February 18, 2019
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.