Editor's note: Below is recent commentary by international law firm Baker & McKenzie on international tax issues as contained in that organisation's Private Banking Newsletter for March. This article is published with permission.

Retroactive accentuation of the taxable basis on the French wealth tax for French residents of Monaco.

(Commercial Chamber of the Cour de Cassation, October 26, 2010, n°09-15044)

The addendum to the French-Monegasque Tax Treaty of May 25, 2003, which was published in the Official Legal Gazette of September 1, 2005, provides an exception to the French domestic law general principle according to which individuals who qualify as non-French tax resident are subject to wealth tax on their assets located in France. Indeed, pursuant to this addendum, as from January 1, 2002, all French nationals having transferred their domicile or their residence to Monaco as from January 1, 1989 are retroactively subject to wealth tax under the same conditions as those applicable to French tax residents.

In a Cour de Cassation, commercial chamber decision of October 26, 2010, the application of this addendum on a retroactive basis was upheld considering that it does not cause discrimination and is justified for reasons of general interest in the fight against tax evasion.

In the case at hand, the claimant, a French resident of Monaco, had taken the initiative to pay the wealth tax on the entirety of personal assets located in France and abroad for the years 2002 to 2005 in anticipation of this addendum becoming effective following recommendation of the tax authorities.

Subsequently, the taxpayer claimed for a reimbursement of wealth tax on the ground that the addendum was of retroactive application and discriminatory. The claimant argued notably that its application represented a violation of taxpayers’ equality insofar as French nationals residing in Monaco were not treated as well as French nationals residing in other countries.

The court rejected these arguments indicating that:

- The addendum does not create discrimination since French nationals in the same situation, i.e. that of resident of Monaco, are treated the same.

- It takes into account the special circumstances of Monaco vis-à-vis France (a French national living in Monaco is always located just a few hundred meters from the French territory) and is justified in the general interest of the fight against tax evasion.

- The implementation of this addendum has respected a just balance between the requirements of the general interest and the imperatives of the protection of taxpayers’ rights because the signing of the clause had been announced publicly and taxpayers had been encouraged to file wealth tax forms in due time. Moreover, no fines were applied for the period 2002-2005.

This solution is in line with income tax rules that already apply to French residents living in Monaco.

The court, moreover, did not have to reply to the argument according to which the international tax treaty could not create an additional tax and in the case at hand, the addendum would add to the provisions of French national law by establishing wealth tax liability on global assets of non-French tax resident individuals. Could the court’s solution have been different if this argument had been raised within the authorized time period?

Key Points:

- A French national, whether tax resident of France or Monaco, is liable to the wealth tax under the same conditions.

- Although the addendum to the French-Monegasque tax treaty leads to a difference in treatment between a French national who is tax resident of Monaco and a French resident who is tax resident of another country, it does not cause discrimination between French nationals who are in the same situation, i.e. tax residents of Monaco.

- The retroactive effect of the additional clause concerning wealth tax respected the balance between the requirements of the general interest and the imperative of the protection of taxpayers’ rights because the signing of the clause had been announced publicly and no fines had been applied for lapsed periods prior to entry into effect of this clause.