Real Estate Investments in St. Barthelemy and the Future
Real Estate on the Island of St. Barthelemy has been a strong magnet for those persons wishing to find a peaceful, unhurried and safe place to retreat over the years.
There has been a sharp rise in demand for properties by potential buyers over the past few years. The rapidly increasing demand for real estate coupled with a restrained number of permits issued and the decline in real estate inventory have resulted in real estate being extremely prized as an investment on the island of Saint Barthelemy.
The island of Saint Barthelemy expects to receive the final approval of its special "Statute" by year's end and with that empowerment act in hand, will be in a position to assume much of its political, regulatory and fiscal responsibility independently of Guadeloupe, to date its administrative head. St. Barthelemy will not be independent but will answer directly to France as an overseas Collectivity. It is also true that a much greater autonomy is to be enjoyed by the island as a result of a convention agreement with France.
Regardless of the existence of Saint Barthelemy as an Overseas Collectivity of France and local laws and regulatory statutes, the future Collectivity of Saint Barthelemy will remain French, subject to the French Constitution, part of the European Union and subject to the International Treaties of France. This Article will explore the Protocol signed between the United States and France in December 2004 and although to date not yet ratified by the United States so as to be applicable, will have significant consequences, should the same be ratified.
As is generally the case between sovereign nations, France and the United States have entered into a number of Treaties, one of which was the "Convention for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Gifts" signed in Washington on November 24, 1978. Pursuant to the 1978 Treaty, the shares of corporations holding real estate are deemed personal as opposed to real property and taxed in the country of residence of the shareholder. Pursuant to the treaty, gifts of corporate shares have not been subject to the imposition of a gift tax in France by residents of the United States, and the inheritance taxes in the event of death of a shareholder have not collected in France, the probate proceedings occurring solely in the country of residence, either through the probate of a last Will and Testament, or Intestate, if the decedent passed without the benefit of a Last Will and Testament. If physical persons hold the real estate, the same has always and will remain, viewed as real estate imposable for tax purposes, in the first instance, in the country in which the real estate is located.
On a practical basis, the same has to date meant that when Americans own real property through a "Societe Civil Immobiliere" (SCI), they were free to gift the shares of the real estate corporation to their children, spouse or other, without tax incidence in Saint Barthelemy (subject of course, only to the US Gift Tax legislation and applicable). The shares held in a corporation holding real estate are freely transferable by gift in France without the imposition of a Gift Tax in that the same has to date NOT been considered real property pursuant to the terms of the Treaty and its addendums.
Relating to the transfer of shares by inheritance when a corporation holds real estate, to date the same has also been viewed as a disposition of personal as opposed to real property in that again, the shares of the SCI have to date been viewed as personal property and hence subject to the tax regulations at death of the country of residence at the time of death, either through Will or Intestate.
The above interpretations are potentially subject to change at any moment. In fact, on December 8, 2004, there as signed by France and the United States "Protocol Amending the Convention Between the United States of America and The French Republic For the Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Estates, Inheritances and Gifts, Signed at Washington on November 4, 1978".
ARTICLE III, modifying Article 5 of the Convention, provides as follows:
Real property may be taxed by a Contracting State if such property is situated in that State
The term "real property" shall in any case include property accessory to real property.
The term "real property" shall also include shares, participations and other rights in a company or legal person the assets of which consist, directly or through one or more other companies or legal entities, at least 50% of real property situated in one of the Contracting States or of rights pertaining to such property. These shares, participations and other rights shall be deemed to be situated in the Contracting State in which the real property is situated.
In a nutshell, the above Protocol, if ratified by the two contracting States, will result in all persons holding property on the island of Saint Barthelemy being subject to inheritance taxes in France, unless the real property held in France results in less than 50% of the real property held by the SCI (the SCI holds property elsewhere in the world for more than 50%).
If in fact viewed as real estate as opposed to shares for gift and inheritance tax purposes, the applicable tax law would be that of the country in which the real estate is located as opposed to that of the residence of the shareholders. Essentially, a very important distinction has been made between the nature of corporate shares as personal property, disposed of pursuant to intervivos gift or by death, be it intestate or with a Final Will and Testament, and the view of corporate shares holding real estate considered real property.
If in fact ratified, the effect will be that the first country of Taxation for American residents holding real estate through an SCI will be France in the event of a Gift or Inheritance, with the appropriate credits applied thereafter in the United States, the country of residents.
It is important to note that other advantages associated with an SCI, in particular the partially limited liability of the shareholders and the ability to gift, bequeath and devise the corporate shares without regard to forced heirship provisions of French law do not appear modified at this time. The incidence is that as to Gift and Inheritance Taxes, the ownership of non-residents through an SCI of real estate in St. Barthelemy may in the future be treated as if held in one's personal name- that is subject to the laws of the country in which the corporate real estate, if greater than 50% of worldwide holdings, is situated. At the time of the submission of this Article, the same is not as yet applicable.
Although this Article examines the potential impact of ownership through an SCI of real estate in Saint Barthelemy by United States residents, it does not examine other portions of the Treaty and in particular the provisions and implications of the ownership of real property in the United States of French residents.
If the Treaty is ratified, an in depth analysis will be the subject of a future article.
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