March 2011

Let's do it the other way

 

 

One piece of advice that all foreigners get almost as soon as they get off the plane is that "No" is the natural answer in France. This rightfully gives the impression that nothing can be done in France that is outside the bounds of very strict norms. So one must learn the famous, or infamous, Système D, with D standing for débrouille (from se débrouiller, to get by or manage on one's own - in other words "fix it yourself"). "Système D" can mean finding an ingenious legal way out of a deadlock, or bending the rules enough to get what you want while minimizing the risks, or both. Système D relies on the existence of gray areas that feel like quicksand to foreigners but navigating them is indispensable if you want to not just live but also flourish in France.

There is something of a parallel between Système D and a saying I heard all the time in the USA: "Where there's a will, there's a way." Although the two are not based on the same moral value, a similar result is obtained.

I always advise foreigners to avoid using Système D,, since too often the methods involved are in effect illegal and carry unnecessary risks. Instead, I advise them to find a way to adapt the American saying to France: For starters, never be discouraged by a negative answer, no matter how definitive it sounds. Foreigners need to use alternative ways to get things done; they must find the innovative solution that avoids illegality as much as possible while keeping themselves feeling comfortable and therefore safe.

 

 

ABOUT MARRIAGE ISSUES IN THE PREVIOUS COLUMN
I received two very different comments about my last column.

After I mentioned the existence of common law marriage in some US states, I was told that in Oklahoma there is no minimum amount of time that a couple must live together to establish a common law marriage.

A reader wrote: "Not all states in the United States use a set amount of time to establish a common law marriage. In Oklahoma, where I worked as a social worker/supervisor, if the couple, hold themselves out at any point, to the public as husband and wife, that constitutes a common law marriage. This can be as simple as signing into a hotel as Mr. & Mrs. ... or purchasing something jointly and saying they are husband and wife on the contract (such as a mortgage), or even simply stating to friends and relatives they consider themselves to be married."

I found this extremely interesting. First of all, I think it may reflect the fact that Oklahoma remained a territory long after most other Western land had become states. In those days, it was often difficult to find a judge or minister to celebrate a wedding. Also, life could be quite dangerous: once a romantic relationship was established, there was no telling how long it might be before "death do us part." I can easily see how such a provision might be abused today, however. I would also assume that the courts discriminate between a one-night stand and a true common law marriage with some stability.

I also wrote last time about the right of parents to block their adult children's wedding in France. I received this response from a scholar researching the life of the French painter Camille Pissarro:
"Loved your latest newsletter! You gave me important information on the rights of parents to oppose their children's weddings. 'Article 173 of the French Civil Code, which gives parents the right to oppose a wedding. The provision may have been pertinent when it was introduced in 1803.' This insight is important because Pissarro's mother (father was dead) opposed his marriage to a "maid" even though they had been together for ten years and had two children. She was a mean-tempered woman and given to irrational emotionalism, but I didn't realize before reading your column that she had a legal right to oppose the wedding. She told her son to go to London (during the Franco-Prussian war in 1871) and wed without her permission. They did this, but she never accepted Pissarro's wife, who could be a bit difficult herself."

 

 

FISCAL STATUS FOR SMALL BUSINESS OWNERS
The type of status a small business owner should choose has always been a complex issue, since there are at least ten possibilities and the differences between them are often so small that people may not realize when their status has changed. I will review most of them, focusing on those applying to self-employed professionals.

To make the situation easier to understand, I would like to introduce the different types of status in an orderly fashion.

PERSONNE PHYSIQUE vs. PERSONNE MORALE
I would like to first explain the meaning of those two terms.
A personne physique is simply a human being.

A personne morale is an incorporated entity that exists because at least two people have agreed to create something that is bigger than the sum of the two individuals. For example a S.A.R.L. (société à responsabilité limitée) must have a minimum of two partners, a S.A. (Société Anonyme), a minimum of seven. A personne morale can be a corporation, a foundation, and a union. In France, it is defined as a legal person in exactly the same way a human being is. (Similar doctrines exist in virtually all Western countries.) Both involve the following:

  • 1 – A date of creation, quickly recorded with the state, in order to grant this new entity its right to exist. In the case of a legal entity, its creation (incorporation) dates from the signature of the by-laws by all the parties.
  • 2 – A name, given at creation (and rarely if ever changed) by the founding members.
  • 3 – An address - a domicile or headquarters, where an entity's business is primarily conducted at any given time and which for this reason must be protected. Like the name, the domicile cannot be changed except by an extraordinary general meeting.
  • 4 – The ability to express its will. An incorporated entity does this through key people such as the C.E.O., members of the board and shareholders. These matters must be regulated by the by-laws.
  • 5 – A patrimoine* - a legal concept that includes all assets acquired and liabilities incurred in the lifetime of the individual or entity. A human being can have right of ownership in an entity only through shares. This is why the incorporation of a sole person as a business (entreprise unipersonnelle à responsabilité limitée or E.U.R.L.) has been legally possible, is so recent and still has a bad rather reputation.
  • 6 – A limited life span. The by-laws define how long an entity will exist (maximum 99 years). An extraordinary general meeting can vote to allow the corporation to continue for another term of 99 years and it can be done as often as needed.

The vast majority of very small corporations bear the same name as their founders, often making it difficult for the people involved to separate the interests of the corporation from their own private interests. This is the case of my father Mr. Taquet, and his company Taquet menuiserie S.A.R.L., which is a century-old carpentry shop on the outskirts of the Parisian suburb.

* patrimoine* is defined by the ability to own and to owe during a lifetime. At any given time, the financial net worth of anybody can be calculated by adding the value of the assets and subtracting from this sum the total value of the debts. This financial evaluation does not take into account the value of the person or entity's future potential, which is linked to the life expectancy of the legal person, whether it is a personne physique or morale.

THE THREE CATEGORIES OF PROFESSIONAL INCOME TAX (tax on profit)

Impôt société (I.S.)
This is applicable only for corporations that are not fiscally transparent; that is, these corporations, which bears the income tax at its level. It can distribute dividends after this income tax, if any, is paid.

Bénéfices industriels et commerciaux (B.I.C.)
This applies to individuals who are engaged in business activities. The code de commerce defines which activities are commercial by nature. It also applies to the managers of the companies that are fiscally transparent. This method of taxation can create some confusion over the fact that there is a corporation and no corporate taxation. Indeed the profit made by the company goes directly in the individual taxed income, and gets mingled with the other type of incomes this person has.

Bénéfices non commerciaux (B.N.C.)
This is for individuals who are professionals in their field and make money selling their expertise.

THE FOUR FORMS OF TAX STATUS FOR INDIVIDUAL PROFESSIONALS AND BUSINESSES
  • 1 – AUTO-ENTREPRENEUR - This new status covers the activities of professionals (profession libérale), trade people (commerçant) and craftspeople (artisan). For professionals, annual revenue must be no more than 32,000€ with net income fixed at 65% of total revenue and business expenses at 35%. For commerçants, annual sales must be no more than 80,000€ and the net income is 29% of the total amount of sales, with the business expenses at 71%.
  • 2 – MICRO BNC - (profession libérale), BIC - (commerçant). These are subject to exactly the same rules as auto-entrepreneurs, with the same limits. The essential difference is that the micro BNC is exclusively for professionals and BIC for trades people, whereas Auto-Entrepreneur deals with the three different statuses.
  • 3 – REEL SIMPLIFIE - (profession libérale). This status has to be declared by those making over 32,000€ and up to 230,000€ HT; the equivalent in the BIC status (commerçant) is up to 763,000€ HT.
  • 4 – REEL NORMAL - (profession libérale). The status of those making more than 230,000€ HT, or, for the BIC (commerçant), above 763,000€ HT.

The last two categories start to be quite complex. Just keep in mind that you are paying VAT by then and you have to submit a year-end declaration showing in detail your sales and other incoming funds and your professional expenses; you are taxed on the exact amount of profit made. A specialist in this field can explain further.

LA REQUALIFICATION - THE FRENCH WEAPON AGAINST LOOPHOLES
It seems quite common in the U.S.A. for well-informed people to seek out loopholes, which allow them to avoid paying certain taxes. In fact, some Americans continue this quest even while living in France, unaware that loopholes are strictly limited under the French legal system.

La requalification des faits, which has no translation in English, is the right for any French inspector to address the individual's situation according to what he sees and understands of the situation, while rejecting some or all the legal documents served to him and using the other ones to strengthen his analysis if the case may be.

A loophole occurs when the intent of the law is violated through strict application of the letter of the law. This often happens when more than one law applies to a situation, creating a conflict of law; it is the conflict that generates the loophole. Countries resolve such conflicts in different ways. Common law countries tend to comply with the letter of the law, eventually passing a new one to close the loophole. Civil law countries tend to favor the intent of the law, and therefore override the letter of the law.

The French legal system has always harshly restricted loopholes, reducing them to an absolute minimum. For example, to make the system more efficient, article L64 of the Code Général des Impôts lists all the types of situations in which the right to take advantage of a loophole is denied. A ruling by the Conseil d'Etat on September 27th, 2006, made it nearly impossible to find any significant loopholes. The Council had already confirmed the existence of the "requalification" concept even with the provision of L64, stating "Si la situation n'est pas prévue par l'article L64, l'abus de droit peut toujours exister selon le critère suivant, si le montage a pour but unique d'atténuer l'imposition ou s'il possède un caractère totalement fictive." That is, even if a situation is not specified in L64, abuse of the law still exists if the only goal of a given set-up is to lower tax burden or if the set-up is fictitious.

Another illustration of the application of this legal concept deals with auto-entrepreneur status. French employees are very well protected by law. Therefore it is often a temptation for unscrupulous employers to find ways to hire people without making them officially employees. The new status made people less afraid of all that was involved in becoming self-employed, and so it has become a lot easier to convince people to work this way.

This kind of arrangement, however, is completely illegal, even if both parties are totally happy with it. In France, the key legal element defining employee status is the lien de subordination - the relationship of authority between the person who decides what to do and the person who does it - even if this obedience relationship is more a legal concept than a daily reality on the job.

What has happened to some of my clients is that someone, most often an URSSAF inspector, audits the individual and the company to find out if the relationship is truly an equal one and therefore the self-employed status is valid, or if the auto-entrepreneur is actually a subordinate and therefore should be an employee.

One could write a book about unequal relationships in business. Among many others, multinationals can squeeze their subcontractors when most of the subcontractor's business comes from one client.

If you are an English teacher with this fiscal status, teaching for a school or schools, you should be extremely careful, since what you are doing there should be done by an employee. You will be subject to requalification if you or one of the schools is audited.

 

Best regards,

 

Jean TaquetJean

 

Q & A

HOLDING A CARTE DE RESIDENT AFTER FIVE YEARS IN FRANCE

QUESTION
My husband is 62 and I am 68. We are both American, and have been living full time in France for almost six years, each holding a carte de séjour visiteur. We are retired and sold our house in the USA, having decided to live the rest of our lives in France. When we applied for the initial immigration visa at the French Consulate in Los Angeles, they said that we would receive a carte de résident after living five years in France, and they indicated that it was a fairly automatic process. Also, each year when we have gone to the préfecture, they have said that we were getting closer and closer to receiving a carte de résident. Last year when we tried to apply, we were told by our préfecture that they were no longer granting this card and that we would have to renew our carte de séjour visiteur every year from now on for the rest of our lives.

We would like to get a carte de résident because, even though we are retired, we are in the performing arts and people ask us from time to time to do workshops and performances. However, we are not allowed to work with our current carte de séjour. Also, we feel a bit insecure living here since it is renewable on a yearly basis and it is hard to feel really settled here. We have to wonder every year when we try and renew our carte whether it will be renewed or not.

A French friend called the bureau des étrangers in another préfecture, and they said that they were giving cartes de résident there. Is it true that each préfecture can use its discretion to either grant or refuse the carte de résident? Is this something that might change with time or should we be resigned to never receiving a carte de résident?

ANSWER
Your question is very legitimate and it addresses an issue that a lot of people are facing. The conclusion you have reached implies that there is no unified policy. The matter is, of course, a lot more complex than that.

Cartes de résident are issued daily by all préfectures in France, so NO, contrary to what you say your préfecture told you, there is no blocking of their issuance. However, YES, the conditions of issuance have been severely reduced. YES, there is an element of interpretation, which may create the impression that there is no unified policy. NO, you should not resign yourselves to never having the card and never working as an artist.

On November 26th 2003, a law initiated by Mr. Sarkozy as minister of interior at the time dramatically changed the condition of issuance of the carte de résident. The previous regulation was much easier to work with: after five years one had the right to ask and the préfecture had the right to refuse; after ten years, one had the right to demand and the préfecture did not have the right to refuse, unless the applicant had hold a student carte de séjour.

The rules were plain, and the préfecture had the right to handpick for five years. A carte de séjour salarié or vie privée holder would stand a good chance of being upgraded after five years, but just about everyone else waited ten years. There were exceptions, but people knew that and tried anyway, knowing that they had a very low chance of success.

Today, there is no more automatic issuance after ten years, so everybody is looking at the five-year point. Some other requirements have been added:

  • 1 – fluency in French,
  • 2 – living in your own home (no subletting or being hosted by someone),
  • 3 – having an income exceeding minimum wage (11,000€ yearly net salary),
  • 4 – being a French fiscal resident,
  • 5 – being completely immersed in France.

The last two requirements are subject to interpretation, which is behind the problem you are faced with.

The first interpretation, the one I encounter most often, is that being a French fiscal resident means not only declaring one's worldwide income to the French tax authorities, but also having a French income that exceeds minimum wage, and therefore is taxed in France. It is the French income that is considered proof of true immersion in and allegiance to France.

The second interpretation, the civil servants tell me they are enforcing, is that having a worldwide income that exceeds minimum wage and declaring it to the French tax authorities is enough for compliance with the immersion requirement.

While you could easily comply with the second interpretation, and may already have done so, you do not meet the conditions of the first one - and there is no way you can do so with your current status, which prevents you from working. This is a beautiful catch 22.

Two recent cases illustrate the situation. Both were handled by the same office in the préfecture de police de Paris, at two different counters, within six months of each other. In the first case, a client whom I did not accompany disputed the first interpretation and argued that the second one was right. This was considered contempt of police authority, and you can imagine the comments I got when I accompanied him the next time; there was a big "black mark" in his file.

In the second case, I accompanied an aspiring art photographer, someone who was not making much money in this profession and was therefore having trouble getting her self-employed carte de séjour renewed. Since she does get a very decent pension from the USA, the civil servant took upon herself to suggest that the photographer might like to request a carte de résident. She did so, and the request was approved; she now holds the card. After the official meeting was over, I took the time to ask how there could be such a difference in the interpretation of the requirements. She swore up and down that her interpretation was the official one. Since I had not accompanied the client the first time in the case described above, I could not challenge her on this.

This may sound like just a detail to you, but to me it is significant. When you got your long-stay visa - an immigration visa - from the consulate, the civil servant there was referring to the second interpretation, the official one, when he explained the procedure to you. So, YES, every year you were getting closer to the time when you had the right to ask for a carte de résident - but not necessarily any certainty of getting one.

The important point I want to make here is that you will indeed have the right to renew, and you should never encounter any problem doing so. I understand that this makes you feel insecure, since it is always possible, even though quite unlikely, that one day you will get a negative answer. The carte de résident, in contrast, assures you of permanent residency in France and is renewed automatically every ten years.

Now, you have a difficult decision to make, since there is little you can be sure of. One option is to prepare a perfect file for next year, asking for a carte de résident, and getting a professional in the field to accompany you so that the argument in favor of the second interpretation has a decent chance of being heard and reviewed. Nevertheless, there is no assurance that this approach will work.

The other option is to ask for a carte de séjour better suited to your situation, either a carte de séjour artistique or a carte de séjour compétences et talents. In this way you would acquire the right to work in France and would qualify under both interpretations, thus guaranteeing that you would get a carte de résident sooner or later. Without knowing more about your situation, I cannot say much more than that, and of course I can say even less about your chances of success. But you would be earning money in France, which could make this an excellent way to bypass the current block you are faced with. In both cases mentioned above, the people had gone from holding a carte de séjour visiteur to a card for the self-employed.

As for the future, even the Socialist Party does not propose to change this provision as far as I know. And I believe that the prefectures in general will continue to be lenient with Americans. Therefore, it is worth trying to get a carte de resident, or another card, as long as your file is solid.

 

 

 

ASSURANCE-VIE - AN ANNUITY IS NOT LIFE INSURANCE

QUESTION
Could you give me some enlightenment about assurance-vie plans in France that are sold through the banks and that are linked to the stock markets. I do not understand what they are, since they are clearly not life insurance policies even though that is the exact translation. For about two years now, their performance has not been what many people expected. Because of that, many are in a difficult financial position (some are aware of this, others are not).

I have lived in France for several decades, but as an American I am outraged by the responses I get from the banks, taking no responsibility for the "advice" or lack of advice relative to the stock market. I thought that the client had a contract with them and they were obliged to guarantee that the financial plan would fulfill its goals. Is there any recourse against those crooks?



ANSWER
I need to explain the words used here before addressing the issue you have raised. An insurance policy is always an agreement in which you pay a sum of money to an insurer to be protected against a possible occurrence, one that is not certain and cannot be anticipated. When you insure a car, it is against the damage it can cause to other vehicles and to people. But accidents as such are never certain and cannot be anticipated. Human health can be insured, since illness and accident cannot be predicted (leaving aside chronic diseases and pre-existing conditions, which are not the topic). Furthermore, while it is true that all human beings eventually die, the exact moment and circumstances are never known in advance, even though modern medicine reduces the uncertainty somewhat.

So, while the most common insurance related to human death is called "life insurance," technically it should be called "death insurance," since the risk covered is death and the proceeds are paid not to the person insured but to a beneficiary mentioned in the policy. In French the name of this type of policy reflects its nature: it is called "assurance décès."

There is another type of policy, much more common in France than in the USA, called assurance-vie. It covers the risk of outliving one's means. In the USA this kind of contract is called an annuity. The way it works is that the insured invests money, regularly or not, for a certain period. Then, on the termination date of the policy, the money held by the insurer is released, often at regular intervals (such as monthly), either for the rest of the insured's life or with other conditions.

In the USA, such products are generally retirement accounts - IRAs, 401Ks, and so on. In France the main requirement is that the money is locked in for at least eight years.

The bottom line is that these products are simply a plan to build up principal for retirement. The real issue is where the money is invested. But that is an issue not just for annuities or assurance-vie; it is something you have to consider every time you put your money anywhere besides a checking account.

Thus, assurance-vie, as a product does not deserve the kind of harsh criticism you are making. Take an example from the American market: would you criticize mutual funds in general because the one you invested in holds futures contracts as an investment? Such funds could lose all their money, leaving you with nothing, but nobody forced you to choose this kind of investment. By the way, this is why American retirement accounts are limited as to the nature of investments they can make and the amount that can be invested in certain products. The degree of risk has to be limited mainly because when retirement age arrives the accounts are supposed to contain at least the amount of the original investment, and hopefully more.

So, to the extent that your outrage is warranted, it applies to France and the USA alike, and probably the rest of the world for that matter. The entire financial industry has one goal: finding the stock, bond, contract, art work, vintage car, piece of real estate, etc., whose value will increase to produce a profit. I would never exonerate this industry of its responsibility to advise investors, but it is your money and you should know what you are purchasing when you invest in a mutual fund. There are safe investments, such as US Treasury bonds, on which the returns are quite low. There are risky investments, such as futures contracts, where the returns - or losses - can be impressive.

Sorry to sound harsh, but investing mainly if not solely in the stock market with this kind of product is mind-boggling. It is in many ways a contradiction in terms. Since the 2008 crisis, stock markets worldwide have all lost considerable amounts of money. Some are catching up quickly while others are still trailing. But assurance-vie is by definition supposed to be a long-term investment. If you were worried about a fall in the market lasting a couple of years, compared to the overall duration of the contract, then you were not ready to invest in the stock market. You should have said NO when the banker proposed this mutual fund, and he would have proposed another.

You should not underestimate your own responsibility in this choice. If you are afraid of fast cars, you do not buy a Corvette or a Porsche. That may not be the best comparison, but I want to make my point clear. Having sold these kinds of product in the USA for several years, I know first hand the methods used to convince people to buy them, and I admit that the car analogy is flawed, since the general public has little knowledge of complicated financial products while nearly everybody above the age of 10 has some interest in cars for one reason or another.

I fully understand and respect your anger, and your feeling that you have been not just misled but tricked into signing up to buy something that was probably not for you. Having this happen in a foreign country may have made the matter seem even worse. But the worst thing you can do is cancel the plan, since you would incur fees and taxes. Probably the best thing you can do is educate yourself sufficiently to understand the banker's advice better, then shift your investment to other types of investments over a rather long period to minimize your losses.

To conclude, I would like to single out one of your comments: "I thought that the client had a contract with them and they were obliged to guarantee that the financial plan will fulfill its goals."

This issue is very much black and white. If the document you signed - which is a contract, in every sense of the word -states that you are guaranteed a certain rate of return, then YES you are fully entitled to it. But in my experience, such products are rare and the guaranteed rates are quite low. The vast majority of investment plans show what the product is potentially worth, using past performance data. Then, in small or large print, depending on the company, there will be words to this effect: "the fund's past performance (before and after taxes) does not indicate how the fund will perform in the future."

That says it all. The return you were hoping for was not contractual the way you thought.



Please forward this message to all who would be interested in its contents. The information contained in this newsletter is intended as exclusively general information. Therefore, I strongly urge readers to seek professional guidance concerning the legal and tax matters mentioned. This newsletter is intended as a general guide and is not to be taken as professional advice.