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Jul 17, 2007

POLITICAL PULSE XI: SAINT BARTHELEMY -
THE NEW COLLECTIVITY, TAXES RESIDENCY AND GENERAL FRAMEWORK

On July 1, 2007, the local elections for the President of the Collectivity of Saint Barthelemy (together with his list) took place and the then-presiding Mayor, Bruno Magras was elected with what can only be described as an expression by the island's residents of a tremendous vote of confidence. Each of the three opponents running for President are represented on the Territorial Council resulting from the applicable rules of proportionate representation, each holding a single seat.

On July 15, 2007, the election took place for the Executive Council, a council comprised of seven (7) persons elected from the pool of persons sitting on the Territorial Council. The same consists of The President of the Territorial Council, four (4) Vice-Presidents and two (2) Council Members. Of note among the opponents is the presence of Maxime Desouches, who sits on both the Territorial Council and Executive Council, and who interestingly enough, was also a member of the President's prior Municipal Council at the time the island remained a Commune.

The new Overseas Territorial Collectivity of France, the island of Saint Barthelemy, has raised many questions among non-resident property owners. Although a continuing work in progress, much has been done by local government in order to pave the way to ease of the transition for residents and non-residents alike. At this time, it is possible to explain the basic framework of the new Collectivity as to residency, the scope of the local powers, and certain aspects of taxation for residents and non-residents.

In that my prior Political Pulse Article of March 2007 described the new structure of the local government, it's councils and powers, I will not do so here. This Article's purpose is simply to put forth, for those non-resident non-French persons, information that is currently available in the French language and to perhaps allay concerns that have been expressed, based, I believe, on the lack of information in the English language. The present article is in no manner exhaustive, nor is it intended to be.

I. LEGAL FRAMEWORK:

There are two legal instruments that determine the general rights and obligations of the island's residents and non-residents. The first is the «Loi Organique» (hereinafter referred to as «L.O.») and the second is the Draft of the Tax Agreement between the new Collectivity of Saint Barthelemy and Metropolitan France. The first is in the form approved by the French Senate, Parliament and French Constitutional Committee. The second, the Draft of the Tax Convention Between the Overseas Collectivity of Saint Barthelemy and France, remains a draft at this time and will certainly bear modifications prior to being executed by the respective representatives of Saint Barthelemy and France. The basics principles appear established.

The legal framework within which the island of Saint Barthelemy has been transformed from a Commune of Guadeloupe to an Overseas Territorial Collectivity of France is Article 4 (Articles L.O.6211-1 to L.O. 6271-7) of the General Code of Territorial Collectivities (hereinafter referred to as «GCTC») It is called the «Statute of the Overseas Collectivity of Saint Barthelemy» (hereinafter referred to as the «Statute») and Article 4 created Book II, dedicated in its entirety to the new Overseas Collectivity of Saint Barthelemy. Saint Barthelemy remains French, subject to the French Constitution, and is not independent of France, which remains it mother country. It has simply been afforded a great amount of independence relative to the issues concerning it..

The approval of the transformation of Saint Barthelemy from that of a Commune of Guadeloupe to an Overseas Collectivity of France, it is important to remind readers, was largely based on the acknowledgement by the French Government of the economic, social and geo-political realities unique to the island and its inhabitants, who have been obligated over the years to assume tremendous additional costs related to their residing on island, all while receiving none of the advantages (educational, medical, cultural, among others) otherwise available to the inhabitants of Metropolitan France, and even to a certain extent, Guadeloupe, to date the island's administrative center. It thus seemed natural in the chain of events that the island's residents would be afforded the ability to determine their own destiny from a political, social, economic and cultural aspect, all while remaining vigilant as to the global realities in which we live.

In an attempt to discourage residency «shopping», there has been prepared a Draft Tax Convention Between the Overseas Collectivity of Saint Barthelemy and France (hereinafter referred to as the «Draft Tax Convention»). Two of the many purposes of this convention, as is the case with all Tax Conventions, is to provide a vehicle whereby a taxpayer is provided with a level of certainty relating to questions of residency, the taxes owed and to prevent the imposition of double taxation by two separate taxing authorities on a single source of income or revenue.

Tax uncertainty has long been the earmark of persons purchasing and owning property in Saint Barthelemy. The tax was due, but was there or was there not a “historical tolerance” relative to residents as well as non-residents? It must be admitted that the fact that non-residents largely chose not to file income tax declarations as an act of solidarity with the local residents created a state of uncertainty as to everyone. The cloud has been lifted and definite rules established within which we are all now at ease to work.

II. RESIDENCY:

The answer to the question of who is considered a resident for tax purposes is provided pursuant to the Statute, Article L.O. 6214-4 -I (1) and the Draft Tax Convention, Article 5. The issue of tax domicile is clearly established.

Physical persons:

Pursuant to the Statute, Article L.O. 6214-4 -I (1) physical persons may only be considered as having their tax domicile in Saint Barthelemy after having resided for at least a five-year period.

The Draft Tax Convention takes the definition a step further in its definition, describing a resident as a physical person (as opposed to a legal entity) who can justify having resided in Saint Barthelemy for at least five (5) years on January 1 of the year of imposition by having their primary home or habitual abode, those who have for at least five (5) years on January 1 of the year of imposition, their primary professional activity, whether or not paid by virtue of a salary, and finally, those who have on the island of Saint Barthelemy, for at least five (5) years on January 1 of the year of imposition, the «center» of their economic interests.

The effects of tax residency on the island of Saint Barthelemy is limited to profits or revenues generated by either an activity undertaken on the island, or in the alternative, income generated by assets of any kind on the island.

Legal entities:

Pursuant to the Statute, Article L.O. 6214-4 -I (1), legal entities may only be considered as Saint Barthelemy tax residents after having the principal place business operations on the island of Saint Barthelemy for a period of at least five (5) years AND conditional upon the fact that the same are controlled, directly or indirectly, by physical persons residing in Saint Barthelemy for a period of time of at least five years.

The Legal entities may only be considered as Saint Barthelemy tax residents after having the principal place business operations on the island of Saint Barthelemy for a period of at least five (5) years AND that the same are controlled, directly or indirectly, by physical persons residing in Saint Barthelemy for a period of time of at least five years, as residency in defined above.

III. TAXES:

As an initial comment, it must be noted that both the Statue and the Draft Tax Convention have created of a distinction between “residency” and “tax domicile”. For the first five (5) years of residency in the new Collectivity of Saint Barthelemy, a physical person or legal entity may be “residing” in St. Barthelemy without having tax domicile here for purposes of taxation. As to a non-French resident, the tax domicile relates only to assets owned in St. Barthelemy, which will be taxed as if domiciled in France, or perhaps Guadeloupe, depending on the modifications made to the Draft tax Treaty.

Scope:

The scope of the Draft Tax Convention relates to the following pursuant to Article 3:

  1. Income Tax, Wealth Tax, Registration Tax, Transfer Taxes on Gifts for the benefit of Metropolitan France on the one hand and for the benefit of Saint Barthelemy, on the other, regardless of the manner of collection.
  2. The taxes to which the Draft Tax convention applies are the following:
    1. Relating to Metropolitan France (hereinafter referred to as “French Taxes”):
      1. Income Tax;
      2. Corporate Taxation including withholding taxes on the payment of dividends;
      3. Registration taxes and those of publication relating to real property;
      4. Wealth Tax;
      5. Employee withholding taxes.
    2. Relating to the Collectivity of Saint Barthelemy (hereinafter referred to as “St. Barthelemy Taxes”):
      1. Transfer Taxes (this is not a typographical error nor a restatement of that which is set forth above. What is globally referred to as transfer taxes is comprised of a number of different charges, which are paid to one or the other, based on the nature of the charge);
      2. Capital gains taxes on real property;
      3. Annual Professional Tax

The Draft Tax Convention will also apply to new taxes to be created in either Metroploitan France or the Collectivity of Saint Barthelemy and that are of an identical or similar nature to those set forth above.

To the extent income and other revenue, be it passive or other, is earned on the island of St. Barthelemy by non-residents, those sums are taxed pursuant to the Draft Tax Convention, under the tax laws and directives of Metropolitan France. This may be changed to reflect that the tax laws and directives of the island of Guadeloupe rather than those of France be applied as to income and other revenue earned on the island of Saint Barthelemy by non-residents, but at this time, the Draft Tax Convention refers to what is mentioned above.

The Actual Taxes Themselves:

As to non-residents, to whom this Article is primarily addressed, I will describe the taxes that are to be collected, those whose collection remain unclear and those that are unlikely to exist. The following in no manner addresses the taxes to be paid by French or Saint Barthelemy residents, for whom information regarding the same is readily available. A number of the taxes identified below are already due and owing at this time.

Although most people have done so at this time, as to those that have not, Rule number 1 is obtain the services of a “Expert Comptable”, a French CPA, who should be entrusted with the books and records relating to yourself and/or the legal entity through which property is held, and the property or other assets owned and operated by you or a third person, on your behalf, in the Collectivity of Saint Barthelemy, in early January of each year for the year preceding that for which the filing is due.

To the extent property is owned by a Corporation, it is necessary to have a bank account opened in the name of that corporation so that all income and expenses flow through that account, just as one would anywhere else.

  1. Income Tax: Income tax will need to be paid if a profit made. This tax has always been due pursuant to the French General Code of Taxation. To the extent income is earned and a profit generated in Saint Barthelemy a tax is due payable in France in the first instance, with applicable credits then applied for the purposes of United States Taxes.
  2. Transfer Taxes: As anyone owning property is aware, there is a one-time transfer tax when purchasing real property on Saint Barthelemy, the rate of which is dependent on whether the property is developed or not, the date of completion of the construction, if the property is developed and also depending on the manner of purchase (corporate or not, etc). The larger portion of the transfer tax paid will now remain on the island of Saint Barthelemy rather than being paid to the Department of Guadeloupe. Part of that tax will be paid to Guadeloupe, who remains at this time, the custodian of records for the island of Saint Barthelemy, relating to its real properties. The new Collectivity of Saint Barthelemy will continue to use the services of the Recorder’s Office and the Plat Map Office of Guadeloupe until some undetermined time in the future.
  3. Capital Gains Taxes: All persons selling real property to date on the island of Saint Barthelemy have been subject to the payment of capital gains taxes which were thereafter credited against any capital gains taxes paid in the country of residence of the selling party or its shareholders. To date, the rate for French residents has been 16 % plus an addition social contribution for a total tax paid of 27%, for non-French European residents a tax of 16% and for non-French, non-European residents a capital gains tax of 33.33%. All the rates are subject to an abatement of 10% per year after the first five full years of ownership. There is no indication as yet of any modification in the capital gains tax rates themselves, although it remains a possibility.

    The Draft Tax Convention provides that the capital gains taxes is a tax within the competence and jurisdiction of the Collectivity of Saint Barthelemy.

  4. French Wealth Tax: Again this tax has always been due pursuant to the French General Code of Taxation. The French Wealth tax is a tax on assets owned in France. There is no similar tax in the United States. For non-French residents, persons are liable to the French tax office on assets (not just real property) physically located in France, without limitation as to real property. The tax is based on the value of the asset on January 1 of each year and is based on net wealth according to a progressive scale from .55% to 1.8% of the net value of the assets, and commences once the value of the net asset reaches the sum of 760,000 Euros (for the year 2007).

    It is important to note although the application of this tax has not been definitively established, it would be difficult to imagine the legal grounds on which to base a defendable position as to its non-imposition on the island of Saint Barthelemy in that it is not a property tax, but an asset tax.

  5. Tourist Tax: A tax on tourists, which is prevalent in the islands, regardless of national identity, throughout the Caribbean, will be instituted on the island of Saint Barthelemy in the amount of 5% of the gross hotel room, vacation villa, or other vacation accommodation. The manner of Collection remains under discussion, but the existence of the tax is a certainty. Many seasonal vacation villa owners may simply assume the cost as part the cost of doing business and in order to obtain a competitive edge.
  6. Garbage Tax: For those owning property in Saint Barthelemy, an annual garbage tax is due of Eighty-Eight Euros (88 Eur.) a year. It may eventually be increased, but it remains a pittance, so the only comment I have relating to the same is pay it. If you have not paid it, please check with the local authorities and do so.
  7. Port Duty: As is currently the case, a port duty is due on the invoice or if used, market value of all goods and merchandise entering the island of Saint Barthelemy, together with transportation costs- be it by boat, plane or other. It is planned that the same be increased to 5% from 4%.
  8. Annual Professional Tax: An annual professional tax is provided for by the Draft Tax Convention and the tax is to be paid by commercial corporations and businesses on island, regardless of residency. There is currently such a tax that is applicable based on gross revenue and that is scaled. The amount is not expected to be significant, but it is not yet determined.
  9. 3% Tax for corporations holding real estate: Once again, a tax which has been due IF applicable, but totally avoidable if property is not held through what may be considered an “Off-shore” or few other exceptions. The French Tax Code provides that that in the event real property is held in France through legal entities, those corporations are responsible to pay a tax in the amount of 3% per year based on the value of the property. An exception is made for persons holding the shares of a French Corporation (among others) so long as the same undertakes the obligation to disclose the following information to the tax office for each year for which they request the same. I generally suggest that property owners holding through a French corporation simply advise the tax office for the corporation of the following information in order to avoid their asking and perhaps not receiving the request.

    Basically, in such a letter, the shareholders obligate themselves, on behalf of the SCI to communicate to the tax administration, upon its request, and for each of the years for which the information shall be requested:

    - The location, description and size of the property situated in France, held directly or indirectly by this entity as of January 1;

    - The name and identity of the shareholders, associates or other members as of the same date;

    - The number of shares or other proprietary rights held by each of them.

    - The shareholders also obligate themselves to provide the French Tax administration, upon its request therefor, a justification if the tax residence of its shareholders.

IV. ISSUES OF ZONING AND BUILDING:

There is planned to enact a local Code of Urbanism and local Zoning Plan. The same should be produced shortly to the Councils for approval.

It is anticipated that, in an effort to reduce the ever-increasing burden on the island’s infrastructure and in an effort to move from a period of rapid development to one of planned development coupled with intelligent management, the new Zoning Plan and Code of Urbanism restrict the number of buildable sectors, that density of buildings be restricted (as is currently the case in Development areas called “Lotissements”.

Building restrictions are an effective manner in which to protect the natural spaces of the island, to protect the indigenous flora and fauna that are becoming extinct as cement takes over the hills and valleys of the island, such as certain large trees protected by the Treaty of Washington, and the large land turtles and iguanas that spot the hillsides and valleys with an increasing rarity.

CONCLUSION:

The above is a brief overview of the issues of residence and taxation which has been the basis of many questions by non-resident, non-French owners of property relating to the new Collectivity of Saint Barthelemy who own property or work on this island.

At this time, there remains much work to do and many outstanding issues to be addressed between Metropolitan France and the new Collectivity of Saint Barthelemy, including whether or not Saint Barthelemy is to be a part of Europe, marginally so, or not at all.

Regardless of the developments that have occurred and those that are occurring, I remain comforted at the thought that the elected team of persons representing the island through its newly formed Territorial Council and Executive Council are very conscious of the fact that the investments and considerations afforded the Collectivity of Saint Barthelemy by non-residents have been considerable and that the same represents an important economic interest for the continued prosperity of the island. It is far from anyone’s intent to do anything to harm the relationship between St. Barthelemy and its non-resident investors and villa owners. The future looks bright for all concerned.

Additional Articles will occur as the different negotiations between the French Government and the Collectivity of Saint Barthelemy progress.

Chantal Decombe-Greaux


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