The taxation of foreign estates is essentially governed by the territoriality rules laid down by the French General Tax Code (Code général des impôts, CGI).

In this area, there are relatively few international tax treaties, particularly with regard to gift tax.

As for European Union law, it is of little significance in this area, although the European Commission has been concerned about potential double taxation and has proposed solutions to eliminate it, at least in part, and to remove any discrimination based on the location of persons and assets. In particular, Regulation (EU) 650/2012 of 4 July 2012 on international successions does not deal with tax matters. That being said, the legislation of the Member States must, of course, comply with the principle of the free movement of capital.

Difficulties to be resolved

Where an estate or a gift involves a foreign element, the main difficulty lies in the need, as far as possible, to avoid double taxation; this may arise from various situations:

• competing claims by two States as to the tax domicile of the deceased or the donor, or of the heirs or donees;
• differing assessments of where the assets are located;
• conflicts of sovereignty where one State taxes the transfer on the basis of the domicile of the deceased or the donor, while another State also taxes it on the basis of the location of the assets or the tax domicile of the heirs or donees (or, possibly, on the basis of a nationality criterion).

In France, certain difficulties are resolved under domestic law by means of a tax credit mechanism, which is capable of avoiding double taxation in most cases.

There are, however, residual difficulties which tax treaties are intended to resolve.

Territoriality rules

The territoriality rules depend on the domicile of the deceased or the donor, the domicile of the heirs or donees and the location of the assets. They are laid down in Article 750 ter of the CGI.

The same rules apply whether inheritance tax or gift tax is concerned (the position is different where there is a tax treaty, since few treaties also cover gift tax). In all cases, nationality is irrelevant.

The chargeable event for the tax due on a gift of cash made by private deed executed abroad is the drawing up of the deed and not its disclosure.

The fact that sums formed part of the deceased’s estate on the day of his or her death may validly be established by the decision of a foreign court; the tax authorities may rely on such a decision as the basis for supplementary inheritance tax assessments charged to the legatee pursuant to Article 750 ter of the CGI.

Deceased or donor domiciled in France

If the deceased or the donor is domiciled in France on the date of the transfer, all the assets transferred are taxable, whether they are located in France or outside France and irrespective of the tax domicile, on that date, of the heirs, donees or legatees (CGI art. 750 ter, 1°).

The scope of gift and inheritance tax (droits de mutation à titre gratuit) is therefore entirely general.

Deceased or donor not domiciled in France

If the deceased or the donor is not domiciled in France on the date of the transfer, two situations may arise:

• if the heirs, donees or legatees are not themselves domiciled in France, only transfers of assets located in France are taxable (CGI art. 750 ter, 2°);
• if the heirs, donees or legatees are themselves domiciled in France, all the assets transferred are taxable, whether located in France or outside France, except where the heirs, donees or legatees have not been domiciled in France for at least 6 years during the last ten years preceding the year in which they receive the assets (CGI art. 750 ter, 3°); in the latter case, only assets located in France are taxable. This provision makes it possible to tax in France the French and foreign assets included in estates opened abroad and in gifts, whether or not evidenced by a deed executed in France or abroad.

The law does not provide that legatees benefit from the exception in the event of non-domicile in France for at least 6 years during the last ten years, but this omission has no consequence, since the administrative doctrine provides for it.

Taking into account the domicile in France of heirs and donees is intended to prevent wealthy individuals from transferring their tax domicile outside France and making tax-free gifts of assets located outside France to their heirs who have remained French residents; this principle was laid down by the Finance Act for 1999, which sought to curb the relocation of wealthy individuals.

International tax treaties

The territoriality rules laid down by the CGI apply only “subject to” tax treaties. They may therefore be set aside if a tax treaty lays down different principles.

According to the case law of the French Supreme Court (Cour de cassation), the highest court with regard to gift and inheritance tax, tax treaties must be regarded as directly applicable; indeed, unlike the Council of State (Conseil d’Etat), the Cour de cassation does not apply the principle of subsidiarity (or priority of domestic law over treaty law) but refers directly to the applicable treaty provisions.

This position of principle was affirmed in particular by the Cour de cassation sitting in plenary formation, with regard to the liability to inheritance tax of the transfer by an individual domiciled in Monaco of shares in a Monegasque non-trading company (société civile) whose assets consisted predominantly of real estate in France.

General principles

Tax treaties relating to inheritance tax or, where applicable, also to gift tax, often follow the model proposed by the OECD in 1982; they thus grant the State of the deceased’s domicile the right to tax the entire estate.

They nevertheless allow the State in which the assets are located also to tax the transfer, as for example in the case of real property or a business (fonds de commerce) located in the territory of that State; in that case, they provide for a mechanism to eliminate double taxation by means of a tax credit to be set off in the State of residence in respect of the tax paid in the State where the assets are located.

Tax treaties therefore reflect French domestic law where the deceased or the donor is a French resident; they also allow France, subject to specific features relating in particular to companies whose assets consist predominantly of real estate, to tax transfers of assets located in France where the deceased was a non-resident (the same applies to gift tax).

General treaties on income and wealth sometimes contain specific provisions on gift and inheritance tax; this is the case, for example, of the treaty of 2 May 1975 between France and Canada, as amended by an amendment of 30 November 1995 (Articles 2 paragraph 4,4, 23, 25 and 26 of the treaty) and of the Franco-Algerian treaty of 17 October 1999.

The French treaty network is not expanding; the last tax treaty concluded by France on gift and inheritance tax dates from 2006 (Franco-German treaty of 12 October 2006).

Not only is the treaty network not expanding, it is shrinking; thus France and Switzerland have no longer been bound by a tax treaty since France, on 17 June 2014, terminated the treaty of 31 December 1953; it was stated that this termination was motivated by the desire to put an end to the “erosion of the tax base to the detriment of French public finances” (Rép. Lefebvre: AN 5-4-2016 No. 82717); for the estates of persons who died on or after 1 January 2015, only the domestic law of each of the two States applies.

Application of tax treaties to gift tax

Whether or not a tax treaty covers gift tax is sometimes clear from the title of the treaty (for example, a treaty applicable to inheritance tax only, or to inheritance and gift tax); however, the title merely reflects the list of taxes covered. If the wording of the article on taxes covered is: “the taxes which are the subject of this treaty are… in the case of France, taxes levied on death” or “transfer duties on death”, gift tax (transfers inter vivos) is not covered.

It is covered, on the other hand, where reference is made, for example, to “registration duties” in general (but not if only stamp duties are concerned), or to “gift and inheritance tax” (droits de mutation à titre gratuit), or to “duties (or taxes) on estates and gifts” (as in the Franco-American and Franco-German treaties).

Domicile of heirs or donees not taken into account

One of the most important consequences of tax treaties is that, unlike under French domestic law, the domicile of the heirs or donees is not taken into account. Tax treaties were, indeed, almost always negotiated at a time when the territoriality rules were based solely on the criteria of the deceased’s domicile and the location of the assets. Generally speaking, their effect is therefore, save for exceptions, to deprive France of the right to apply Article 750 ter, 3° of the CGI (non-resident deceased, asset located outside France and resident heir).

Only the Franco-German tax treaty of 12 October 2006 takes into account the tax residence of the heirs, donees or legatees; Article 11 of that treaty provides that, notwithstanding the provisions of Article 9 (which lays down the principle of exclusive taxation in the State of residence for assets not located in the other State), where an heir, legatee or donee was domiciled in France at the time of the deceased’s death or at the time of the gift, France may tax all the assets received by that person; it is also specified that, in accordance with the provisions of French legislation concerning the set-off of foreign tax, France sets off against the tax calculated under its legislation the tax paid in Germany on all assets other than those which, under the provisions of Articles 5, 6, 7 and 8, are taxable in France.

Where the tax treaty does not provide for the possibility of taking into account the domicile of the heirs or donees, the position of the tax authorities is not entirely clear. It had been stated, with regard to the Franco-Italian tax treaty of 20 December 1990, that, “in accordance with the objectives pursued by the legislature”, if a donee domiciled in France receives movable and immovable property located in Italy which (according to the question, although the answer does not repeat this point) is given to him or her by a donor domiciled in Italy, that treaty does not deprive France of the right to tax, but the tax that may have been paid abroad in respect of assets located outside France may be set off against the French tax (Rép. Morel-A-L’Huissier: AN 8-2-2011 No. 92034: BF 4/11 No. 436).

This answer was not, however, incorporated into the Bofip (official tax doctrine database); current administrative doctrine merely states that, “save in special cases” (without further detail), the treaties concluded by France preclude the application of Article 750 ter, 3° of the CGI because they allocate taxing rights according to the State of tax residence of the deceased (or donor) and the location of the assets forming part of the estate (or gift), without taking into account the situation of the heirs or legatees (or donees). These treaties therefore have the effect of depriving France of the right to tax assets bequeathed or given by a non-resident deceased or donor to a French-resident beneficiary, if they are located outside France (in the other Contracting State or in a third State) or are not taxable under the treaty. In our view, the “special case” referred to in the above-mentioned administrative doctrine can only be that of explicit tax treaties, such as the Franco-German treaty.

Non-discrimination clause

The OECD model tax convention on estates and gifts contains, in Article 10, a provision prohibiting discrimination based on nationality. Such a provision is often included in the tax treaties signed by France, but not systematically; for example, the Franco-American treaty of 24 November 1978, as amended, does not contain a non-discrimination clause, in accordance with the reservation made by the United States to the OECD model convention (estates and gifts), according to which: “The United States, which taxes the entire estates of all its nationals wherever domiciled at the time of death, reserves the right to grant, for the estates of United States nationals domiciled abroad, exemptions, deductions and other reliefs which are not granted to the estates of persons who are neither nationals of nor domiciled in that country”.

The fact that the tax treaty does not include the principle of non-discrimination is, however, of no consequence where there exists, between France and the foreign country concerned, an income tax treaty that prohibits discrimination whatever the taxes concerned, even if they are not covered by the treaty. In that case, discrimination is prohibited with regard to gift and inheritance tax on the basis of the “income” treaty, even if the “estates” treaty does not contain a specific non-discrimination clause.

The case of the Franco-American treaty

In the Franco-American context, Article 12, 4 of the treaty of 24 November 1978, as amended by the amendment of 8 December 2004, provides that, for the calculation of the French tax due on an estate or a gift made by a person who, at the time of his or her death or of the gift, was a citizen of the United States or was domiciled in the United States, the same allowances and credits are granted as if the person had been domiciled in France. In addition, for the calculation of the French tax due on an estate or a gift made by a person who, at the time of his or her death or of the gift, was domiciled in France, in favour of a person who is a citizen of the United States or is domiciled in the United States, the same allowances and credits are granted as if the beneficiary had been domiciled in France.

The courts have had occasion to clarify the scope of the principle of non-discrimination with regard to the conditions of taxation in France of a deceased person of Moroccan nationality domiciled in Monaco. In that case, since the deceased was neither a French nor a Monegasque national, the Franco-Monegasque tax treaty of 1 April 1950, which, by way of exception to the usual principles, concerns only nationals and not residents of either State, was theoretically not applicable; it was nevertheless applicable by virtue of the principle of non-discrimination laid down by the Franco-Moroccan tax treaty of 29 May 1970 on income taxes, which applies to taxes of every kind and description (Article 5 of the treaty). In application of that principle, the estate of a Moroccan domiciled in Monaco could not be treated, as regards the heirs, differently from that of a French national domiciled in Monaco, which made the Franco-Monegasque treaty on inheritance tax applicable.

In addition to the treaty non-discrimination clause, European Union law may lead to the prohibition of restrictions or discrimination on the basis of the principle of the free movement of capital, which the Court of Justice of the European Union (CJEU) considers applicable in the field of inheritance tax.

Such a principle has the effect of prohibiting a State from applying discriminatory rules as regards the value of taxable assets, the taking into account of personal allowances, the deduction of debts, etc. It also has the consequence of prohibiting restrictions on the tax deductibility of gifts made to bodies established and recognised as being of public interest in another Member State.

As regards France, it was held, under the legislation prior to Amending Finance Act for 2014 No. 2014-1655 of 29 December 2014, that France could not restrict the exemption from gift and inheritance tax provided for gifts and legacies to public bodies or bodies recognised as being of public utility to bodies located in France or in a State of the European Union or of the European Economic Area bound to France by a tax treaty.

Mutual agreement procedure

The treaty-based settlement of difficulties in applying tax treaties generally follows the same rules as for treaties concerning taxes on income and wealth; the treaty mutual agreement procedure is a specific, non-judicial remedy that allows the taxpayer to apply to his or her State of residence to request that it examine the case and find a solution eliminating double taxation by mutual agreement with the other State.

In practice, the difficulties most often concern:

• the determination of the domicile of the deceased (or, where applicable, of the donor);
• issues relating to the allocation of debts;
• conflicts between legislations in determining which treaty provision governs the transfer of an asset.

In the event of difficulty, the matter should be referred, in France, to the international dispute prevention and resolution office (bureau SJCF-4B, which took over the responsibilities of the former Mejei) of the Directorate General of Public Finances (Direction générale des finances publiques, DGFiP) (64-70 Allée de Bercy, Télédoc 849, 75574 Paris Cedex 12; bureau.sjcf4b@dgfip.finances.gouv.fr).

The Franco-German treaty of 12 October 2006 provides for an arbitration procedure (Article 14). It specifies that, if the competent authorities fail to reach a mutual agreement within a period of twenty-four months counted from the day of receipt of the request from the taxpayer(s) concerned, they may agree to have recourse to an arbitration commission; this procedure is therefore optional and left to the discretion of the States.

Anti-abuse clauses

Tax treaties (estates and gifts) sometimes, though rarely, contain specific anti-abuse provisions; for example, the Franco-American tax treaty of 24 November 1978, as amended, allows the United States to tax, in accordance with its legislation, the estate of a deceased person or the gift of a donor who, at the time of his or her death or of the gift, was either a citizen of the United States, or a person domiciled in the United States, or a former citizen or former long-term resident whose renunciation of that status had as one of its principal purposes the avoidance of tax; however, this right applies only for a period of 10 years following such renunciation (Article 1, 4 of the treaty).

Another example: the Franco-German treaty of 12 October 2006 provides for a right of follow-up in favour of Germany: a person holding German nationality who, at the time of the death or of the gift, had been staying outside Germany for no more than 5 years without having a dwelling in Germany is considered to be domiciled in Germany within the meaning of the first sentence of Article 4 (residence) of the treaty; situations of dual residence between France and Germany are, however, then dealt with in accordance with the usual principles.

Determination of tax domicile

The tax domicile does not necessarily coincide with civil domicile ; the determination of the tax domicile of individuals is governed by specific rules, identical to those laid down for income tax (Article 750 ter of the CGI expressly refers, with regard to tax domicile, to Article 4 B of the same Code, relating to the determination of tax domicile for income tax purposes; BOI-ENR-DMTG-10-10-30 No. 30).

For the purposes of gift and inheritance tax, in the same way as for income tax, a person (whether the deceased, the donor, the heirs or the donees) is thus considered to be domiciled in France if he or she has in France:

• either his or her home (foyer), understood, according to the tax authorities, as the place where the taxpayer normally lives, i.e. the place of his or her habitual residence, provided that this residence in France is permanent; the tax authorities state that the taxpayer’s habitual residence remains his or her home even if he or she is required, for professional reasons, to stay elsewhere temporarily or for most of the year, provided that the family normally continues to live there and all its members gather there; the definitions put forward by administrative doctrine are not, however, entirely consistent with the case law, which defines the home differently, as being located where the taxpayer has the centre of his or her family interests and where he or she normally lives;
• or, in the absence of a home, the place of his or her principal residence, understood as the place of his or her actual presence, generally for a period of more than six months; if the length of stay in France is less than six months but longer than in other States, this criterion also results in domicile in France;
• or the place of his or her professional activities, unless these are carried on on an ancillary basis; this place means the place where the activity is actually carried on;
• or the centre of his or her economic interests, i.e., according to the tax authorities, the place where the main investments are made, or the place where professional activities are carried on, or the place from which most of his or her income is derived.

These criteria are alternative and not cumulative; for example, if it turns out that one of them is met by the deceased, his or her entire estate is taxable in France, even if the heirs are not themselves French residents and the assets are not located in France (unless, of course, a tax treaty provides for a different solution).

In principle, these criteria are applied in light of the clarifications provided by the administrative courts, which rule on the application of the territoriality rules for income tax; indeed, these clarifications are generally adopted by the civil courts, which have jurisdiction over gift and inheritance tax. In this regard, moreover, the tax authorities state that officials responsible for auditing gift and inheritance tax must, where there is doubt as to the tax domicile, contact their colleague responsible for income taxation, while taking into account any change of domicile that may have occurred between 1 January and the date of the chargeable event.

For the application of the centre of economic interests criterion, the civil courts would probably adopt the approach of the Conseil d’Etat, which holds that a taxpayer’s centre of economic interests cannot be established merely by finding that assets are located in France, since those assets must be income-producing; as the public rapporteur Laurent Olléon stated in his conclusions on that decision, “what must be compared is the level of income derived by the taxpayer in each country, whether income from his work or from his property”.

Illustrations from case law

Few decisions have been handed down by the civil courts on tax domicile for the purposes of gift and inheritance tax. The following two, which in substance follow the administrative case law, are nevertheless worth noting:

1. a. A person who held dual Venezuelan and French nationality and who died in the Netherlands Antilles was considered to be domiciled in France at the time of death; that person indeed had his or her home in France, even though he or she had actually stayed more frequently in Venezuela than in France during the last years of his or her life, the residence in France having remained “the base of the couple and the family” and his or her home within the meaning of Article 4 B of the CGI; this decision adopted the statement of principle from the case law of the Conseil d’Etat, stating that “the taxpayer’s home, which determines tax domicile, means the place where the person concerned normally lives and has the centre of his family interests, without taking into account stays made temporarily elsewhere, in particular owing to the requirements of his profession”; the judgment also stresses that the fact that the taxpayer’s centre of economic interests was located abroad is irrelevant since, of the three statutory criteria, it is sufficient for only one to be demonstrated to result in domicile in France; finally, the judgment confirms that tax domicile must be assessed solely by reference to the tax provision, without regard to the Civil Code.
2. b. A taxpayer who carried on his activity mainly in New Caledonia, where he managed a company, was not considered to be domiciled in France at the time of his death, even though he died in France after having stayed there for more than six months during the previous year; indeed, those stays did not result from personal or professional convenience but solely from the need to treat an illness that could not be treated in New Caledonia; the transfer to France by the deceased of his principal place of residence, which in no way showed an intention to establish his principal establishment in metropolitan France, did not establish that he had his tax domicile there.

Domicile of the heir or donee (or legatee)

For the application of Article 750 ter, 3° of the CGI, the tax domicile of the heir (donee or legatee) is assessed according to the income tax rules (CGI art. 4 B). Residence in France must be established on the day of the chargeable event for the transfer free of charge; the criterion of domicile during a period of 6 years in the ten years preceding the chargeable event is met even where the domicile has been discontinuous.

In application of these principles, a gift made to a child under 6 years of age does not fall within the scope of Article 750 ter, 3° of the CGI since the duration condition cannot, by definition, be met (Rép. Zimmermann: AN 12-7-2005 No. 58326: BF 10/05 No. 1031, not incorporated into the Bofip). It has also been specified that no distinction is to be made according to whether the heir, donee or legatee is a minor or an adult, and that nothing prevents a child under 18 from having had his or her tax domicile in France for more than 6 years during the last ten years preceding the year in which he or she received assets (Rép. Reichardt: Sén. 20-8-2015 No. 14014, specifying that a minor dependent on his or her parents does indeed have his or her home in France if the parents are themselves domiciled in France).

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