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The Overseas Collectivity of St. Barthélemy - PART V

I.THE CHANGE IN THE CAPITAL GAINS TAX RATE:

Pursuant to the new French Finance Law voted by the legislative branch, as of January 1, 2005, the capital gains tax has in fact been increased to its pre-2004 level of 33.33% for non-European, non-French residents (i.e., Americans) as opposed to the rate of 16% during the year 2004. As to non-French, European residents, the capital gains tax rate is currently 16%, and as to French residents, the capital gains tax rate as of January 1, 2005 is 16% plus various social taxes which result in additional 11% for a total of 27% capital gains tax. It is interesting to note that the capital gains tax is at its highest for the non-European residents who make no use the social programs of the European community and in no manner benefit from the advantages afforded Europeans, including the French, within the borders of Europe.

In light of the above, it is increasingly important to properly structure any purchase of property for US tax purposes so as to be able to pass through any losses or gains and to protect oneself against future changes. Otherwise the additional taxes paid in France in the event of a sale, or taxable event, is largely without use for United States Tax purposes.

II.THE STATUTE- WHAT IS HAPPENING?

As most people are now aware, on December 7, 2003, the island’s residents voted that yes, they in fact wished to move towards greater fiscal independence and towards an official governmental and legislation recognition of the tolerance that had since time immemorial, been afforded this little island of the Caribbean- St. Barthelemy. Although a fiscal tolerance had largely been afforded the Collectivity’s residents, there was no law nor legislative recognition of the same and as France and Europe moved towards the European Union, it became evident that it was crucial that the fiscal “status quo” be officially recognized in order to protect St. Barthelemy’s fragile economy and to prevent the natives from being forced in a position in which they would have to sell their properties in order to face the fiscal burdens that would be forced upon them. Hence - “The Statute”. The Statute that was voted in fact was the culmination of decades of efforts by local mayors and other elected officials to have the French government recognize the practical, social, economic and cultural particularities associated with the geographical position of Saint Barthelemy and its distance from France..

Since the decisive vote of December 2003, the island’s elected officials have worked hand in hand with the French legislature and at this time, the second proposed draft of the Statute has been presented to the island for review. The Statute that is at this time being reviewed contains a framework within which the island is empowered to legislate the matters described in previous articles, but does not in of itself contain the laws and regulations that will govern the collectivity and its residents. It in fact enables the local legislative debate and the voting of the rules and regulations s provided therein.

The issue of residence is a very delicate yet important question remaining to be decided. The Statute itself does not address the issue which will be the subject of local legislation. The length of the period of time which will be required spent on island is currently and will continue to be much discussed. One can only question the wisdom of having a single test, related to the “Physical residence” of an individual over a 12-month period. Perhaps, a fairer and more appropriate method of determining residency will also require a second “actual residence” test as is the case under current regulations in other countries. The often-raised example of the retired couple owning a home in St. Barths, essentially using the island as a base, and traveling around the world 8 months of the year is not a far cry from the reality of some island residents. Where does such a person reside? Does he reside anywhere? Clearly, he must.

Although a potential 8 month requirement for residency has been put forward, it would appear that the same could only work if coupled with another test such as actual residence. In the event an American would spend 7 months in St. Barths and another 5 in the United States, he would technically be a resident neither of St. Barthelemy under an 8-month rule, nor of the United States, where a Six-month test is generally applied, depending on the individual State in question. Such a person would theoretically risk failing to qualify for residency in either country.

At this time, it is anticipated that the final Statute empowering the collectivity will be approved, voted and in effect by the end of 2005.

Although the Statute provides for application and collection of duties and taxes- the tax structure of the Collectivity will replace the national rules currently applicable relating to the same.

The purpose and clear intent of the Statute is to protect the status quo for the island’s residents. It is not intended, nor will it, shelter assets and property belonging to non-residents and the island has made clear its determination not to become a fiscal paradise, not to encourage the sheltering of assets or the existence of false residencies and in fact to actively prevent the same.

The issue of ownership of real property and the nature and effect of the new laws on non-resident Americans is often the subject of many questions. Although I often hear the same, there is no legal requirement at this time, nor will there be in the future, obligating a non-resident to share ownership with a French resident. Americans may buy and hold property in their own names, or directly through a corporation or other entity already formed or to be formed. At this time, the taxes normally applicable in France may legally be requested, and in fact are due, by all persons holding property in France, either directly, or indirectly.

Although the ownership of property on the island of Saint Barthelemy makes the same subject to the rules, tax treaties and taxation by the French Tax administration, the same has not always been rigorously applied in Saint Barthelemy. What will the future hold? It is reasonable to assume that the Collectivity’s elected officials and the French government are aware of the fact that the ownership and investment by Americans on the island of Saint Barthelemy has been in large part contributable to the island’s economic success. There is no reason to believe that the legislation to be enacted on a local level will do anything to discriminate against American investment or otherwise discourage the continued purchase of property by Americans who wish to vacation, spend time or even retire in Saint Barthelemy.

It will be impossible for the Collectivity, given its size and resources, to legislate the entirety of the local regulation relating to taxes and duties and the plethora of the rules relating to the powers to be granted it, all at once. The drafting revision, modification and enactment of legislation, and time relating to each will probably result the enactment of local legislation relating to residents as a first and primary step. Quite some time will be needed for a complete finished product. Each local regulation or law will require parallel enforcement powers and administrative support. It is also reasonable to assume Guadeloupe or France will administer the issues relating to non-residents, pending the putting into place of the administrative and legislative tools necessary within the collectivity itself.

The much-anticipated Statute governing the regulatory and legislative powers of the local collectivity is expected to see the day by the end of h calendar year 2005, there will be no radical change on the surface. It is my firm opinion that the real estate market will continue to be very positive, that the social and economic fabric of the island will continue much as it has in the past and that any attempts at creating in St. Barthelemy the fiscal shelters created elsewhere will be met with tremendous opposition and decisive action.