Tax havens and countries with privileged taxation

The concepts of tax-privileged countries and tax havens raise numerous questions in the field of international taxation. Indeed, these terms are often associated with tax fraud. However, the legal and tax reality is not so simple.

What is a tax haven?

The term “tax haven” is not a legal one. In common language, it refers to a country that applies no taxation or at least very low taxation and is often associated with tax fraud.

It is necessary to understand that a taxpayer can choose the tax option that is most favorable to them. As long as this choice is made in strict compliance with French and international tax legislation, there is no tax fraud, which only concerns situations of illegality.

Many entrepreneurs and investors are now interested in “tax planning,” which can be an interesting optimization tool, provided it is done in strict compliance with tax legislation.

The fight against tax havens is a central issue for countries worldwide.

In this regard, the Organisation for Economic Co-operation and Development (OECD) has established an international “standard” to combat certain tax havens. This standard aims at the international exchange of tax information.

At the European level, the EU Council has also implemented instruments to combat tax fraud, tax avoidance, and money laundering. This fight mainly involves the publication of lists of states that do not meet minimum standards for information exchange.

The blacklist contains states that are uncooperative in terms of tax transparency and information exchange. It was updated on February 22, 2021, and includes 12 states:

• American Samoa

• Anguilla

• Dominica

• Fiji

• Guam

• Palau

• Panama

• Samoa

• Trinidad and Tobago

• U.S. Virgin Islands

• Vanuatu

• Seychelles

In addition to this blacklist, the EU has established a gray list targeting states that have made commitments to comply with minimum standards for tax transparency and information exchange. The list includes 9 countries, including Australia, the Maldives, and Turkey.

As for France, tax legislation does not use the concept of a tax haven but that of a privileged tax state.

What is a privileged tax state?

Article 238 A of the General Tax Code (“Code Général des Impôts” or CGI) defines the criteria to consider whether a state is a privileged tax state or not:

For a French company to have links with a privileged tax state has significant consequences:

– According to Article 238 A of the CGI:

This text limits the deductibility of certain expenses paid by a company tax-resident in France to a company located in a privileged tax state. The article lists the expenses concerned, including interest, royalties, or service remunerations.

The debtor company can, however, deduct these expenses if it demonstrates, firstly, that these expenses correspond to real operations, and secondly, that they do not have an abnormal or exaggerated character given the service provided.

– According to Article 209 B of the CGI:

This text provides that when a company tax-resident in France holds more than 50% of a company located in a privileged tax state, the profits made by the latter are taxable in France.

This mechanism will not apply:

• if the company is located in a European Community state,

• if the structure of the ownership and/or operation of the company cannot be regarded as an artificial arrangement aimed at circumventing French tax legislation,

• or if the legal entity established in France demonstrates that the operations are real and do not have an abnormal or exaggerated character.

Individuals fiscally domiciled in France are also likely to be affected if they have connections with privileged tax states. This is particularly the case when the individual owns shares in a holding company located in one of these states, as per Article 123 bis of the CGI. In this situation, the law provides for taxation in France of accumulated income even if it is not distributed.

French tax legislation is even more stringent towards non-cooperative states and territories (hereafter NCST).

The particular case of Non-Cooperative States and Territories

NCSTs are covered by Article 238 0 A of the CGI. In addition to the states covered by the EU, French tax legislation adds the British Virgin Islands to its list of NCSTs.

In addition to the mechanisms studied above, French legislation has implemented various mechanisms to prevent individuals and companies from having connections with NCSTs.

Regarding income tax, this will notably result in a withholding tax rate of 75% for certain income received from an entity located in an NCST: income from movable capital, capital gains, or non-salary income.

For companies tax-resident in France, maintaining connections with an entity located in an NCST means renouncing the benefit of the Parent/Subsidiary regime or the exemption of capital gains on participating securities.

It is necessary to note that these mechanisms will not apply as soon as the reality of the operations is demonstrated and they do nothave the object or effect of allowing, for the purpose oftax fraud, the location of profits in such a state or territory.

Why choose a tax lawyer expert in privileged tax countries?

The implementation of international investments requires extreme vigilance, especially for privileged tax states or non-cooperative ones. Hiring a tax lawyer is anecessity to secure your operations.

The lawyers at LEXPERTAX are experts in international taxation.

Therefore, we will be able to accompany you in setting up an international schemethat is suitable and compliant with tax legislation.