The wealth tax is dead; long live the wealth tax! Ke­hinde Dauda ex­plains what’s changed and what stays the same with the new im­pôt sur la fortune im­mo­bil­ière

French Property News - - Expert Advice - Ke­hinde Dauda is a French tax ex­pert and an English-french bilin­gual char­tered ac­coun­tant at Green­wich Tax­a­tion Ser­vices Tel: 020 3651 0016 green­wich­

The good news is that the French wealth tax has been abol­ished. The bad news is that it has been re­placed with a dif­fer­ent form of wealth tax. The ISF ( im­pôt de sol­i­dar­ité sur la fortune) has been re­placed with the IFI ( im­pôt sur la fortune im­mo­bil­ière) from 1 Jan­uary 2018.

The ISF is ap­plied to any kind of as­set, in­clud­ing fi­nan­cial in­vest­ments, ve­hi­cles, house­hold goods and fur­ni­ture. The new tax is largely in­spired by its an­tecedent and will op­er­ate in much the same way, ex­cept that it will only ap­ply to real es­tate prop­erty (land and build­ings as well as rights and shares in them).

Given the sim­i­lar­ity to the ISF, it may be use­ful to re­cap some of the prin­ci­ples of the wealth tax which re­main un­changed un­der the new IFI and then high­light what has changed. Some of the rules are not straight­for­ward, but I will sum­marise them.

What hasn’t changed? Only in­di­vid­u­als and their house­hold com­pris­ing spouses/ civil part­ners/co­hab­i­tants and their mi­nor chil­dren are sub­ject to the wealth tax. For French res­i­dents, all prop­erty, wher­ever it is held in the world, is tax­able, and for non-french res­i­dents only prop­erty lo­cated in France is tax­able. The tax is sub­ject to the pro­vi­sions of dou­ble tax agree­ments with France (the UK has no dou­ble tax agree­ment with France cov­er­ing wealth tax).

The thresh­old for the wealth tax re­mains €1.3m and the method of cal­cu­la­tion has been re­tained. There is still a 30% re­duc­tion on the value of the main res­i­dence.

The same bands and tax rates ap­ply to the cal­cu­lated value of tax­able prop­erty.

The ex­emp­tion of non-french prop­erty of those mov­ing to France (or re­turn­ing af­ter an ab­sence of five years or more) still ap­plies for the first five years in France.

Busi­ness and agri­cul­tural prop­erty are ex­empt if they meet qual­i­fy­ing con­di­tions. Gen­er­ally, if the real es­tate is used in the tax­payer’s trade or pro­fes­sion, it will be ex­empt. The cap on to­tal wealth tax plus in­come tax of 75% of to­tal in­come is still in place.

What has changed? All real es­tate held di­rectly or in­di­rectly is within its scope. Other than the change in name, the sig­nif­i­cant dif­fer­ence from the ISF is that the IFI will only ap­ply to real es­tate prop­erty, but in the widest pos­si­ble sense. The in­ten­tion is to catch any form of real es­tate prop­erty, whether held di­rectly or in­di­rectly through other en­ti­ties (com­pa­nies, in­vest­ment funds, trusts) ir­re­spec­tive of the chain of own­er­ship. If there is real es­tate any­where in the chain of own­er­ship, sub­ject to some ex­emp­tions, it will be taken into ac­count. This con­trasts with the old ISF where shares in com­pa­nies were only taken into ac­count if the com­pany’s as­sets com­prised more than 50% real es­tate or if it was a sig­nif­i­cant share­hold­ing (more than 10%).

The rule re­lat­ing to in­di­rect own­er­ship of real es­tate could prove dif­fi­cult to com­ply with in prac­tice. While it is rel­a­tively easy to iden­tify real es­tate that is owned di­rectly (such as your main home, your hol­i­day home or prop­erty that you are let­ting out), it may not be so easy to de­ter­mine or value real es­tate that is owned in­di­rectly.

This could be the case, for ex­am­ple, if you are a mi­nor­ity share­holder in a com­pany that owns real es­tate and you do not have easy ac­cess to the in­for­ma­tion you need to work out if you need to in­clude those shares and if so, in what pro­por­tion. The ex­emp­tions cen­tre round th­ese kinds of dif­fi­cul­ties. Below is a sum­mary of the ex­emp­tions re­lat­ing to in­di­rect own­er­ship: Real es­tate which is used for the com­pany’s own trade (trade means com­mer­cial, ar­ti­sanal). Less than 10% share in trad­ing com­pa­nies. Less than 10% share in non-trad­ing com­pa­nies if you can show that you can­not ob­tain the in­for­ma­tion nec­es­sary to de­ter­mine the tax­able pro­por­tion of your share­hold­ing. The law doesn’t stip­u­late how you would show this, but I ex­pect you would at least have to demon­strate that you re­quested the in­for­ma­tion from the com­pany. Less than 5% share in quoted prop­erty in­vest­ment com­pa­nies. Less than 10% share in in­vest­ment com­pa­nies/funds (such as SICAVS), pro­vid­ing the pro­por­tion of their to­tal as­sets that is tax­able real es­tate is less than 20%.

De­spite th­ese ex­emp­tions, it may still be dif­fi­cult for some peo­ple to com­ply with the rule re­gard­ing in­di­rect own­er­ship. Whereas in­di­rect own­er­ship of real es­tate prop­erty may be rel­a­tively small, it must be taken into ac­count when de­ter­min­ing the tax­able prop­erty.

The IFI will only ap­ply to real es­tate prop­erty, but in the widest pos­si­ble sense – the in­ten­tion is to catch any form of prop­erty, whether held di­rectly or in­di­rectly through other en­ti­ties

Valu­ing shares in com­pa­nies

If real es­tate is held in­di­rectly in a com­pany, the tax­able value of the shares is cal­cu­lated by mul­ti­ply­ing the share value by the real es­tate ra­tio (mar­ket value of real es­tate held by the com­pany/mar­ket value of com­pany’s to­tal as­sets).

If there is a chain of com­pa­nies in the share­hold­ing then you start with the com­pany at the low­est level which di­rectly owns the real es­tate and then work up the chain.

De­ductible li­a­bil­i­ties/ debts

In ar­riv­ing at the value of the tax­able prop­erty, you are al­lowed to deduct li­a­bil­i­ties. Given that the wealth tax is now fo­cused on real es­tate, de­ductible li­a­bil­i­ties (such as loans or mort­gages) must also re­late di­rectly to own­er­ship of the real es­tate prop­erty. Th­ese would in­clude loans for ac­qui­si­tion, main­te­nance and con­struc­tion. In terms of de­ductible taxes,

taxe fon­cière is de­ductible, but not taxe d’habi­ta­tion (which is an oc­cu­pancy tax and there­fore not di­rectly re­lated to own­er­ship of the prop­erty) nor is in­come tax. There is anti-avoid­ance leg­is­la­tion to counter re­duc­ing the tax­able prop­erty by ar­ti­fi­cially in­flat­ing li­a­bil­i­ties. Th­ese mea­sures in­clude: Re­stric­tions on the de­ductible amount of in­ter­est-only loans Re­stric­tions on the de­ductible amount of large loans (where debt is more than 60% of the prop­erty and the prop­erty is over €5) Dis­al­low­ing cer­tain bor­row­ings from close fam­ily mem­bers or com­pa­nies con­trolled by close fam­ily mem­bers Cer­tain ex­emp­tions are no longer avail­able.

The in­ten­tion behind the IFI is to bring into charge where pos­si­ble all real es­tate. The ex­emp­tions men­tioned above are in­cor­po­rated in law, but some ex­emp­tions that ex­isted for share­hold­ings un­der the old ISF are gone. This means real es­tate held in th­ese com­pa­nies are po­ten­tially tax­able: Fi­nan­cial in­vest­ments of non-french res­i­dents. Cer­tain share­hold­ings with a com­mit­ment to a min­i­mum hold­ing pe­riod of two years ( pacte Dutreuil). Cer­tain em­ployee or direc­tor share­hold­ings. Cer­tain hold­ings in small and medium-sized en­ter­prises. There were pro­vi­sions for re­duc­tions in the wealth tax li­a­bil­ity to en­cour­age in­vest­ment in start-ups; th­ese are now gone.

Wealth tax re­turns Un­der the old ISF there was a dis­tinc­tion be­tween those with tax­able wealth ex­ceed­ing €2.75m and those below. Now all French res­i­dents must de­clare de­tails of their tax­able prop­erty on the an­nual in­come tax re­turn.

Non-res­i­dents who do not com­plete a French in­come tax re­turn (be­cause they do not have French source in­come) will con­tinue to de­clare tax­able prop­erty us­ing a spe­cific wealth tax re­turn.

Be­tween €800,000 and €1,300,000 0.5% Be­tween €1,300,001 and €2,570,000 0.7% Be­tween €2,570,001 and €5,000,000 1.0% Be­tween €5,000,001 and €10,000,000 1.25% Over €10,000,000 1.5%

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