Income arising overseas

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).