding rate of 33.33% (aligned with the corporate income tax rate).

As for the taxation of investments made by FPIs, see the taxation applicable to SCPIs (tax transparency).

c. Les Sociétés Immobilières Règlementées (SIR)

Legal framework

The legal framework for Sociétés Immobilières Règlementées (regulated real estate investment companies) is set out in the Belgian Act of May 12, 2014, which came into force on July 16, 2014. The SIR’s purpose is in particular to “make buildings available to users, whether directly or through a company in which it has an interest, and, as the case may be and within the limits provided for this purpose, to hold other types of “real estate assets“.

This type of company has commercial and operational activities but is not obligated to act in the interests of shareholders, because the collective public interest serves as the legal rationale for this corporate structure in Belgium.

A company whose actual managers can only be individuals, the SIR covers the entire real estate sector: from holding real estate (and thus ensuring its management, urban conformity, etc.) for the long-term, with the aim of making it available to users, to the construction or renovation of real estate assets. For this purpose, the SIR must carry out its own activities without delegating any responsibility to another legal entity. This presupposes a concrete “substance” in terms of operational teams.

Incorporated as a “société anonyme” (public limited company) or a “société en commandite par actions cotée en bourse” (publicly-traded limited partnership) with at least 30% of its shares traded on the market (i.e. with publicly held voting rights), the SIR is subject to the control of the Autorité des Services et Marchés Financiers (FSMA) and to strict rules regarding conflicts of interest.

The SIR may not, however, invest more than 20% of its assets in a single property complex, as its investments must be diversified. In exceptional cases, this limitation may nevertheless be waived, subject to a reasoned opinion from the FSMA.

Taxation

The SIR is not subject to corporate income tax in Belgium under the express condition that it distributes at least 80% of its net income in the form of dividends.

Withholding tax on dividends is 30%. However, depending on the investment of the SIR concerned, a “reduced” withholding tax may apply. A case in point is the SIR investing in health care properties.

Where shares in a SIR are held through a OneLife insurance policy, the life insurance package allows the taxpayer to avoid any 30% withholding tax on income from movable property. Indeed, under the Double Taxation Treaty between Belgium and Luxembourg, the withholding tax on dividends may not exceed 10% or 15% in Belgium.

Moreover, investing in real estate through a life insurance policy allows the capital to grow by reinvesting the income received while benefiting from deferred taxation. In effect, taxation only takes place in the event of a partial or total redemption and according to the tax regime applicable to life insurance policies: the taxable capital gains on redemptions will be pro-rated according to the percentage of the capital redeemed.

Also, since 1 January 2018, assets held indirectly through a life insurance policy have been included in the taxable base for French property tax under the rules applicable to residents and non-residents.

Your professional advisor and OneLife experts are at your side to advise you on the best real estate investments to subscribe through your life insurance policy.

Onelife, it’s now, or whenever!

Authors:

Fanny PERPERE – Wealth Planner

Nicolas MILOS – Senior Wealth Planner

Jean-Nicolas GRANDHAYE – Corporate Counsel

Maximising your wealth

For High-Net-Worth Individuals (HNWI) crafting a wealth strategy can be a difficult and challenging experience, especially for those whose wealth spans borders.

Beyond requiring a favourable tax regime, these individuals need a solution that maximises and ensures the longevity of their wealth.

In Luxembourg, the assets transferred into a life assurance contract are managed according to an investment strategy which is completely customised by the individual.

In fact, Luxembourg insurance regulation allows a large range of underlying investments into internal funds. This offers investors access to a world of interesting investment opportunities.

These investments range from liquid to illiquid underlying assets, depending on the investment strategy and risk profile of the life insurance policy. They can be traditional or non-traditional – or a combination of both.

You can pursue personal investment interests, invest in mainstream assets, explore both regulated and non-regulated options … all via a life assurance policy which is tailored to you and your family’s unique needs.

To learn more about traditional and non-traditional investable assets and to read => our case study examples, visit.

Reform of the Belgian company law & the civil partnership (“société de droit commun”) …

Under the Companies Code Reform Act of 15 April 2018, civil partnership companies become simple partnerships, and new administrative and accounting obligations apply to them. Formerly praised for its discretion and simplicity, is it still viable as an essential and indispensable asset-planning tool?

1. The advantages of a life insurance corporate structure

Before setting to work enumerating the list of legislative changes made to company law for the Belgian arena, we must first situate how this code applies to the special area of asset planning.

One of the special structures mentioned in this context is certainly the civil partnership. Such a company is referred to as “a contract under which two or more persons agree to bring something into a community with the objective of carrying out one or more specifically determined activities and for the purpose of giving the partners a direct or indirect capital benefit” (i.e. distributing the benefits to the partners).[1] A civil partnership (now a simple partnership) has no legal personality, meaning that it is fiscally transparent. [2] Thus, the partners of a simple partnership are taxed directly on their share of the taxable income. Since the purpose of a simple partnership is the normal management of private assets, it is appropriate for them to not be subject to corporation tax, benefit from withholding tax, and not be taxed on capital gains or life insurance income.

There are several advantages to combining a company under ordinary law with a life insurance policy, such as avoiding income tax, avoiding the application of inheritance tax by means of prior donation, and (not least for the donor) maintaining control over the assets, all within a legal framework of discretion with respect to third parties.

2. The law of 15 April 2018… A minor reform?

The law of 15 April 2018 has profoundly changed the notion of an undertaking, for the purpose, according to the Belgian government, of achieving better uniformity and greater simplicity.[3] A company under ordinary law becomes an undertaking within the meaning of the Code on Economic Law, and is henceforth called a simple partnership.[4] This has several direct implications:

Obligation of transparency, information, and non-discrimination: now required to register with the Banque‑Carrefour des Entreprises (the Belgian register for legal entities), simple partnerships will be assigned a business number, which must be mentioned on every document they issue.[5] The simple partnership’s bank account number must also be mentioned on these documents.[6] As a direct result of this new disclosure of information, all kinds of information about simple partnerships will henceforth be publicly accessible via the Internet. This information will include, of course, the full names of the founders. Violating this registration obligation (and that of disclosure) will be punishable by a fine of up to €10,000.00.
Accounting obligation: simple partnerships are required to keep “(…) accounting books appropriate to the nature and extent of its activities (…)”. However, the accounts are simplified for simple partnerships with a turnover of less than €500,000 (amount set by Royal Decree).[7] Simple partnerships created from 1 November 2018 will be immediately subject to this obligation, and existing simple partnerships will not be subject to it until the next full financial year, starting on 1 May 2019.

At this point, it seems important to note that tax transparency and the automatic exchange of information have been gaining more and more ground every day. Under these new administrative obligations, Belgian taxpayers are now subject to a new disclosure requirement. But this disclosure is not absolute. In the current state of affairs, simple partnerships are not required to file annual accounts as determined by the Companies Code.[8] Discretion is thus always possible. But for how long?

That being said, effective asset structuring does not necessarily imply the use of a simple partnership with more complicated administration. The desired goals of exemption from income tax, avoiding inheritance tax, control and flexibility can be achieved via simple life insurance, combining foresight, civil expertise and fiscal knowledge.

For more information about this, contact OneLife’s experts.

Nicolas MILOS – Senior Wealth Planner

[1] Article 1 of the former Companies Code.

[2] Article 2 § 1 as amended by the Companies Code Reform Act of 15 April 2018, Moniteur Belge of 27 April 2018, to be taken together with Article 46 of the Companies Code.

[3] The entry into force of the provisions of this law was postponed to 1 November 2018.

[4] As proposed by Article 35 of the Companies Code Reform Act of 15 April 2018, Moniteur Belge of 27 April 2018

[5] Article 56 of the Companies Code Reform Act of 15 April 2018.

[6] Article 58 of the Companies Code Reform Act of 15 April 2018.

[7] Article III.85 of the Code on Economic Law as amended by the Companies Code Reform Act of 15 April 2018.

[8] See the new Article III.90, § 2 of the Code on Economic Law, taken together with Article 98 of the Companies Code.

Take control of your wealth

Every High-Net-Worth Individual (HNWI) has their own unique perspective on managing their wealth. But the world of wealth is not easy to navigate and there is not a ‘one size fits all’ solution. Life assurance ensures complete control and flexibility over your finances, whether this means pursuing personal investment interests to planning a sustainable wealth transfer strategy.

A life assurance contract can be tailored to the needs of the policyholder, with the various underlying investment opportunities that range from liquid to illiquid assets. These include cash, external funds, internal collective funds, alternative funds, financial holdings and equity investments into start-up businesses. A life assurance policy can structure these investments in an efficient and sustainable way, giving you access to a world of opportunity.

And this combined with the benefits of using a Luxembourg life assurance policy which provides a safe and flexible framework for your wealth. At OneLife, we realise that every client’s situation is unique. Our team of experts is on hand to advise you on the best way to maximise what is here today so that it is preserved and grows for tomorrow. What other solution can provide such a holistic approach to wealth management?

To find out more about the various types of investment opportunities, click => here and read our #Success in Investments e-Book.