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At first glance Belgium does not give the impression of being a tax-friendly country. The marginal tax rate in the personal income tax rises up to 54%, ranking it number 1 among OECD countries for highest tax rates on labour income. In addition the country charges a social security rate of 13% for employees and 35% for employers as well as municipal taxes of up to 11%. The basic corporate tax rate amounts to 34%.

Although the country has the highest labour tax and social security burden in the world, Belgium nevertheless remains a popular destination for (ultra) high-net-worth individuals, because of its tax advantages while being ensconced between France, Germany and the Netherlands. Belgian tax residents, selling their company shares do not incur any tax liability on their capital gains. There is no withholding or capital gains tax payable at all, nor is there such thing as a Belgian wealth tax. Besides, the taxation on the income of savings accounts is very low. Therefore, it is very feasible to become a Belgian tax resident, which is reflected by the number of wealthy Dutch and French who already discovered Belgium as a tax haven years ago. The north-east border of the Flemish region and the region north of Antwerp have known a steady influx of wealthy Dutch people, the so-called “Netherbelgians”, while the prosperous French found their way to the south of West-Flanders and Brussels.

We hereby provide you with a cross-border solution for French nationals (expats) having or moving their tax residency in/to Belgium.

Combination of a life assurance contract and a shared gift or “donation-partage”

This technique is applicable for a French expat living in (or moving to) Belgium, while at the same time having at least one heir with tax residency abroad of France, regardless if this is Belgium or another state. The only necessary condition is that the concerned state has no gift tax, that the gift tax is negligible, or that the gift tax is imposed on the donee instead of the donor.

Subscription of Branch 23 unit-linked life assurance contracts

Mr Dubois is a French national. As an ultra-high-net-worth individual (UHNWI) with over €45 million in liquid financial assets, he is planning to move his effective residence to Belgium both for inheritance tax and for wealth tax purposes, the French “l’impôt de solidarité sur la fortune” (ISF). His two daughters, however, remain French residents, while his only son is living and working in Sweden. Mr Dubois’ objective is to optimize both his income and inheritance tax regime, while his estate planning has to take into account the succession in direct line, i.e. to his children living in France and in Sweden.

At a first stage, Mr Dubois subscribes three unit-linked life assurance contracts of the type Branch 23 without any guaranteed return, i.e. as many policies as he has children. In each life assurance contract he designates himself as beneficiary and his three children as lives assured. Each policy is configured in a way that it terminates after the death of the last life assured, i.e. the last surviving child.

Configuration of each Branch 23 life assurance contract
Policyholder = Mr Dubois
Lives assured = Daughter 1, daughter 2 & son
Beneficiary = Mr Dubois
Mr Dubois uses (part of) his liquid assets for the single premium payment of each life assurance contract of the type Branch 23. This type of contract benefits from a particularly favourable tax treatment in Belgium as it is completely exempt from income tax. Benefits paid out as well as partial withdrawals or total surrenders are all exempted from the withholding tax of 25%, even during the first eight year-period of the contract. The only barrier for Branch 23 life assurance contracts is the 2% premium tax. However, this 2% premium will only be levied once on payment of the premium (normally at the time of subscribing the contract) and not every year. Once this 2% premium tax has been paid, one is exempt from the withholding tax for life, regardless of the return generated each year.

If the payment of the single premium at the time of subscribing the life assurance contract could take place before Mr Dubois established his domicile in Belgium, the premium tax of 2% can even be completely avoided.  Only top-ups later on, once Mr Dubois has become a Belgian tax resident, would be subject to the premium tax.

Gift of the life assurance contracts

In a second stage Mr Dubois does a gift in favour of his son domiciled in Sweden of the entirety of his policyholders’ rights on all three of the life assurance contracts. The following conditions will be attached to this gift:
Mr Dubois imposes a specific condition on his son. The gift is done subject to the charge of the payment of an annuity of e.g. 4% of the net asset value of the life assurance contracts.
In order to retain control over his gift during life, Mr Dubois accepts his designation as a beneficiary of all of the three policies by means of an endorsement to each life assurance contract. That way, his son can no longer freely dispose of his rights as a policyholder without consent of Mr Dubois as beneficiary. This relates for example to the rights on withdrawal or surrender, the transfer of the policyholder rights, the revocation of the designation of the beneficiary and the designation of another beneficiary (cf. Belgian Insurance Act art. 178, 181, 183, 185 etc.).
According to the above-mentioned article 184 of the Insurance Act, the transfer of the policyholders’ rights can only be carried out through endorsements to the life assurance contracts, which have to be signed by the respective policyholder/transferor (Mr Dubois), donee/transferee (the son) and life assurance company. Furthermore, an additional notarial deed is advised to avoid a (new) premium tax of 2%. By opting for a Belgian notarial deed, the donation will subject to the 3% – 3,3% flat rate gift tax in direct line (depending on the Region of the donor) and will no longer be included in the taxable base for the inheritance tax. The notarial deed can also be signed before a foreign (e.g. Dutch of Swiss) notary, in which case no gift tax will be due. In that case, however, a sudden death of the donor (Mr Dubois) within the three-year period following the gift, will imply that this gift, which has not been registered in Belgium, will be subject to the progressive rate inheritance tax of up to 27% – 30% in direct line (depending on the Region of the deceased).

Configuration of each Branch 23 life assurance contract after the gift
Policyholder = Son
Lives assured = Daughter 1, daughter 2 & son
Beneficiary = Mr Dubois

Recognition of the gift in France

In a third stage, there will be recognition in France of the foreign gift (in Belgium or another country) in the presence of a French notary.
This recognition of the gift done by Mr Dubois as a Belgian tax resident is not taxable in France.
Notary fees will be due.

Shared gift or inter vivos distribution (“donation-partage”)

In addition to the recognition of the gift, the French notary subsequently proceeds with the so-called “donation-partage”, which is in fact a shared gift or inter vivos distribution from the part of the son residing in Sweden towards the daughters residing in France. The son hereby transfers two thirds of his policyholders’ rights to his sisters in France in order to obtain an equilibrium (1/3 + 1/3 + 1/3 = 1). According to article 184 of the Insurance Act, these transfers have once again to be carried out through an endorsement to the respective life assurance contract, which has to be signed by the son, his sister and the life assurance company.
The shared gift will be taxed at 2.5% in France. The taxable base is the net asset value of the two transferred life assurance contracts.
Proportional notary fees will be due.

Configuration of each Branch 23 life assurance contract after the shared gift
Policyholder = Daughter 1/Daughter 2/Son
Lives assured =  Daughter 1, daughter 2 & son
Beneficiary = Mr Dubois

Death of Mr Dubois

Upon the death of Mr Dubois, his three children (policyholders) can once again freely exercise their policyholders’ rights on their respective life assurance contract without payment of any inheritance tax, neither in Belgium nor in France, because no life assurance benefits are paid out. The children become full owners, because the charge of the life annuity expires. To avoid any future obligation to pay inheritance tax in Belgium or in France, the children are advised to surrender their respective life assurance contracts in time, i.e. before termination of the contract at the moment of decease of the last of the three children.

Conclusions

This cross-border solution offers Branch 23 unit-linked life assurance as an effective wealth planning tool for French (ultra)-high-net-worth individuals moving to or living in Belgium.
The heirs in France (daughters) are exempt from the French wealth tax (“l’impôt de solidarité sur la fortune” or ISF).
The revenues of the Branch 23 unit-linked life assurance are tax exempt both in Belgium and in France.
No inheritance tax due in Belgium nor in France upon death of Mr Dubois or later on.
 

By Tim Goethals, Senior Wealth Planner - Weatlh Structuring Solutions

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