French Wealth Tax (IFI): What Gulf Investors Need to Know

For an investor resident in the Gulf, the French wealth tax question is almost never about the rate. It is about whether an asset sits inside or outside the French tax base, and that is decided by two layers of rules: the French code, and the treaty. France has concluded a treaty with the United Arab Emirates, with Qatar and with Kuwait, each containing a wealth article that modifies the domestic position, and the three are not identical. Reading the applicable one before reading the code is therefore not a refinement, it is the starting point.

A non-resident holding French property through a company is frequently told that the structure removes the asset from the French wealth tax base. Under all three Gulf treaties that is wrong where the company is property-rich, and right in one specific case the treaties spell out. The distinction turns on what the company does with the building.

To discuss your position: +33 1 42 84 13 13 or infos@sassi-avocats.com.

What this page covers, and what it does not

It covers the treaty position of investors resident in the UAE, Qatar and Kuwait. The French domestic rules, who is liable, the threshold, the scale, the exempt categories and the deduction of liabilities, are set out on the IFI guide for foreign investors and on understanding the French wealth tax, and are not repeated here.

Two domestic rules must nevertheless be stated, because everything else is built on them.

Non-residents are taxed on French assets only. Under article 964 of the French tax code, an individual who is not domiciled in France for tax purposes is liable to the wealth tax on French real property and on shares in companies to the extent of the fraction of their value representing such property, whereas a French-domiciled individual is liable on worldwide real estate. The whole question for a Gulf investor is therefore the definition of a French asset.

New residents already benefit from a five-year rule under domestic law, with no nationality condition. This is the point most often missed, including in treaty-focused analyses. The second paragraph of article 964, 1° provides that individuals who have not been domiciled in France for tax purposes during the five calendar years preceding the year in which they establish their French domicile are taxable only on their French assets, and that this applies for each year in which they keep their French domicile, until 31 December of the fifth year following the year in which the domicile was established.

The practical consequence is important and it cuts against a common sales pitch: a Gulf resident relocating to France is, in principle, outside the French wealth tax base for non-French real estate for five years whatever his nationality, by operation of the code alone. What the treaties add on this point is examined below, and it is less than is usually claimed.

The common architecture of the three treaties

The three wealth articles were drafted on the same model, and they share four features. Reading them in this order avoids the usual mistakes.

Real estate is taxable where it is situated, but the rule is written as a comparison. Each article provides that wealth consisting of real property situated in the other State is taxable in that other State if the value of that real property exceeds the aggregate value of the items the article then lists. This comparative mechanism has no equivalent in most French treaties, and it means that the position of a given investor cannot be settled without valuing the whole of the relevant holdings. It is the single most frequently overlooked feature of these three articles.

Shares in property-rich companies are treated as real estate, with one carve-out that matters more than the rule. Under the UAE and Qatar articles, shares, interests or other rights in a company whose assets consist of more than 50 per cent of real property situated in a State are deemed to be real property situated in that State; the Kuwait article uses the test of assets consisting principally of real property. But all three add the same exception, in almost identical words: real property which the company uses for its own industrial, commercial or agricultural business, or for the exercise of an independent profession, is not taken into account in determining that percentage.

That carve-out is the difference between a holding structure that fails and one that works. A company whose building is its own factory, hotel, warehouse or professional premises is not property-rich for treaty purposes, however large the building is on its balance sheet. A company whose building is let to third parties is.

The residual clause is exclusive to the State of residence. This is the protective part, and it is also the part the general literature gets wrong. Each article provides, subject to the preceding paragraphs, that wealth owned by a resident of one State is taxable only in that State. For anything that is not French real property and not shares in a property-rich company, France therefore has no taxing right at all, rather than a shared one.

The contrast with other French treaties is worth stating, because it explains why Gulf structuring is different. Under the France Egypt treaty, for instance, the residual clause provides that all other elements of the wealth of a resident of one State may be taxed in each State under the law of that State: taxation is shared, not exclusive. The Gulf treaties do not work that way.

A temporary exemption exists in two of the three treaties, and in both it is conditional on nationality. The conditions are strict and identical in substance, and they are set out country by country below.

United Arab Emirates: article 16 A

The wealth article of the France UAE treaty, signed on 19 July 1989, is article 16 A, inserted by the protocol of 6 December 1993. It has six paragraphs.

Paragraph 1 applies the comparative rule to real property held by an individual. Paragraph 2 deems shares in a company whose assets consist of more than 50 per cent of real property to be real property situated in that State, excluding from the percentage the property the company uses for its own business or independent profession. Paragraph 4 provides that, subject to the preceding paragraphs, wealth owned by an individual who is a resident of one State is taxable only in that State.

Three points deserve emphasis for UAE residents, and the second is an exposure rather than a protection.

• The article applies to individuals. A corporate holder is not covered by it, and its position falls to be analysed under the domestic rules and the rest of the treaty.

• Paragraph 3 creates a substantial-participation rule that has no equivalent in the Kuwait article: wealth consisting of shares, interests or rights forming part of a substantial participation in a company, other than a company covered by paragraph 2, which is a resident of one State, is taxable in that State. A substantial holding in a French company can therefore fall within the French base even where the company is not property-rich. This is the UAE-specific point to check before any French corporate investment.

• There is no five-year treaty exemption for persons becoming resident of France. A UAE resident who relocates nevertheless benefits from the domestic rule of article 964, 1°, second paragraph, described above, which is not conditional on nationality. What he does not have is a treaty-level guarantee of it, and that matters only if the domestic rule is amended.

Paragraph 5 contains a most-favoured-nation clause in favour of the Emirates. A dedicated page addresses the UAE position in more detail: IFI for UAE investors.

Qatar: article 17

The wealth article of the France Qatar treaty, signed on 4 December 1990, is article 17, in the form given to it by the protocol of 14 January 2008. It has six paragraphs, and it is the most favourable of the three.

Paragraph 1 applies the comparative rule. Paragraph 2 deems shares in companies whose assets consist of more than 50 per cent of real property to be real property, with the same carve-out for property used in the company’s own business, and adds a second exclusion that the other two treaties do not contain: shares of listed companies, and the securities of sociétés immobilières pour le commerce et l’industrie, are not treated as real property for the purposes of that paragraph, whatever the composition of their assets. A listed property company is therefore outside the deeming rule altogether.

Paragraph 4 provides that, subject to paragraphs 1 and 3, wealth owned by a resident of one State is taxable only in that State, and then sets out the temporary exemption. The relief is available to a person who is a resident of France and a citizen of Qatar without having French nationality, and it operates by excluding assets situated outside France, held on 1 January of each of the five years, from the wealth tax base for the five years following the calendar year in which the person becomes a resident of France.

Paragraph 5 adds a reactivation rule that is worth knowing: if the individual ceases to be a resident of France for a period of at least three years and then becomes a French resident again, a fresh five-year window opens from the calendar year of the return.

Three practical consequences follow, and each has caught investors out.

• The condition is citizenship of Qatar without French nationality. A dual national does not qualify, and the relief is lost by acquiring French nationality. This is why a naturalisation decision has a wealth tax dimension.

• The exemption covers assets situated outside France, so French real property remains fully within the base throughout the period. Since the domestic rule of article 964 already produces that result for a new resident, the treaty’s added value here is to make it a treaty obligation rather than a rule the French legislature can change, and to run from the calendar year of arrival on the terms the treaty fixes.

• The three-year rule of paragraph 5 means that a departure followed by a return is not neutral: it can restore a benefit that had expired, and it should be factored into the timing of a move.

A dedicated page addresses the Qatari position in more detail: IFI for Qatari investors.

Kuwait: article 16 B

The wealth article of the France Kuwait treaty, signed on 7 February 1982, is article 16 B, inserted by the protocol of 27 January 1994. It is the least discussed of the three and it contains the best technical argument.

Paragraph 1 applies the comparative rule to real property. Paragraph 2 provides that shares, interests or other rights in a company whose assets consist principally of real property situated in a State, or of rights relating to such property, are treated as real property situated in that State, excluding the property the company uses for its own industrial, commercial or agricultural business or for an independent profession. Paragraph 3 then states, in terms worth quoting because they leave no room for a shared taxing right: subject to the provisions of paragraph 1, wealth owned by a resident of one State is taxable only in that State.

There is an argument in that wording, and it is specific to Kuwait. Paragraph 3 reserves paragraph 1 only, not paragraph 2. Shares in a property-rich company, which are deemed to be real property by paragraph 2 alone, can therefore be argued to fall back within the exclusive residence rule of paragraph 3. The Qatari and Emirati clauses are drafted differently, Qatar reserving paragraphs 1 and 3 and the UAE reserving the preceding paragraphs generally. The point is arguable rather than settled, but on a Kuwaiti holding it is the first thing to raise.

Paragraph 4 provides a temporary exemption in the same shape as the Qatari one, and on the same condition: it is available to an individual who is a resident of France and a citizen of Kuwait without having French nationality, and it excludes assets situated outside France held on 1 January of each of the five years following the calendar year in which the person becomes a resident of France. The same paragraph contains the reactivation rule: a loss of French residence for at least three years followed by a return opens a fresh five-year window.

One drafting difference should be noted by advisers. Where the UAE and Qatar articles use a quantified threshold of more than 50 per cent, the Kuwait article uses the qualitative test of assets consisting principally of real property. The two tests do not necessarily produce the same answer on a mixed holding, and the Kuwaiti wording leaves more room for argument in both directions.

The clause that links the three: Qatari most-favoured-nation treatment

Paragraph 6 of article 17 of the Qatar treaty is the provision that makes these three regimes a single subject rather than three.

It provides that if, after the signature of the Convention, France grants under a treaty or protocol with a third State which is a member of the Gulf Cooperation Council a regime more favourable, as regards the provisions of that article, than the one granted to Qatar, the same favourable regime shall apply automatically under the France Qatar treaty from the date the other instrument enters into force.

Two consequences, and they are practical rather than theoretical.

For a Qatari client, the relevant text is not only article 17. Any more favourable wealth provision France concedes to another Gulf Cooperation Council member becomes available automatically, without renegotiation. A review of a Qatari position therefore has to look across the Gulf treaties, not only at the Qatari one.

And for the adviser, it means the comparison table matters. The listed-share exclusion of the Qatari paragraph 2, the Kuwaiti drafting of paragraph 3, and any future concession to another Council member interact through this clause.

What this means in practice

Four consequences, in the order in which they arise in a real file.

Direct French real property is taxable in France under all three treaties, subject to the value comparison each article sets out. No structuring removes it; what structuring affects is the computation.

Holding French property through a company depends entirely on what the company does with the building. If the property is let to third parties, the company is property-rich and the shares are deemed French real estate. If the company uses the property for its own industrial, commercial or agricultural business or for an independent profession, that property is excluded from the percentage, and under the Qatar treaty a listed company falls outside the deeming rule whatever its assets. French domestic law separately restricts the deduction of liabilities inside such structures, and a structure put in place for a wealth tax reason without an independent commercial rationale attracts attention rather than deflecting it. See French wealth tax and company-owned property.

Everything else is outside the French base, and exclusively so. Shares in operating companies, financial assets, portfolios and property outside France are not merely protected by a shared taxing right: the residual clause gives France no taxing right over them while the investor remains resident in the Gulf. The UAE substantial-participation rule of paragraph 3 is the exception to watch.

Relocation to France is less of a cliff than it is usually presented, but its timing still matters. The domestic rule of article 964 gives every new resident five years on non-French assets, regardless of nationality. The Qatar and Kuwait treaties add a treaty-level guarantee of the same result for their nationals who do not hold French nationality, plus a reactivation mechanism after three years of absence. The planning question is therefore the date of the change of residence and, for a dual national, the nationality itself, rather than the structure.

Reporting, and the audit risk

Two practical points close the subject, because they are where files actually go wrong.

A treaty position does not apply itself. The French wealth tax is self-assessed, and a non-resident who concludes that an asset falls outside the base must be able to show, if asked, the treaty provision relied on and the figures supporting the comparison the article requires, including the computation of the property percentage with the operating-asset carve-out applied. That file should be built when the position is taken, not reconstructed three years later.

Non-residents are a priority category in French wealth tax audits, and the recurring points are the valuation of French property, the deduction of liabilities within a holding structure, and the treatment of shares said not to be property-rich. See how to respond to a French tax audit and the firm’s practice in international tax and through Paris Legal Family Office.

Frequently asked questions

Does the UAE treaty prevent France from taxing my Paris apartment?

No. Article 16 A treats real property as taxable in the State where it is situated, subject to the value comparison the paragraph sets out. What the treaty does protect, and exclusively, is everything that is neither French real property nor shares in a property-rich company, with the reservation of the substantial-participation rule of paragraph 3.

I hold my French property through a company. Is it outside the base?

It depends on the use of the property. If the company lets it to third parties, the shares are deemed to be French real property. If the company uses it for its own industrial, commercial or agricultural business, or for an independent profession, that property is left out of the percentage under all three treaties. Under the Qatar treaty, listed company shares are excluded from the deeming rule whatever the composition of the assets.

I am moving to France. Do I get a five-year exemption?

Yes, in principle, and not because of your nationality: the second paragraph of article 964, 1° of the French tax code taxes a new resident on French assets only until 31 December of the fifth year following his arrival, provided he was not domiciled in France during the five preceding calendar years. The Qatar and Kuwait treaties guarantee an equivalent result at treaty level for their citizens who do not hold French nationality, and allow a fresh five-year window after at least three years of absence. The UAE treaty contains no such provision, which does not deprive a UAE resident of the domestic rule.

I hold both Gulf and French nationality. Does that change anything?

It removes the treaty exemptions under the Qatar and Kuwait treaties, both of which require citizenship of the Gulf State without French nationality. It does not remove the domestic rule of article 964, which has no nationality condition. The difference is the level at which the protection sits.

Are my shares in a Gulf operating company within the French base?

No, while you remain resident in the Gulf. The residual clause of each of the three articles provides that wealth other than that dealt with in the preceding paragraphs is taxable only in the State of residence, which excludes a French taxing right rather than merely limiting it.

Is the position the same under every French treaty?

No, and this is why the treaty must be read rather than assumed. Some French treaties contain a residual clause under which other elements of wealth may be taxed in each State under its own law, which is shared taxation. The three Gulf treaties attribute taxation exclusively to the State of residence, and the Qatari article adds a most-favoured-nation clause that imports any better treatment France grants to another Gulf Cooperation Council member.

Reviewing a Gulf holding before it is questioned

The firm reads the applicable treaty against the actual holding structure, computes the property percentage with the operating-asset carve-out applied, documents the comparison each wealth article requires, advises on the timing of a change of residence, and defends non-resident clients in French wealth tax audits.

Sassi Société d’Avocats

Me Sassi, French tax lawyer

32 avenue Carnot, 75017 Paris, France

Telephone: +33 1 42 84 13 13

E-mail: infos@sassi-avocats.com

More than 30 years of experience in French and international taxation, tax audits and financial criminal law. The firm acts for clients across France, in the French overseas territories and abroad.