May 4, 2010
 

Readers of International Tax Tidbits will recall that in the last several months I have focused on planning and compliance issues with respect to U.S. taxpayers and their U.S. obligations.  This month, in conjunction with the upcoming luncheon program hosted by the French American Chamber of Commerce and the German American Chamber of Commerce, we want to focus on tax-related incentives for cross-border investment.  While not the topic of the luncheon, which focuses on fraud detection and prevention in international business, in researching the origins of corporate fraud prevention in 14th century France, I came across what may be the first instance of a property tax abatement designed to lure long-term investment (in this case, close to six hundred years!). 

 

In the 14th century on the outskirts of the southern French city of Toulouse, investors joined together and created the first companies offering limited liability to shareholders interested in pooling their capital and sharing the risks of undertaking large infrastructure projects.  These first companies were established to build and operate water mills on the Garonne River.  The mills generated energy essential to the local economy to grind wheat into flour and saw timber into boards.  Each mill, part of a complex including a bridge across the river, was a key component of a town's defenses against marauding English forces during the Hundred Years' War.  To encourage construction of mills, cities such as Toulouse offered a very attractive incentive – complete exemption from real estate taxes.

 

The notion of reducing or eliminating property taxes for a term of years is fairly common in the U.S. at state and local levels, as well as internationally, and is often tied to criteria such as job creation, development of technology, and a minimum level of investment.  Calling such an arrangement a "tax holiday" has gone out of fashion, especially with organizations such as the OECD criticizing what it considers unfair tax competition by low-tax countries to attract investment from higher tax countries. 

 

Sometimes these tax reduction opportunities are overlooked, especially in outbound investment from the U.S. to foreign countries, when the focus is primarily on income tax planning.  The good news is that a number of countries still have attractive tax incentive programs based on a reduction of taxes on real property, typically levied at the local level, to encourage inbound investment.  But the bad news is that they are likely not available in the locales where investors want to be -- near potential customers or international transportation hubs.  Those places don't need to give anything away in order to attract investment!