Wealth Tax Reform in France
Tuesday 07 November 2017
Wealth tax in France is going through some changes, writes Sandy Dalmas of French tax accountants Roche & Cie.
One of the key manifesto promises of President Emmanuel Macron, reform of l’impôt sur la fortune (ISF), is completing its passage through the French parliament and will become law next month. What will this reform bring? What is the new perimeter of this tax?
Taxable Assets
The new wealth tax is reoriented to cover only real estate assets; so l’impôt sur la fortune (ISF) becomes l’impôt sur la fortune immobilière (IFI).
Thus, the taxable base will constitute the following:
French tax residents will bear this tax on all their assets or real estate rights held in France or abroad. For non-residents, the wealth tax will only cover their fixed real estate assets in France.
There will be no change to the current 30% discount of the market value of the main residence against liability to the tax.
Premises used for the taxpayer’s main professional activity remain exempt from the wealth tax.
This also applies to property used for furnished rental activity, but only provided the landlord is a registered professional landlord (LMP). That is to say, they are business registered and their annual rental income is greater than €23,000, which must also be higher than their other business/professional income.
The partial (75%) exemption of woodland remains.
Thus, the taxable base will constitute the following:
- All properties and real estate rights;
- Parts or shares of companies or organizations (established in France or abroad) held by the taxable person, for the fraction of their value representing property or real estate rights held directly or indirectly by this entity.
French tax residents will bear this tax on all their assets or real estate rights held in France or abroad. For non-residents, the wealth tax will only cover their fixed real estate assets in France.
There will be no change to the current 30% discount of the market value of the main residence against liability to the tax.
Premises used for the taxpayer’s main professional activity remain exempt from the wealth tax.
This also applies to property used for furnished rental activity, but only provided the landlord is a registered professional landlord (LMP). That is to say, they are business registered and their annual rental income is greater than €23,000, which must also be higher than their other business/professional income.
The partial (75%) exemption of woodland remains.
Deductible Liabilities
The draft budget bill brings some novelties in terms of deductibility of debts.
Before the reform, the deductibility rules were simple and broad: the debts had to exist on January 1st of the tax year, they had to be chargeable to the taxpayer and be justified by due procedure.
With the introduction of the IFI, only certain debts will be deductible:
Only debts related to the acquisition of property, repair, maintenance and improvement expenses, construction, reconstruction or enlargement of the property will be deductible.
Similarly, the tax debts relating to property will be deductible.
Interest only loans called 'crédit in fine', where the loan is repayable in one single payment at the end of the contract has been a practice commonly used to reduce the tax base for wealth tax. The scheme allowed the taxpayer to ensure the deductibility of fixed-rate debt for the duration of the loan. Henceforth, these debts will be deductible only up to the total amount of the loan less a prorated amount taking into account the number of years passed over the total number of years of the loan.
Debts contracted directly or indirectly (that is, through intermediary companies) by the debtor from their spouse/partner or children under 18 years will no longer be deductible.
Debts contracted directly or indirectly with an ascendant/descendant (except minor children), brother/sister are also no longer deductible, unless the loan was granted on normal market terms.
When the value of taxable assets exceeds €5 million and the amount of debts admitted as deductible exceeds 60% of this value, the portion of the debt exceeding 60 % is only deductible for half of its value.
Before the reform, the deductibility rules were simple and broad: the debts had to exist on January 1st of the tax year, they had to be chargeable to the taxpayer and be justified by due procedure.
With the introduction of the IFI, only certain debts will be deductible:
Only debts related to the acquisition of property, repair, maintenance and improvement expenses, construction, reconstruction or enlargement of the property will be deductible.
Similarly, the tax debts relating to property will be deductible.
Interest only loans called 'crédit in fine', where the loan is repayable in one single payment at the end of the contract has been a practice commonly used to reduce the tax base for wealth tax. The scheme allowed the taxpayer to ensure the deductibility of fixed-rate debt for the duration of the loan. Henceforth, these debts will be deductible only up to the total amount of the loan less a prorated amount taking into account the number of years passed over the total number of years of the loan.
Debts contracted directly or indirectly (that is, through intermediary companies) by the debtor from their spouse/partner or children under 18 years will no longer be deductible.
Debts contracted directly or indirectly with an ascendant/descendant (except minor children), brother/sister are also no longer deductible, unless the loan was granted on normal market terms.
When the value of taxable assets exceeds €5 million and the amount of debts admitted as deductible exceeds 60% of this value, the portion of the debt exceeding 60 % is only deductible for half of its value.
Calculation of the Tax
There will be no change in the tax threshold, which remains at €1.3 million (net asset value).
Similarly, no revaluation of the scale rates are planned, so the existing rates, from 0.50% up to 1.5%, remain in place.
The deductibility of shares held under the 'Loi Dutreil', and the reduction in favour of investment in small to medium sized companies, have been abolished. Only the tax reduction for gifts (75% up to €50,000) has been retained.
Similarly, no revaluation of the scale rates are planned, so the existing rates, from 0.50% up to 1.5%, remain in place.
The deductibility of shares held under the 'Loi Dutreil', and the reduction in favour of investment in small to medium sized companies, have been abolished. Only the tax reduction for gifts (75% up to €50,000) has been retained.
Sandy Dalmas
Chartered Accountant
Cabinet Roche & Cie
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