How to Use the New Texts about Inheritance to Make Your Will
By Florian Vila and Prof Robert Anthony, Anthony & Cie
Our experience shows that international inheritance can be complex and diffcult to honour. In addition, in some cases where testaments are filed in different countries and depend on different laws, several readings of the deceased’s testamental wishes can be made. Situations can leave the door wide open to conflicts between heirs and may also create confusion on the application of inheritance tax. In this case, which law will prevail?
It is extremely important to plan your inheritance with great care to ensure it will be respected, to avoid leaving a minefield behind and a double taxation of the inherited assets.
In this case, a taxpayer may be taxed twice for the same taxable matter by two different states. This could be three times, given the dizzy acceleration of globalisation.
International inheritance takes place when a foreign element in an inheritance exists, i.e.:
- When a person dies in a country where he is neither a citizen nor a permanent resident.
- When the deceased owns movable and/or immovable property in a country where they are not a citizen or a resident.
- When the heirs of the deceased are foreigners or reside in another country than the deceased.
In the case of an international inheritance, it is important to distinguish two aspects:
- The legal aspect determines who the heirs are and what their rights are.
- The tax aspect determines where the inheritance will be taxed.
Let’s take a practical case within the European Community
Mr Noluck is English but has been living in France for the last three years. His main residence is in France and he owns three additional apartments: one in France and two in the United Kingdom. Mr. Noluck dies on French soil. His family, his named heirs, want to know how to proceed with his inheritance.
Step 1: Dealing with the legal aspect
The European Regulation has introduced a single law on inheritance: in general, the law applicable to inheritance is the law of the deceased’s main residence at the time of death. However, it is possible to choose when writing a will to apply the law of the country of citizenship.
In this case, there are two possibilities:
- Mr Noluck did not make a will. Consequently, French civil law applies in the context of his inheritance.
- Mr Noluck made a will before his death, requesting that the law of his country of citizenship applies to his inheritance. In this case, the British inheritance law applies.
This can have a significant impact on the evolution of the inheritance. For example, under French law, the testator does not have the right to deprive his children of what is called the “hereditary reserve”. This rule does not exist in British law; the person making the testament has complete freedom to transfer his assets.
Step 2: Understanding the tax aspect
Once the legal matter has been clarified, the tax aspect must be addressed to understand which country will require the heirs to pay tax on the inheritance.
Once again, there are two possibilities:
- A tax treaty specific to inheritance matters is established between the countries involved in the inheritance: the treaty will require the tax due to be split between the two countries.
In our case, a Franco-British treaty is in force, Article 6 of which states that France will grant a tax credit equal to the tax levied in the United Kingdom on the English property in order to avoid double taxation on the same taxable asset.
- Absence of a tax treaty between countries: In the absence of a treaty, the assets will always be taxable, if taxed, in the country where they are held. In addition, it will be necessary to investigate with country of residence of the deceased to know if the assets should also be taxed in the country of residence. In this case, a double taxation will apply on the same taxable matter.
To summarise, Mr Noluck, who died in France, depends on the French legislation unless he has made a will requesting that the law of his country of citizenship applies. With regards to the tax aspect, the Franco- British treaty eliminates double taxation by means of a tax credit.
In the case of Mr Noluck, the solution was relatively simple. It is an international estate between two European countries which have entered into a tax treaty dealing with inheritance aspects. For some other countries, international inheritance can turn out to be thorny.
If France is one of the countries with the most bilateral tax treaties in the world (120), only about forty deal with an inheritance; the rest of them do not apply at all in the context of an international inheritance.
Some agreements between countries can facilitate the inheritance process. In this case, I would like to draw your attention in the convention established between France and Monaco, which is particularly convenient for inheritance. This agreement allows Monegasque residents, in certain cases, to benefit from very advantageous tax reductions concerning the taxation on their French properties – but only if you know how it works.
So, Monegasque residents, French expatriates, French residents without French citizenship or any person owning property in France, make sure you are informed about your situation in order to protect yourself from any unpleasant surprises.
Florian VilaAnthony & Cie, Sophia Antipolis, France
T: +33 4 93 65 32 23
Published: GGI Insider, No. 102, July 2019 l Photo: Uwe Rieder