What if Dubai changed your estate planning? In recent years, property in Dubai has become a means of diversifying wealth for many French people, particularly with international mobility in mind.
However, when it comes to succession, the fact that assets are located abroad is not decisive. Where a deceased person had his or her tax domicile in France, gift and inheritance duties apply, in principle, to all the worldwide assets transferred, whether located in France or abroad. An estate comprising substantial assets may therefore, depending on the degree of kinship and the taxable value, give rise to particularly high taxation, with the scale reaching a marginal rate of 45% between parents and children.
Certain tax treaties are, however, an exception, allocating the right to tax real property exclusively to the state in which it is located, making it possible to reposition part of one’s property portfolio outside the scope of French duties while remaining domiciled in France for tax purposes.
While holding property in Dubai may result in no inheritance tax being payable in France, such an approach requires rigorous legal and tax planning. Bruzzo Dubucq assists taxpayers who are relocating or organising their interests between France and the United Arab Emirates in analysing and securing these arrangements.
I. The France-United Arab Emirates tax treaty
The principle: real property is taxable only in the state in which it is located
The France-United Arab Emirates tax treaty lays down a simple rule, which departs from the usual approach of worldwide inheritance taxation for French residents. As regards real property, the treaty expressly provides that real property is subject to inheritance tax ONLY in the state in which it is located1.
In other words, under the treaty, a property located in Dubai falls within the taxing power of the United Arab Emirates.
To date, Emirati tax law has no inheritance tax or similar levy. In practice, death therefore does not give rise locally to any charge comparable to French gift and inheritance duties.
The consequence in France: exemption with application of an average rate mechanism
Where assets in the estate of a French resident are taxable in the United Arab Emirates (and therefore untaxed) under the treaty, they are exempt from the French taxes covered by the treaty.
However, the treaty2 states that France retains in this case the right to calculate the tax on the other assets taxable in France by applying an average rate, determined by taking into account all the assets that French domestic law would allow it to tax.
Point to watch: holding through a company
The treaty distinguishes between real property (allocated to the state in which it is located) and tangible or intangible movable property, including shares and deposits, which, save for exceptions, are taxable in the state of residence of the deceased.
Thus, if the property in Dubai is held through a company, the asset transferred is no longer, legally, the property itself, but the shares in the company, that is, intangible movable property. The transfer then falls back under the ordinary treaty rule: taxation in the state of residence of the deceased, and therefore in France if the deceased was a French tax resident.
French residents wishing to optimise inheritance tax on their estate will therefore generally favour holding property in their own name.
II. Refinancing French property to invest abroad without giving up ownership
Where one owns a substantial property portfolio in France, a property OBO (selling to oneself) can make it possible to pass French property on to the next generation while releasing cash that may escape inheritance tax if invested abroad.
How an OBO works: selling to a debt-financed acquisition vehicle
An Owner Buy-Out (OBO) involves selling a property asset to an acquisition vehicle (often a newly incorporated company), which finances the purchase through a mix of bank debt and an equity contribution.
In other words, the transaction does not create wealth. It changes the form of the assets: part of the value of the property is converted into cash, in return for debt.
From an estate planning perspective, there are therefore two aims.
First, refinancing the French property makes it possible to bring the next generation into the acquisition company without paying gift tax, since the net value of the new company is nil given the debt: the French property is passed on while remaining within the family, with parent-child governance rules set out in the company’s articles of association.
Second, the proceeds released by the OBO can be used to acquire a property located in the United Arab Emirates, preferably held directly. In this configuration, part of the estate may, subject to conditions, fall outside the French inheritance tax base, while a property portfolio is retained in France.
The limited partnership (SCS) as a tool for refinancing French property
Where the French property portfolio is substantial, a property-by-property approach sometimes reaches its limits, particularly in terms of governance, raising debt and organising control.
In this context, a limited partnership (société en commandite simple, SCS) can be a suitable vehicle: it allows management power (general partner) to be separated from capital contribution (limited partners), which facilitates certain wealth structures and certain financing arrangements. In practice, it can be used to structure an overall refinancing while governing the transfer of control.
Moreover, the SCS is the only legal vehicle under French law that naturally benefits from tax hybridity: the share of the general partners is subject to income tax (IR) and that of the limited partners to corporation tax (IS), which can make it possible to optimise the taxation of rental income (IS) and of resale (IR).
Subject to certain rules, the debt taken on by the company may be deductible for the partners’ real estate wealth tax (IFI), which also makes it possible to reduce real estate wealth tax in France.
In other words, selling one’s property assets to a family limited partnership makes it possible to turn one’s assets into cash while bringing the next generation into the estate and optimising the taxation of rental income and of any eventual resale3.
III. The impact of Sharia on the transfer of property in Dubai
The tax analysis set out above does not settle the civil law question of who inherits property held in Dubai on death.
Where the deceased was habitually resident in France, the civil law applicable to the succession is, in principle, French law, including for assets located abroad.
But for a property located in Dubai, Emirati law may prevail. It is in this context that, depending on the status of the deceased and the absence of arrangements enforceable locally, a risk may re-emerge of local rules, and potentially Sharia, being applied.
Sharia may exclude certain heirs from the succession to a property in the United Arab Emirates, but its application can be avoided by a will recognised locally.
Property located in Dubai may, under certain conditions, reduce an estate’s exposure to French transfer duties, since the France-UAE treaty allocates the taxation of real property to the state in which it is located.
To make the most of the mechanism without giving up French property, a refinancing strategy (an OBO and, for certain estates, structuring through an SCS) can make it possible to release cash and reallocate it to a property asset in the Emirates, exempt from inheritance tax in France.
Finally, the tax advantage is only of value if the transfer is secure under civil law: a will recognised locally remains the key tool for limiting uncertainty over the devolution and administration of the estate in Dubai.
Bruzzo Dubucq assists individuals who are relocating or whose wealth is split between France and the United Arab Emirates, in order to secure their choice of residence, the structuring of their investments and the transfer of their estate, anticipating both the tax consequences and the applicable civil law constraints.
- Article 17 of the Convention between the Government of the French Republic and the Government of the State of the United Arab Emirates for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income, inheritance and wealth, signed on 19 July 1989, in force since 1 July 1990, as amended by the Amendment of 6 December 1993. ↩︎
- Article 19 of the Convention between the Government of the French Republic and the Government of the State of the United Arab Emirates for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income, inheritance and wealth, signed on 19 July 1989, in force since 1 July 1990, as amended by the Amendment of 6 December 1993. ↩︎
- For a detailed presentation of the use of the SCS for refinancing and wealth structuring purposes: https://bruzzodubucq.com/commandite/ ↩︎
