Franco-Swiss double taxation agreement relating to inheritance

In 2012, the Federal Council had already signed a new agreement. However, the Swiss Parliament refused to ratify it, judging its conditions as unacceptable. July 2013, no later than one year after this refusal, the Swiss Federal Council gives it another try by signing a new double taxation agreement with France relating to inheritance matters. This new agreement is already widely criticised in Switzerland and might very well meet the same fate as the former one.

Should this agreement be rejected by the Parliament once more, France could decide to terminate the 1953 agreement that is still in force. This would lead to a legal vacuum with regard to double taxation of estates between France and Switzerland.

The new agreement would bring three major changes:

a) Domicile of the heirs (estate’s beneficiaries)

According to the new agreement, heirs and legatees of a deceased person with last domicile in Switzerland would be taxed in France if they have been domiciled there for more than eight years out of the ten-year period immediately preceding the opening of the inheritance. This rule could be particularly problematic if the estate holds property in Switzerland. As of today, the inheritance of a property is only taxable in the canton where the property is located. Therefore, in case of a direct inheritance (parent to child for example), no tax is levied by Swiss tax authorities (there are only a few exceptions in some cantons, like Vaud and Neuchâtel, where a tax exemption is provided for the first CHF 50’000 to CHF 250’000 and where the tax rates lie around 3%). By contrast, the French tax system has a progressive tax scale that can reach 45% of the value of the property that is inherited in direct line. If the estate’s transmission is not taxed in Switzerland, no tax deduction can be claimed on the amount of the tax levied by France. Therefore, should the new agreement be adopted, the transmission of property located in Switzerland to the issue of the deceased might be taxed up to 45% of the property’s value, instead of the tax-free solution currently in force. The heirs could therefore be compelled to sell the property in order to pay for the inheritance tax. Finally, please note that the taxation of property located in another state is contrary to the OCDE-model on double tax treaties relating to inheritance.

b) Companies holding real estate

The new agreement also places the heirs of a property and the persons inheriting shares of a company holding real estate on the same level by stating that properties held indirectly through such a company should be taxed in the state where they are located, provided that more than 50% of the company be held by the deceased or his family and that the real estate represents more than two-thirds of its assets. In such case, the shares of the company should be taxed in the state where the property is located. For example, if the deceased was domiciled in Switzerland and held a property in France through a real estate company, he will be taxed by the French tax authorities. This rule aims to fill a legal vacuum, which permitted to avoid paying inheritance tax by using a real estate company.

c) Tangible personal property

The last change brought by the new agreement relates to tangible personal property. According to its contents, the valuable items that are located in France (such as gold bullions, jewellery or gemstones) but belong to persons that are domiciled in Switzerland, should now also be taxed by France. Until now, only the furniture (tables, beds, paintings etc.) was taxable.

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The new Franco-Swiss double taxation agreement relating to inheritance is highly controversial and raises a very delicate issue. Indeed, most of the Swiss citizens with domicile abroad live in France (more than 180’000 in 2012). In Geneva, the situation could become particularly problematic because of the large numbers of Swiss citizens that have settled down in the French border area. Should the new agreement be adopted, the situation of these people could be considerably worsened if they inherit property located in Switzerland. Moreover, this agreement could become a dangerous precedent and inspire other neighbour-countries to impose such conditions. In any case, Switzerland has only signed ten double tax treaties relating to inheritance between 1951 and 1979, which means that the existence of a legal vacuum in case of termination of the agreement by France would not be an exception.

For all these reasons, it is highly probable that the Swiss Parliament will refuse to ratify this agreement or that, in case of ratification, that a referendum shall oppose its adoption.