1. TRUST THE FRENCH…! FRENCH TAX REFORMS 2011 EDWARD REED THURSDAY, 23 FEBRUARY 2012

2. Loi de Finances Rectificative du 29 juillet 2011 Wealth tax (ISF) reform “Shield” abolition (bouclier fiscal) Gift/inheritance taxes Exit tax Trust (anti-avoidance) taxation What is still in store… Law no 2011-900, published 30 July in Official Journal, in force 31 July http://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000024413775 French tax reforms 2011 FRENCH TAX REFORMS 2011

3. WEALTH TAX (ISF) Changes in 2011 Lower threshold raised from €800,000 to €1.3m Assets over €1.3m taxed under original 2011 progressive rates –i.e. @ 0.55% from €800,000 to –a max of 1.8% on €16.79m Tax return deadline extended to 30 September 2011 No material change to directly- held exempted assets

4. WEALTH TAX (ISF) Changes effective 1 January 2012 Under €1.3m = zero Assets between €1.3m and €3m @ 0.25% Assets whose value equals or exceeds €3m @ 0.5% Tax rate will be charged from the first € So there is a reduction for those whose wealth is on the thresholds or just over (€1.3m-€1.4m and €3.0m-€3.2m) If wealth below €3m, you no longer file a separate return but use your income tax return (due 15 June)

5. WEALTH TAX (ISF) Old rates (ignoring bouclier) €800k - €1.31m@ 0.55% = €2,805 €1.31m - €2.57m @ 0.75% = €9,450 €2.57m - €4.04m @ 1% = €14,700 €4.04m - €5m @ 1.3% = €12,480 Total ISF= €39,435 2012 rates €5m @ 0.5% = €25,000 Total ISF = €25,000 Illustration – assets € 5m

6. WEALTH TAX (ISF) ANTI-AVOIDANCE re pre-2012 planning Non-res. shareholder lends to SCI (shareholder loan a/c) This reduces net value of shares Loan situs = shareholder residence From 2012, shareholder debts no longer deductible High investigation risk Some requalification risk even if loan replaced by commercial loan Non-resident France

7. WEALTH TAX (ISF) TRUSTS (from 2012) – effectively transparent Settlor French resident = trust assets includible in settlor’s wealth, whatever terms… If ISF cannot be levied on settlor, tax must be paid by trustees or French-resident beneficiaries “Penal” rate of 0.5%, irrespective of trust fund value ISF exemption for anyone in first 5 years of residence does apply Issue also where French assets even if no settlor/trustee/beneficiary NOT CLEAR that one of many beneficiaries liable on pro rata ‘share’… Room for double taxation where several residents

8. CONTEXT ISF reforms estimated to cost government €900m. €70bn trade deficit in 2011 French public debt is 89.1% of GDP (2012 est.) (eurozone average 87.4%) Plan –increase rates; and –limit tax incentives and reliefs Credit rating downgrade + 05/2012 election: watch this space…

9. BOUCLIER FISCAL Tax shield Refund right existed since 1988 to prevent you paying over 50% of tax In 2010, helped 14,400 people (residents) reclaim average €41,041 For 2010 (i.e. in 2011) cost the state €591m Abolished from end 2012 (2011 income benefits)

10. INHERITANCE AND GIFT TAXES 5% increase in the top two tax rates for direct lines and gifts between spouses: –€902,838 → taxed at 40% –€1,805,677 → taxed at 45% All other rates remain unchanged Parents could make gifts to children of up to €159,325 every 6 years - now extended to 10 Rapport fiscal extended from 6 to 10 years Abolished: 35% or 50% tax deductions for gifts according to donor’s age

11. EXIT TAX (1/2) With effect from 3 March 2011 6 years + French tax resident leaves France with a latent capital gain: gain crystallises on day preceding exit date Securities must have a value exceeding €1.3m or 1% of share capital Tax irrespective of whether the company is French or foreign Can be deferred depending on where the person is migrating to e.g. EU member states or EEA treaty states with TIEA Social tax component cannot be deferred (12.3%) – global rate 31.3%

12. EXIT TAX (2/2) Charge on unrealised capital gains may be cancelled or refunded if: –holding still held 8 years after exit; –on date of resumption of tax residency (if securities still held); or –upon taxpayer’s death Will be reduced/cancelled if actual capital gain less than the latent capital gain Credit given for foreign tax paid abroad

13. TAXATION OF TRUSTS Civil law: no equivalent to trusts in French Civil Code Tax law: till now no detailed regime; see new Art 792-0 bis of tax code (+ 885G ter, 990J, 1649AB) Government aims to prevent tax avoidance through the use of trusts For 1 st time, tax definitions of “trust” and “settlor” (very wide) If you escape wealth tax, “sui generis” tax is there to sweep you up! Income tax on distributions (amended Art 120-9), so accumulated income OK Anti-avoidance Art 123 bis untouched

14. INHERITANCE/GIFT TAXATION OF TRUSTS Creation of new trusts that qualify as gifts Gift tax will apply: –60% in all cases where the settlor is resident in France –45% if beneficiaries are descendants of the (non-resident) settlor but the trust assets are French –60% if beneficiaries are not descendants of the (non-resident) settlor but the trust assets are French Taxation of existing trusts and trusts where no gift tax has been paid Inheritance tax at death of settlor: –If beneficiary’s interest is known it will be taxed according to his relationship with the settlor (45% - 60%) –If the beneficiary’s interest is not known the whole trust will be taxed (45% - 60%) –Trusts in “uncooperative” states will be taxed at 60%

15. ENFORCEMENT BY DISCLOSURE Main ISF rules described above, but how will “they” find out…? New disclosure obligation on trustees –re existence, modification and extinction of trusts if –settlor or one of the beneficiaries French-resident or trust contains French assets Fine + non-disclosure penalty 5%, even if no tax loss Pension and charitable trusts should be ok, but what about EBTs?

16. DISCLOSURE OBLIGATIONS Ruling issued on 23 December 2012 implies that any trust with French resident settlor/beneficiaries or French assets on 31 July 2011 will need to report: –existence of trust and contents of trust deed; –amendments to trust or closing of trust; and –value of assets as at 1 January Where changes were made (e.g. exclusions) between 29 July 2011 and 1 January 2012, position is unclear – watch this space –Trustees will need to obtain up-to-date advice as further guidance etc is published

17. CHARITABLE TRUSTS Exclusively charitable trusts can avoid new wealth tax and inheritance tax, if irrevocable Beneficiaries must qualify as eligible charities under Article 795 French tax code French charities? Check the “list” at Article 795 Other European charities? Rely on EU case law and/or obtain ruling from French tax authorities –Consider “hiving off” assets into exclusively charitable trust where settlor wishes to benefit charity

18. KEY ISSUES STILL TO BE RESOLVED/ACTION POINTS Think twice before creating a trust with a French connection Trustees need to –check their structures and –identify any French-resident settlors/beneficiaries and assets Think about estates in trust/will trusts… Trustees need to source advice on –onerous reporting duties –how to re-structure All shareholders’ loans into SCIs should be identified and reviewed

19. KEY ISSUES STILL TO BE RESOLVED/ACTION POINTS Range of possible planning identified so far: –settlor/beneficiary emigrates – but check exit tax –French-resident beneficiaries excluded generically (?) –named French-residents excluded (?irrevocably) –trust split into funds e.g. pro rata, with suitable exclusions –trust “grantorised” to non-French resident “settlor”, with personal, general power of appointment Watch default provisions and cross-accruers; watch gift tax… Revocability a potential issue Strengthened “fraude à la loi” anti-avoidance doctrine

20. OTHER NEWS + WHAT’S IN THE PIPELINE? Tax on foreign owners of second homes has been dumped From 31 July 2011, flat levy on insurance policy wrappers outside IHT increased to 25% over €902,838 (still 20% below) Second law passed 19 September (No 2011-1117), published 20 th : –special income tax of 3% on incomes over €500k till deficit down to below 3% of GDP –social security taxes on capital revenues up from 12.3% to 13.5% –tax at 2% on hotel nights worth over €200! –CGT on homes: 10% annual reduction after 5 years’ ownership goes – from 1 February 2012 will go to 30 years (NB from 25 August 2011 re SCI-held properties) VAT raised to 21.2% from 01 October 2012 0.1% “Tobin” financial transactions tax

21. TRUST THE FRENCH…! FRENCH TAX REFORMS 2011 EDWARD REED Macfarlanes LLP 20 Cursitor Street London EC4A 1LT T +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com This presentation is given on behalf of Macfarlanes LLP. Macfarlanes LLP is not authorised under the Financial Services and Markets Act 2000, but it is able in certain circumstances to offer a limited range of investment services to clients because it is regulated by the Solicitors Regulation Authority. It can provide these investment services if they are an incidental part of the professional services it has been engaged to provide. © Macfarlanes LLP 2010