Use of UAE foundations to hold French assets requires careful tax and legal planning
While UAE foundations offer potential benefits for holding French assets, they also introduce specific tax and legal complexities. This analysis from Leevyn Isabel, Commercial Director, examines the critical considerations for risk mitigation, particularly the application of French trust regulations and reporting requirements to these structures.
Tax residency: a critical factor
The tax residency of the founder and beneficiaries of the foundation is paramount. French tax implications vary significantly depending on whether these individuals are French tax residents.
French tax residents: Beneficiaries who are French tax residents may face French personal income tax on distributions from the foundation, potentially at rates of 30% or 34%. Even without distributions, French residents may be taxed on undistributed income if the foundation's assets are primarily financial investments, and it is in a preferential tax jurisdiction like the UAE. Founders or deemed founders who are French tax residents would be subject to French real estate wealth tax with respect to the real estate assets they hold directly or indirectly worldwide. Same world-wide principle would apply for inheritance and gift taxes.
Non-French tax residents: If neither the founder nor the beneficiaries are French tax residents, and the foundation holds French real estate, French personal or corporate income tax implications may still arise.
French real estate wealth tax (IFI)
The French Real Estate Wealth Tax (IFI) applies to French real estate assets, whether held directly or indirectly, including through a foundation, when their net fair market value surpasses €1.3 million. The applicable tax rate ranges from 0.5% to 1.5%.
However, the France-UAE tax treaty introduces potential relief. Specifically, if the foundation's owner is a UAE tax resident, they may be exempt from IFI under certain conditions. This exemption hinges on the value of their French shares listed on the French Stock Exchange exceeding the value of their French real estate assets. Therefore, careful consideration of asset allocation and residency status is crucial to determine IFI liability when utilising a UAE foundation to hold French assets.
Gift and Inheritance Tax
The France-UAE tax treaty covers inheritance tax but not gift tax. French inheritance tax applies to French real estate held by a foundation, with the tax rate determined by the family link existing between the founder and the beneficiary.
If the founder is a UAE tax resident, the treaty applies. However, the treatment of a foundation for tax treaty purposes necessitates a detailed study.
Reporting obligations and penalties
Foundations with a connection to France (i.e., a French tax resident founder or beneficiary, French assets or French resident managers) face reporting obligations. Failure to comply can result in substantial fines of €20,000, for which the founder and beneficiaries are jointly liable.
Advantages of France-UAE tax treaty
The France-UAE tax treaty significantly impacts the tax liabilities of individuals and entities operating between the two jurisdictions. Key provisions include:
- Tax sparing credit: The treaty incorporates a tax sparing clause, enabling residents of either country to claim a tax credit for taxes that would have been levied in the other country absent the treaty. This aims to prevent double taxation and encourage cross-border investment.
- Enhanced information exchange: The treaty facilitates the exchange of tax-relevant information between French and UAE tax authorities, promoting transparency and combating tax evasion.
- Exemption for UAE-sourced income: French tax residents working in the UAE generally benefit from an exemption on UAE-sourced income within France, streamlining their tax obligations.
- Capital gains tax relief: French expatriates are typically exempt from French capital gains tax on the disposal of assets situated in the UAE, fostering investment and asset mobility.
- Inheritance tax mitigation: The treaty provides provisions that limit French inheritance tax exposure for French expatriates residing in the UAE at the time of their death, offering estate planning advantages.
Compliance and expert guidance
Maintaining strict adherence to French reporting obligations and robust accounting practices is paramount when utilising UAE foundations to hold French assets. Due to the intricate nature of the applicable regulations, engaging professionals specialising in both UAE and French tax law is strongly advised.
Meticulous compliance with French reporting requirements and maintaining accurate financial records are essential. Given the complexity of the legal and tax frameworks, expert guidance is crucial to navigate potential pitfalls and ensure optimal structuring. It's vital to note the 10-year statute of limitations for tax regularisation in France. Despite the complexity, UAE foundations can still offer effective asset protection for French holdings, when correctly implemented. The tax residency of the foundation's founder and beneficiaries significantly influences the applicable tax rules, requiring careful assessment and planning.
How can Ocorian help?
Successfully navigating the complexities of French tax law for UAE foundations demands meticulous planning, expert guidance, and unwavering compliance. For families and individuals seeking to preserve wealth and ensure seamless intergenerational transfer, foundations offer a compelling solution, effectively separating ownership from assets for enhanced protection and tax efficiency.
Ocorian specialises in establishing and administering tailored investment foundations that align with your wealth planning goals and legacy aspirations, while adhering to all regulatory requirements. We empower you to confidently structure your business and succession plans for future generations.
Disclaimer: Please note that the information provided in this article is for general informational purposes only and does not constitute 1 tax advice. Readers are advised to consult with a qualified tax advisor for advice specific to their situation. The author is an expert at Ocorian and does not provide tax advisory services.
