Based on the combined provisions of the domestic tax law of the U.S. and France, as well as the tax treaty entered into between the U.S. and France on Nov. 24, 1978, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates, inheritances, and gifts (Franco-U.S. Tax Treaty), gifts of securities or cash from a U.S. tax resident to a French tax resident are free from gift tax up to … $11.7 million, whether or not family ties exist between the donor and the recipient!
Gifts qualify as taxable transactions under U.S. tax code Section 2502(a). A U.S. tax resident donor is therefore potentially liable for the payment of the U.S. gift tax of 40% of the value of the gift. However, U.S. tax code Section 2505 also provides that any person having her tax residence in the U.S. may transfer her wealth, by gift or bequest, free from gift or inheritance tax within the limit of an amount determined by law. This amount, which currently stands at $11.7 million for each U.S. tax resident, can be used for any transfer of wealth made during his lifetime (gift) or by death (succession).
In order to benefit from this tax exemption, each gift given by a U.S. tax resident donor during his lifetime, as well as any gift made as a result of his death, must be declared, whether or not the recipients are family members. If the $11.7 million ceiling is not reached, no gift tax is due in the U.S.
This ceiling applies not only to gifts between a donor and a donee who are both U.S. tax residents, but also to gifts from a U.S. tax resident to a French tax resident.
Article 8 of the Franco-U.S. Tax Treaty (which is one of the seven tax treaties entered into by the U.S. concerning gifts) provides that:
« Except as provided in Articles 5, 6, and 7, property, including shares of stock in a corporation, debt obligations (whether or not there is written evidence thereof), other intangible property, and currency may be taxed by a Contracting State only if the decedent or donor was a citizen of or was domiciled in that State at the time of death or the making of a gift, and if taxable by that State under its laws. »
The right to tax a gift in securities or cash granted to a French tax resident donee is therefore allocated to the U.S. if the following two conditions are met:
- the donor is a U.S. tax resident, and
- even if no U.S. gift tax is effectively paid, thanks to a specific allowance, exclusion, credit, or deduction (such as the threshold), the gift constitutes a taxable transaction in the U.S.
Article 12(6) of the Franco-U.S. Tax Treaty provides that:
“If under this Convention any property would be taxable only in one Contracting State and tax, though chargeable, is not paid (otherwise than as a result of a specific exemption, deduction, exclusion, credit, or allowance) in that State, tax may be imposed by reference to that property in the other Contracting State notwithstanding any other provision to the contrary.”
By applying the provisions of the U.S. tax code (pursuant to which gifts constitute taxable transactions but assign to U.S. tax resident donors an individual exemption up to $11.7 million) combined with Articles 8 and 12(6) of the Franco-U.S. Tax Treaty, we conclude that gifts of securities or cash granted by a U.S. tax resident donor to a French tax resident donee are not subject to any gift tax in the U.S. if the donor has not reached his $11.7 million threshold, nor in France.
Though favorable, this conclusion is questionable because the person liable to pay the gift tax is not the same under the tax law of the U.S., which taxes the donor, or under French tax law, which taxes the donee.
However, the French tax authorities have, in the context of individual tax rulings, confirmed that gifts of securities or cash granted by a U.S. tax resident donor to a French tax resident donee were not subject to any gift tax in France, because such donations were taxable in the U.S. and thus, even if no gift tax is actually paid in the U.S. by reason of the deductible imputation.
Because these tax rulings are applicable only to the facts presented in the individual cases on which the rulings were made, they are not binding with regard to any other present or future cases, even if the situation at stake is identical.
Until the French tax authorities publish an official position in their guidelines, it is therefore strongly advised to file a nominative demand for tax ruling with the French tax authorities before proceeding with any gift from a U.S. tax resident to a French tax resident on the assumption that the French donee will not be taxed.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Claire Guionnet Moalic is a tax partner at Orsay Avocats Associés in Paris.
Claire specializes in Tax Law. She represents French and international clients in all taxation aspects of their financial operations: capital investments, mergers, acquisitions, reorganizations and trans-border transactions.
Claire also counsels clients regarding daily operations (monitoring of subsidiaries, directors’ and employees’ compensation, documentation on transfer price, etc.) also represents them in all disputes and procedures related to taxation.
Finally, Claire represents individuals regarding personal finance and estate planning.
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