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St Barth, French West Indies Law Firm

30/03/2007

Taxation In The Future Territorial Authority (download click on image) (Collectivite Territoriale) Of Saint Barthelemy

Future Tax

Article LO 6214-4. - I. of the institutional act resulting from the official and unofficial negotiations leaves very little room for adjusting the tax treaty to be concluded (which has already been drafted according to the latest news from the Ministry of Finance) since it provides that the said treaty may only "specify" that this article has been introduced.

Our experience leads us to believe that negotiations always result from a more or less visible balance of power.

To be specific, the treaty of 1877, which acted as a shield, has been completely neglected by the act and it is no longer very easy to see what it is still possible to "negotiate" to lead to adjustments aimed at softening some major consequences for the island's economy (sudden increase in manpower costs, reduction in the value of companies, loss of real estate customers, etc.) and its inhabitants (tax insecurity relating to the past, risk of loss of status in the case of temporary relocation, etc.).

We assume the following premises as being established since they were confirmed by the draft tax treaty and recent declarations by the elected representatives of Saint Barth during the conference of the Economic Liaison Committee on 3 March 2007:

- All non-island source income will be liable for State taxes.

- There are no plans for a tax amnesty or moratorium.

In our opinion, the projected tax result of the change to the new status is as follows:

1. Situation for residents of Saint Barthélemy who satisfy the five-year residency requirement (on top of the year of the move) on 1 January of the tax year:

Residents who satisfy the five-year residency requirement on the island on 1 January of the tax year will be liable for tax levied by the territorial authority but this exemption will only apply to their island-source income and capital.

All other metropolitan France or foreign-source income and capital will be liable for taxation in metropolitan France.

They must consequently provide proof and declare said income and provide answers in the event of a tax audit by the State tax authorities.

They will furthermore be liable for supplementary social security contributions such as CSG and CRDS (for which the combined total rate amounts to 11%) on all island and extra-island source income.

With regards to losing the status as resident, the draft tax treaty issued in October 2006 does not provide for any specific regime for time spent outside of Saint Barthélemy by students in the course of their studies.

Therefore, tax resident status of Saint Barthélemy will be lost if more than 183 days are spent abroad or in metropolitan France during a year or in the event of a similar change with regard to the effective head office of their economic activities.

Each person must be able to provide proof at any time that he complies with Saint Barthélemy's residency requirements to benefit from the island's tax regime.

We point out that the residency requirements in France for tax purposes are as follows:
- More than 183 days spent in France in a year and in any event the principal place of abode in France,
- Professional activity (except where it is ancillary), and
- Predominant centre of economic interest

France considers that you are a French tax resident as soon as you satisfy one of the three requirements.

The number of tax residents should consequently drop over time since it is presently difficult to spend one's whole life in Saint Barthélemy without being tempted to spend some time elsewhere for professional or other reasons.

Once a person loses resident status, it will be practically impossible to recover it since it is unanimously recognised that it is impossible to meet the cost of living in Saint Barthélemy and the taxation based on the scales in force in metropolitan France.

In the absence of an amnesty or moratorium for the past situation, proceedings currently launched by the tax authorities will be continued.

Proceedings may consequently be brought against all residents without distinction with regard to the period of residency to collect French taxes considered to be owed on the effective date of the tax treaty, i.e., four years in arrears for income tax (ten years in the event of failure to declare income) and ten years in arrears for wealth tax.

Tax penalties are fixed at 80% or 40% and late payment interest was formally set at 0.75% per month (currently 0.40%).

Indeed, the tax authorities have never recognised the terms of the handover treaty of 10 August 1877. They are consequently obliged to collect all taxes owed up until the effective date of the tax treaty (this date may however be discussed so that all income from 2007 is concerned by its entry into force).

2. Persons born in Saint Barthélemy but who live outside of Saint Barth will be liable for all taxes in metropolitan France on their island-source income and capital as though they had no specific relationship with Saint Barthélemy.

3. Situation for French persons established in Saint Barthélemy for less than five years (on top of the year of the move) on 1 January of the taxable year:

As an exception to the General Tax Code relating to French Overseas Territories, they will be liable for all taxes in metropolitan France and the tax scales applying in metropolitan France (instead of the significantly preferential scales applying overseas).

4. Situation for persons whose second home is in Saint Barth:

Persons whose second home is located in Saint Barthélemy will probably pay taxes in France as if the territorial authority did not exist.

For these persons to be considered as non-residents under the institutional act, the territorial authority of Saint Barthélemy will be transparent for tax purposes.

The text of the act states: "Individuals or legal entities failing to satisfy the residency requirements laid down in the preceding two paragraphs are considered as domiciled in metropolitan France for tax purposes".

Therefore, owners of property and residents, "non-residents" for tax purposes under the law, will be liable for French taxes as though they lived or if their property was located in metropolitan France.

This text provides that it may only be departed from in the scope of the tax treaty and the tax treaty may only specify the provisions. To our opinion, the interpretation of this text by the tax treaty could not exempt from taxes second home owners.

As regards principles, we reaffirm that the inequality in relation to public contributions resulting from the new status, for which the tax economics have now been clearly announced, is shocking and anti-constitutional.

This discrimination cannot be justified without calling into question the principle of equality, which forms the foundation of our Republic.

Copyright: Emmanuel Jacques

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Emmanuel Jacques Almosnino Practice Areas

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