POLITICAL PULSE- THE CODE OF CLARIFICATION OF THE ISSUE OF RESIDENCY AND THE NEW RULES RELATIVE TO THE PURCHASE AND SALE OF PROPERTY
(The author, Chantal Decombe-Greaux is an active American Attorney admitted before all Courts of the State of California, the Supreme Court and the Ninth Circuit Federal District Court. She is a duo-national of both France and the United States. Born in NY of French parents, she has spent her life between metropolitan France, the United States and the French Caribbean. She has resided full time on the island of St Barts for the past 19 years, is the Director of Decombe & Decombe, a Real Estate Counseling firm on the islands of St. Barthélemy and St. Martin, and has been assisting Americans and other English speaking clients in their real estate and business investments in the French islands since her arrival in 1990. In 2009, Chantal Decombe- Greaux was sworn in as a Court Certified Judicial Expert Translator – Interpreter for the French and English languages before the Court of Appeals in Guadeloupe. She may be contacted at 011-590-590-27-85-79 or via email: firstname.lastname@example.org).
Notice: The following is in no manner intended to provide a legal opinion nor shall it be construed in any manner to constitute legal advice. The following is solely intended to provide English-speaking persons with information relating to the Political, Social and Economic development of the Collectivity of Saint Barthelemy, which is otherwise only available in the French language.
The Overseas Collectivity of Saint Barthelemy has set roots and is slowly emerging and growing into its own as the administrative and legal issues that are inherent to such a process are addressed. At this time, many of the outstanding questions and issues still pending a year ago have been resolved- favorably for overseas investors and island residents.
As a reminder, on November 13, 2007, the Island’s Territorial Council approved the Code of Contributions for the new Collectivity of the Island of Saint Barthelemy. The date of effect of the local Code was January 1, 2008.
The following Article will address the issues that tend to prompt the greatest number of questions by clients and attempt to demystify what is in fact a very simple set of rules that are currently applicable to the Overseas Collectivity of Saint Barthelemy.
I. “RESIDENCY” a change is made:
As originally drafted, the Code of Contributions for the Collectivity of Saint Barthelemy provided that as to both physical persons and legal entities, the same would be considered a local resident if:
- Physical Persons:
Physical persons who are considered to be residents pursuant to the Code of Contributions are:
-Those persons who can justify that they have had their home or principal place of residence, for the period of at least 5 years on January 1 of the year of imposition; or
-Those persons who can justify that they have had their principal professional activity in Saint Barthelemy, for the period of at least 5 years on January 1 of the year of imposition; or
-Those persons who can justify that they have had the center of their economic, material or business interests in Saint Barthelemy, for the period of at least 5 years on January 1 of the year of imposition;
- Legal Entities:
Legal entities considered to be residents pursuant to the Code of Contributions are:
-Those entities which, regardless of their corporate form or corporate, for the period of at least 5 years on January 1 of the year of imposition, have established Saint Barthelemy as their effective principal place of business; or
-Those entities which, regardless of their corporate form or corporate, for the period of at least 5 years on January 1 of the year of imposition, have established Saint Barthelemy as their effective principal place of business or which are controlled, directly or indirectly by persons who are considered physical residents of the island of St. Barthelemy (majority ownership of shares by a tax resident of the Collectivity of St. Barthelemy).
The Collectivity of Saint Barthelemy originally considered that as of the date of July 15, 2007, all persons, be they physical persons or legal entities, having “resided” in the Collectivity prior to July 15, 2002, would be considered a “resident” for tax and other purposes.
In that the application and interpretation of the 5-year rule could create difficulties, on December 23, 2008, Christine Lagarde, the French Minister of the Economy, Industry an Employment confirmed the position of the French Government that all persons deemed to have “resided” in St. Barthelemy prior to July 15, 2007 would be considered residents of the island of Saint Barthelemy. Although this letter is not law at this point, it is fully expected that the Convention between France and the Collectivity of Saint Barthelemy confirm the position.
II. INCOME TAXES:
A. Income generated in Saint Barthelemy by residents:
As to the effects of residency on the payment of income tax, it is important to recall that the same are limited, as to both physical residents as well as resident legal entities, to the income or benefits from business or other activity on the island of Saint Barthelemy or from property or assets located within the Collectivity. All other income or benefits generated from any other source is taxed as per the applicable tax rules and laws in the country in which the income is earned by a Saint Barthelemy resident.
Further, it is not because income is earned in Saint Barthelemy by a local “resident” that all other countries are precluded from taxing that income if the laws of the country of citizenship require the payment of taxes. Taxes are then due, with credits applied as per the laws of the country of citizenship as per law or treaty.
B. Income generated in Saint Barthelemy by non-residents:
All non-Saint Barthelemy residents who earn income (this definition excludes capital gains taxes, which is treated separately below) on the island of Saint Barthelemy are expected to file income tax declarations with the competent authorities, to declare their income and to pay income taxes in the amount due.
The distinction between who is and who is not a resident having been clearly identified at this time, it is unlikely that the tax office will accept the fact that persons required to file income tax returns and to pay taxes, choose not to file.
III. SALES AND PURCHASES OF REAL ESTATE IN THE NEW COLLECTIVITY:
As is the case with the prior tax rules, the sale of real property has given way to the application of the local rules relative to the payment of transfer taxes, wealth taxes and other taxes relative to ownership.
A.The Role of the Notaire:
The role of the Notaire is best translated as one of title insurer for the purposes of real estate transactions. He is an interministerial appointee responsible for the collection and payment of transfer taxes, capital gains taxes and responsible for the drafting and registration of the Deed of Sale. He does not represent the interests of one party over the other. He is paid on a statutory percentage of the amount of the transaction a statutory percentage due only in the event of the realization of the transaction, although he may provide for the payment of the initial contract in that document. In the event the sale and purchase is not realized.
B.Considerations Specific to the Seller and Buyer of Real Property:
The sale of real property generates tax issues as to both the buyer and the Seller, although each is concerned with different taxes.
1. The Seller:
The Seller is concerned with the payment of the capital gains taxes. He is also responsible for the appointment of a fiscal representative in the event he is a non-resident legal entity or physical person.
Pursuant to the Code of Contributions for the Overseas Collectivity of the Island of Saint Barthelemy, the capital gains taxes to be paid at the time of sale by physical persons and legal entities residing in Saint Barthelemy is a rate of 25%. This rate is applied when the legal entity holding the real estate is considered a resident, or alternatively, the physical person holding the real estate is a physical resident of the Collectivity of Saint Barthelemy.
As to the applicable capital gains tax rate for non-resident sellers, the same depends on the residency of the seller. In the event of an SCI, if the SCI was not a resident prior to July 15, 2007 or if the same has not been a resident for the period of five (5) years on the date of sale, the applicable capital gains tax rate depends on the residency of the seller and/or shareholders, depending on the kind of legal entity. As to American residents holding property through an SCI or individually, the capital gains tax rate at this time is the sum of 33.33%. As to European residents, another rate is applicable. Although there had been some discussion as to whether a distinction would be made between residents and non-residents relating to whom the tax would be paid, Metropolitan France or the island of Saint Barthelemy, the French government has acknowledged the right of the Collectivity of Saint Barthelemy to collect the capital gains taxes relative to a sale, direct or indirect, of real property, situated within the Collectivity. The amount of the tax to be paid may vary, however, based on the residency of the shareholder or owner.
The purpose of this article not being the details of the calculation of the basis for the gain, suffice it to say that it is very important, even crucial, that in order to benefit in the best possible manner from the benefits of a higher basis, that each invoice relative to the construction of a property, its improvements and collateral acquisition costs be carefully analyzed in order to best benefit from the available deductions.
In addition to the payment of the capital gains tax due by all persons, it must be reminded that all non-resident sellers, be they physical persons or legal entities, must appoint a fiscal representative for the purposes of acting as a surety to the tax office for the purpose of the payment of the capital gains tax. In the event the tax administration considers an incorrect amount of tax was paid by the Seller, the same may seek payment from the fiscal representative, who then is subrogated to the right of the tax administration and who, pursuant to contract with the seller (without which the fiscal representative will not act as such for a seller), may seek reimbursement from the seller for any additional amounts paid to the tax administration on behalf of the seller.
2. The Buyer:
The buyer is primarily concerned with transfer taxes and notaire’s statutory fees in the purchase of real property or shares.
It is important to note that the concept of a TVA, or value added tax, no longer exists under the Code of Contributions applicable to the island of Saint Barthelemy. As such, there is no longer any specific, separate taxation of properties sold within 5 years of their development or in other circumstances in which a value added tax was previously applied. All properties are subject to the same transfer tax, at the same rate regardless of whether the same is developed or not and whether the same has recently been developed.
Pursuant to the newly enacted Code of Contributions for the Collectivity of Saint Barthelemy, the rate of transfer taxes due in the event of the sale of real property or the sale of shares of a corporation whose assets are predominantly represented by real property, is the amount of 4.8%. To that amount must be added the statutory fees due the notaire.
In the event of the sale of real property, the 4.8% is paid on the sales price of the property, excluding the value of furnishings, an inventory of which must be prepared separately. It must be noted that if the local tax administration may tax the value of the property as opposed to its price if it deems the same to be different.
C. Manner of Purchase:
The structure used for the purchase of real property must be carefully viewed with an eye towards an eventual resale of the property in light of the potentially different capital gains tax rate applicable based on the identity and residency of the seller.
1. Societe Civil Immobiliere (SCI): An SCI is a very common method used to purchase property on Saint Barthelemy. 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 United States Internal Revenue Tax purposes, pursuant to United States Treasury Regulations, certain choices may be made as to the treatment of the SCI or other corporation and the entity will thereafter be treated by the IRS according to the choices made. The tax implications of doing so, or not, are potentially significant. The choice for United States tax purposes, including the resulting deductibility of expenses and taxes due or paid, must be quickly established and decisions made regarding US tax treatment of different structures. Failure to act within a very short period may result in the loss of deductions and unwanted impositions of revenue by the IRS.
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 as an independent legal entity.
Although the above is in no manner exhaustive of the impact and considerations on the purchase and sale of property subsequent to the enactment and recently applicable Code of Contributions, I hope to provides a general overview to those to date unaware of the same.
The Code of Contributions of the Collectivity has been drafted with an eye towards serving the interests of those persons who are largely responsible for the continued economic and cultural development of the island and its residents - the tourists, the investors and all those who have brought their knowledge, culture and experience to the island. The new Collectivity of St. Barthelemy has been carefully tailored to best address the economic, social and political realities of the community in which the residents live and in which non-residents invest.
©2009 Chantal Decombe-Greaux