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Case Study 5: Using a Real Estate Offshore Company in Property Investment

Let’s take the example of the Canadian citizen Mr. Jason. He has always loved France and especially its capital Paris. He plans to buy an apartment in a lovely neighborhood in Paris. However, taking into account the cost of the apartment and especially the little time he will stay there, Mr. Jason would wish to rent it.

In this practical case, the mission is to study and evaluate the tax effect on this operation. Indeed, in case of inheritance and resale of the apartment, Mr. Jason would pay the least amount of inheritance taxes and / or taxes on the capital gains. He also wonders about the tax payable on the rental income since rental income is usually taxable in the jurisdiction where the property is located.

Possible solution for optimizing the tax payable on rental income:

The individual owner of real estate either a French resident or not, will be charged with French taxes on the rental income of the Parisian apartment. The tax rate can go up to 49.58 %.

Upon the resale of the apartment, the registered capital gain is taxable. According to the tax system of France, real estate capital gains will be subject to tax if it is not a question of a primary residence. Such is the case of Mr. Jason. In order for the capital gains to be exempt from tax, the apartment must be purchased through a Luxembourg real estate company.

In fact, France and the Grand Duchy of Luxembourg have signed a double tax agreement. With this agreement, the capital gains generated by the sale of the apartment will be exempt from tax in France. Moreover, the taxation of rental income in France will become 34 1/3.

Additional protection of the real estate using a trust:

In case of inheritance, if the property is held directly or indirectly by a trust, it will be exempt from inheritance tax. The terms of the trust should, however, be well set. It must be irrevocable and discretionary at all costs. In addition, residents of France should be excluded from the beneficiary of the trust.

Nevertheless, the dividends paid by a Luxembourg company to a trust do not allow to benefit from a significant tax advantage. Dividends are subject to tax of up to 25% in the tax system of Luxembourg. To avoid this tax on dividends, it is highly recommended that the Luxembourg company is run by an offshore company.

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