Finance and Tax Blog for individuals and companies

On May 10th the European Court of Justice (ECJ) delivered a favourable ruling in respect of investment funds on French withholding tax. The case against France was brought by German, Spanish Belgian and US investors. They argued that the French rules which taxed dividends paid on French equities to non resident investment funds but exempted when paid to French funds was contrary to EU law. Funds invested in French equities should now consider reclaiming French withholding tax paid from 1 January 2009. This could have implications for other markets in the EU and investors should consider making protective claims

The ECJ ruling confirms:

1. The French rules are a restriction on free movement of capital between EU member states and third countries; and
2. There is no justification for France applying such discrimination in either an EU or third country context;

Informed sources comment that this will be a massive hit to the French economy as claims for refunds of French withholding tax is estimated to be in excess of euros 4 billion.

Francois Hollande has just become president of France. One of his first reported tasks is to scrap tax breaks for the so called wealthy and high earners and introduce a top rate of tax of 75%. This brings about a particularly interesting twist following Budget 2012 in the UK; it may be more tax efficient for such super rich French residents to move to the UK where the top marginal rate of income tax is projected to be 45% for the year 2012-2013 and the top marginal rate of capital gains tax is 28%. The UK has become a safe harbour for overseas residents to take advantage of our tax breaks despite some Media comment to the contrary and investment in UK property and assets is both tax efficient and protects against the volatility of the Euro and other currencies.

If a French resident were to come to the UK to work for as period of two years he would normally be treated as resident but not ordinarily resident for UK tax purposes. This means such an individual would only have to pay UK on his proportionate share of UK earnings effectively reducing the top marginal UK tax rate of 45% to say, 22.5% to 30%.

Non-UK domiciled but resident individuals in the UK are subject to a more beneficial tax regime than throughout the rest of Europe. In particular an individual taxpayer can elect to be taxed on the remittance basis. This means that only UK tax is paid on income and gains remitted to the UK. In the earlier years of UK residence such individuals would not have to pay the “penalty kick” charge of £30,000 or £50,000 for the restricting UK tax paid to remittances.

Non-UK residents are only pay UK tax on net rental income in investment property. They do not pay capital gains tax on disposal. In Budget 2012 the Chancellor introduced lower rates of corporation tax on company profits which also means the UK is a good headquarters place to centre overseas operations into Europe and the Far East including China. The rate of corporation tax is projected to reduce to 24% for the year ended 31 March 2013 and smaller companies only pay 20%.

This short article is really an addendum to my previous blog Transparent reporting funds “TRF”, part 5 of the Offshore Funds series.

The requirement for reportable income to be computed in accordance with IFRS may also present a compliance problem for French FCPs, since their accounts are prepared in accordance with French GAAP which does not follow IFRS principles. It may therefore prove difficult for French FCPs to comply with reporting fund requirements unless they adopt IFRS or calculate total comprehensive income agreed by HMRC as equivalent.