PLUS ÇA CHANGE
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
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%