The Overseas Collectivity of St. Barthélemy - PART IV
Investing in St Barthélemy
The Statute for the Overseas Collectivity
Although in the second portion of this article, I have preserved the information contained in my prior article relating to the island of St. Barthelemy becoming an Overseas Collectivity of France, I thought it important at this time of political and financial crossroads on the island to discuss issues relative to investment on the island of St. Barthelemy, both currently and in the future. Many people I meet with have a plethora of questions relating to the purchasing of property on the island. I hope that the following will serve the dual purpose of providing potential buyers/investors with a preliminary backdrop to the process of purchasing and its considerations, and the dispelling of myths that seem to persist over time regarding the same.
I. INVESTING IN SAINT BARTHELEMY
Who Can Purchase on the island of Saint Barthelemy:
In fact, any person or entity can purchase on the island of St. Barthelemy. Although certain legal entities may be disfavored from a tax standpoint, there is no prohibition, legally speaking, to the same. It is absolutely not required to have a French citizen own 50%, or other, of the property to be purchased, through the ownership of corporate shares, or outright.
1. Cost of Property: In addition to the purchase price of the property in question, there are Notaire's statutory fees along with filing and registration fees (globally referred to as "transfer taxes") to be paid in a transfer of property, and those are generally assumed by the purchaser. The seller is responsible for the payment of the capital gains taxes due, if any. The amount of the transfer taxes to be paid upon property depends on several factors, including whether the property is developed or undeveloped, whether the property, if developed has been completed more than five years earlier or not, and if non-developed, whether the purchaser plans to build the same, and further, if so, when, etc.
The exact amount of the transfer taxes varies based on the price in that certain costs, such as the conservator’s salary, are fixed and the higher the price, the lower the percentage.
2. Inheritance: Under the general provisions of International Law, real property is disposed of at death pursuant to the laws of the country in which the same is situated. Such is the case when real property is held in an individual’s name. When the property is held through a corporation, the corporate shares are considered “personal property” and thus disposed of, pursuant to the laws of the country of residence of the decedent without regard to the laws of the country in which the property is situated.
There is a forced heirship provision for children in France and French Law does not allow for the exclusion of children as heirs regardless of the provisions of a Last Will and Testament. The right of the children depend largely on the number of children from the marriage. Likewise, French law does little to consider the complexities associated with today’s mosaic families in which children may in fact result from one, two, or more marriages or even yet, certain adoptions. French estate law favors bloodlines as opposed to family ties or the contractual ties of marriage. In order to avoid the harshness of the same as well as to benefit from the advantages of the tax treaties and applicable laws, depending on the individual circumstances, one may want to consider the creation of a French corporation called an SCI (Societe Civil Immobiliere), prior to the purchase of property, such that the buyer is the SCI. The Creation of a Societe Civil Immobiliere should under no circumstances be viewed as a knee-jerk reflex and the considerations regarding the same carefully reviewed on a case-by-case basis.
3. Societe Civil Immobiliere (SCI): An SCI is a real estate holding corporation whose corporate purpose MUST be civil. The corporation is not commercial in nature and may only hold real property and engage in the acquisition, lease, rent, sale, improvements, management along with anything directly or indirectly related to its purpose. It must be specified that if an SCI rents property it may be imposable, for tax purposes, at the level of corporate taxation as opposed to personal taxation, depending whether the property is furnished, rented yearly or seasonally, etc.
For Internal Revenue Tax purposes, pursuant to United States Treasury regulations, an election may be made to have the SCI treated as a corporation or partnership. The time period in which to make the election is very limited and the tax implications of doing so, or not, potentially significant. The choice for United States tax purposes, including the resulting deductibility of expenses and taxes due or paid, must be quickly established.
An SCI must have a minimum of two (2) shareholders, regardless of the distribution of shares among them. The shares may be held by an individual or by a legal entity, with the exception of a trust, which is a legal structure not recognized in France.
4. The Role of The Notaire: Unlike the United States, there is in France a "Notaire" who is appointed and who acts essentially as a "Title Insurer”. He is responsible for the drafting and filing of the Deed. The Notaire's fees are set by statute and he is responsible for making certain that "Free and Clear Title" is transferred. After the receipt of a Statement of Recorder's liens from Guadeloupe, the Deed is signed and title transferred. The delay between signature of the Purchase Agreement and the Deed is generally about three (3) months.
5. Purchase & Sale Agreement: Once a Seller and a Buyer have agreed on price, a Purchase and Sale Agreement is executed, at which time 10% of the purchase price is placed into the Notaire's escrow account as an earnest money deposit. In the event the purchaser decides not to buy, after all the conditions to a sale have been fulfilled, the
earnest money deposit is forfeited. Any number of conditions precedent may be included in the sale, and the same can be used to protect the potential buyer from the loss of his earnest money deposit.
Notwithstanding the above, the Buyer, or his agent in the event of signature through a Power of Attorney, has a seven (7) day period after the receipt of the signed Purchase and Sale Agreement to back out of the sale and to have reimbursed within 21 days, his earnest money deposit with no questions asked.
6. Taxes/Filing Requirements: Please be advised that although many people have put forth the fact that persons and entities owning property in Saint Barthelemy do not have to declare income nor file income tax declarations, please be advised that there are filing requirements applicable to St. Barthelemy, which, it cannot be forgotten, is, after all, French. The fact that there may have been historical tolerances in no manner constitutes a waiver of the applicability of French taxes, other than those from which the island is specifically exempt pursuant to statute.
The above provides a very general overview of the purchase transaction for property in Saint Barthelemy. Explanation and review of tax issues, Franco-American Treaties and a case-by-case analysis and structure is important in order to preserve and secure real estate purchases and its resulting investment, on the island of St. Barths.
7. Capital Gains Taxes- The issue of capital gains taxes has been the subject of many questions by Americans owning property on the island of Saint Barthelemy. In fact, at this time, the following holds true:
As of January 1, 2004, the capital gains tax for an American citizen resident holding property in his or her own name is 33.33% of the net gain. For a French resident it is 16% along with a 10% social contribution, for a total of 26%. If non-resident (physical persons) shareholders own property through a French SCI, the capital gains tax withheld is 16% in that the SCI is viewed as a pass-through, unless viewed as a corporation for tax purposes. If a French commercial corporation sells property, the corporation should declare and pay the capital gains at the time of its annual filing.
It must be noted that the current situation regarding the rate of imposition of capital gains taxes on the island of St. Barthelemy is temporary. Once St. Barthelemy enacts its own tax statutes, capital gains and its tax will necessarily be considered. There is no reason to believe that no capital gains taxes would be due. In fact, it is normal and perhaps preferable that a tax be levied so as to enable the island to face its financial obligations. The capital gains tax paid on the island of St. Barthelemy will continue to be treated as a credit towards the amounts due in the United States as a capital gains tax, thereby avoiding double taxation. The notion of avoidance of double taxation is in fact the basis of a treaty and will continue to operate under the new Overseas Collectivity of St. Barthelemy.
The above is intended to provide a very general overview of the basic considerations relating to the purchase and investment of real estate on the island of Saint Barthelemy. In light of the amount of the investments on island, it is important to obtain local counsel to properly review the transaction, to provide support to your United States Tax Attorney or Accountant, as required, and to analyze the your specific situation so as to ensure that your ownership experience on the island of Saint Barthelemy will be a pleasurable one without unpleasant surprises.
II. THE STATUTE FOR THE OVERSEAS COLLECTIVITY:
Although it is true that the island is in the process of working towards a special statute the intent of the same is to preserve the rights and assets of the island’s residents, and not to create a tax haven. At this time, the date of the creation of the Overseas collectivity is set for April 2005. The same is a result of the overwhelming cry of approval for such a statute at the time of the vote by the local population on December 7, 2003. The creation of the statute to be applicable to the Overseas Collectivity of St. Barthelemy, as a reminder, will include the following:
- Creation, application and collection of duties and taxes- the tax structure of the Collectivity replacing the National rules currently applicable relating to the same.
- Regulation regarding prices market regulations and the repression of fraud;
- Issues of zoning, building, management of public property, all subject to the provisions of the Code of Urbanism.
- Traffic Circulation, transportation and regulations applicable to vehicle rental companies;
- Management of public roads and registration of vehicles along with the management of the airport and port infrastructures;
- Registration of boats, airline connections with other islands and places, with the exception of the air traffic between St. Barthelemy and St. Martin;
- Water, energy and garbage;
- Postal and Telephone organization and setting of rates;
- Customs regulation-Tobacco sales;
- The management of social security, retirement and other labor issues;
- Organization and management of schools and school transportation;
- Management of Sportive and Cultural matters of territorial and regional interest;
- Definition of policy relating to tourism;
- Environmental Protection and matters of public domain as to property belonging to persons and to the Collectivity and with the approval of France, authorizations of occupancy of property belonging to the State;
- Operational Plans regarding natural catastrophes and civil security;
- The delivery of Long Term Visas in the Collectivity of St. Barthelemy;
- Employment regulations regarding foreign workers.
The budget of the Collectivity shall be determined based on a fiscal year between January 1 to December 31, and shall include receipts, expenses and investments.
Although many American citizens appear very concerned that there will be property and other taxes levied upon them, it is important to note that at this time, property taxes are not viewed as a source of funding. It must be remembered that certain taxes, some of which are in fact indirect in nature, are and will continue to be received. Some new taxes may be levied. The most obvious taxes to be applied are the following:
-Port Duty- All merchandise, whether new or used, brought to the island for use on the island is currently the subject of a 4% duty, based on its value. The same may in fact be increased to 5%, which is more likely than not.
-Tourism Tax- Discussion has been made regarding a tourist tax to be paid at the time of departure from the airport
-Rental Tax- There has also been discussion of the levy of a tax equivalent to 5% of the gross rental amounts for all persons renting their properties on a weekly basis. This tax would conversely, not be applicable to yearly rentals, which house island residents working and/or living on the island.
-Garbage Tax- At this time a garbage tax is paid in the sum of 80 euros per year. The garage tax will remain and may increase in the future, if necessary.
-Transfer Taxes- All persons purchasing real estate in St. Barthelemy are familiar with the notion of the payment of what is globally referred to as a “transfer tax”. The rate depends on several things, including whether the property is developed or not, and if not whether the same will be developed in the near future, whether the property was developed for a period exceeding five years, etc. The transfer taxes, which in fact include both the taxes associated with the transfer and the Notaire’s statutory fees, will continue to be applied. The big difference is that the bulk of the income generated from such transfers will in fact remain on the island of St. Barthelemy as opposed to being paid to Guadeloupe, where it has to this date, been paid.
The income to be received by the island of St. Barthelemy, from the transfer taxes, is in fact quite considerable and should considerably assist the island face its budgetary needs.